Northwestern Mut. Fire Ass'n v. Comm'r of Internal Revenue

• Citation: 12 T.C. 498
• Decision Date: 30 March 1949
• Docket Number: Docket No. 16147.
• Parties: NORTHWESTERN MUTUAL FIRE ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

12 T.C. 498

NORTHWESTERN MUTUAL FIRE ASSOCIATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 16147.

Tax Court of the United States.

Promulgated March 30, 1949.

The petitioner, a domestic mutual fire insurance company doing business in Canada, paid taxes in 1942 and 1943 to Canada, measured by the net premiums received in Canada, less premiums paid for reinsurance, in accordance with the provisions of the Canadian Special War Revenue Act of 1915, as amended. Held, the taxes paid upon the net premiums were not taxes ‘in lieu of a tax upon income‘ as those terms are used in section 131(h), I.R.C., and petitioner is not entitled to a credit for income taxes paid to a foreign government under section 131, I.R.C. Jo D. Cook, Esq., for the petitioner.

Wilford H. Payne, Esq., for the respondent.

OPINION.

BLACK, Judge:

This proceeding involves deficiencies in petitioner's income taxes for the years 1942 and 1943 in the respective amounts of $5,089.03 and $5,347.81. The petitioner claims refunds for the years 1942 and 1943 in the respective amounts of $10,183.13 and $10,854.73.

The deficiencies are due primarily to the disallowance of foreign tax credits claimed in the petitioner's income tax returns for the calendar years 1942 and 1943 in the respective amounts of $5,076.60 and $5,339.84 as income taxes paid to the Dominion of Canada. The respondent in the deficiency notice explained this disallowance as follows:

The foreign tax credits claimed in your income tax returns for the calendar years 1942 and 1943, in the respective amounts of $5,076.60 and $5,339.84, as income taxes paid to the Dominion of Canada, have been disallowed for the reason that the stated taxes do not constitute ‘income, war profits or excess profits taxes paid in lieu of a tax upon income, war profits, or excess profits otherwise generally imposed‘ by Canada. The evidence indicates that the taxes in question were in the nature of an excise imposed under the Special War Revenue Act of Canada and therefore do not meet the requirements of section 131 of the Internal Revenue Code in respect to allowable credits.

For the stated reasons it has been determined also that your claims for refund in the respective amounts of $10,183.13 and $10,854.73 should be disallowed for the years 1942 and 1943. The claims for refund are disallowed on the additional ground that a proper application of the provisions of section 131 of the Internal Revenue Code negatives the use of investment income as the basis for computing the limitation factor provided for under subsection (b) thereof, in the case of a mutual insurance company (other than life or marine) paying a tax based upon ‘the gross amount of income‘ as defined in section 207 of the Internal Revenue Code.

The petitioner, by appropriate assignments of error, contests these adjustments and claims refunds.

The case was submitted upon a stipulation of facts and joint exhibits, which are adopted as our findings of fact. They may be summarized as follows:

The petitioner is a mutual fire insurance corporation, organized and operating under the laws of the State of Washington, and is engaged in the business of writing insurance against the perils of fire and allied lines in all states of the United States and in Canada, with its principal office in Seattle, Washington. Its income tax returns for the years 1942 and 1943 were prepared on the accrual basis and were filed with the collector of internal revenue for the district of Washington at Tacoma, Washington, within and under extensions of time allowed by the Commissioner.

In the years 1942 and 1943 the petitioner paid to the Dominion of Canada amounts in Canadian funds equivalent to $15,272.16 and $16,202,54, respectively, in United States funds in taxes in accordance with the provisions of the Canadian Special War Revenue Act of 1915, as amended in 1942. ¹ That tax was based upon the ‘net premiums‘ of petitioner on its business in Canada and for 1942 and 1943 the tax rate applicable to petitioner was 3 per cent.

