Rev. Rul. 58-616

Reconsideration has been given to Revenue Ruling 55-240, C.B. 1955-1, 406, relative to mutual insurance companies, in view of the decisions in Holyoke Mutual Fire Insurance Company v. Commissioner , 28 T.C. 112; Citizens Furd Mutual Fire Insurance Company v. Commissioner , 28 T.C. 1017; and Property Owners Mutual Insurance Company v. Commissioner , 28 T.C. 1007, acquiescences, page 7 this Bulletin.

In the Holyoke, Citizens Fund and Property Owners cases, supra , the Tax Court of the United States held that the companies therein, chartered as mutual companies, were taxable as such under section 207 of the Internal Revenue Code of 1939 (section 821 of the Internal Revenue Code of 1954) even though each had guaranty fund certificates outstanding. The court emphasized the fact that, since the term `mutual insurance company' is not defined in the 1939 Code, or in Regulations 118 with respect thereto, the classification of an insurance company as a mutual or a stock company depends on the circumstances of each case. One of the most important factors in making this determination relates to democratic ownership and control of the company by the policyholders which is as equally a fundamental characteristic of a mutual insurance company as the company's furnishing insurance to the policyholders substantially at cost. Keystone Automobile Club Casualty Co. v. Commissioner , 122 Fed.(2d) 886, at 889 and 890, certiorari denied, 315 U.S. 814.

Revenue Ruling 55-240 holds that, in the absence of democratic control by the policy members, an insurance company may not qualify as a mutual insurance company taxable under the provisions of section 207 of the 1939 Code. It is the position of the Internal Revenue Service that whether democratic control is in the policyholders of a mutual insurance company depends on the circumstances of each case and is determined by the control which the policyholders actually exercise, to the exclusion of any group other than policyholders, and not upon the unexercised power to control which such other group has by statute or otherwise. On the facts presented in Revenue Ruling 55-240, there was insufficient evidence to establish that the policyholders had democratic ownership and control and, as a consequence, the taxpayer could not qualify as a mutual insurance company.

Revenue Ruling 55-240, C.B. 1955-1, 406, clarified.