In petitioner's returns for the years 1942 and 1943 it claimed foreign tax credits in the respective amounts of $5,076.60 and $5,339.84.

The petitioner's gross amount of income for the years 1942 and 1943 from all sources was $6,716,320.72 and $7,045,067.97, respectively, and its gross amount of income from sources in the Dominion of Canada (converted to United States funds) was $507,681.54 and $533,987.07, respectively.

In the years 1942 and 1943 the petitioner's normal tax net income from all sources was $126,451.85 and $151,828.23, respectively, while its normal tax net income from sources in the Dominion of Canada (converted to United States funds) was $37,843.46 and $40,943.06, respectively.

During the years 1942 and 1943 petitioner was not liable to tax on its net income from Canadian business under the provisions of the Canadian Income War Tax Act of 1917, as amended by chapter 97,² the provisions of which are set forth in the Revised Statutes of Canada of 1927.

Prior to the year 1942 the petitioner was required by the provisions of the Special War Revenue Act of 1915 to pay to the Dominion of Canada a tax of 1 per cent on its net premiums from its business within the Dominion of Canada.³

In 1942 the Dominion of Canada amended the Special War Revenue Act of 1915 by the enactment of chapter 32 of the Statutes of 1942, heretofore set out, increasing the net premium tax on all fire insurance companies doing business in Canada, including the petitioner and the basis for said tax was the ‘net premiums‘ of said companies from their business within the Dominion of Canada. For all mutual fire insurance companies such as the petitioner, not subject to taxation on their net income under the provisions of the Canadian Income War Tax Act of 1917, the rate was increased from 1 to 3 per cent. For all fire insurance companies which were subject by Canadian law to taxation on their net income under the Income War Tax Act of 1917 (which did not include this petitioner) the rate was increased from 1 to 2 per cent.

In the year 1946 the Canadian revenue measures were revised and the Income War Tax Act originally enacted in 1917 was amended so that mutual fire insurance companies such as petitioner (excepting only those mutual fire insurance companies deriving their premiums wholly from the insurance of churches, schools, or other religious, educational, or charitable institutions) were made subject to the general income tax law of Canada.⁴ Prior to the enactment in 1946 of the above amendment to the Income War Tax Act of 1917, mutual fire insurance companies such as petitioner were not liable to tax under the provisions of the Income War Tax Act of 1917, as hereinabove set out.

Concurrent with the above change in the Income War Tax Act of 1917, the Special War Revenue Act of 1915, as amended in 1942, was amended further changing the name of the act from ‘Special War Revenue Act‘ to the ‘Canadian Excise Tax Act,‘ and that amendment further provided that the rate of tax upon the net premiums for mutual fire insurance companies, such as petitioner, should be reduced from 3 per cent to 2 per cent.⁵

In 1942 and 1943 the taxes imposed under the Special War Revenue Act of 1915, as amended, and the Income War Tax Act of 1917, as amended, were paid to the Minister of National Revenue, sometimes referred to as the Minister of Finance.

In the years 1942 and 1943 the administrative details of collection and auditing of taxes payable by insurance companies under the Special War Revenue Act of 1915, as amended, and the auditing of income tax returns of insurance companies which were subject to the provisions of the Income War Tax Act, as amended, were handled by the Department of Insurance.

In the years 1942 and 1943 the details of collection and auditing of taxes other than taxes on insurance companies payable under the Special War Revenue Act of 1915, as amended, and the general administration and the auditing of returns of taxpayers other than insurance companies under the Income War Tax Act of 1917 were handled by the Department of National Revenue.

In its returns for the years 1942 and 1943 and in ‘The Statement in Support of Credit for the Foreign Tax Paid‘ (Form 1118) for those years, petitioner computed the amount of credit on the gross amount of income for each year which constituted its taxable income and formed the basis under the statute for determining the amount of tax due in this country. On such basis and using the ratio of the total gross income from Canada ($507,681.54 for 1942 and $533,987.07 for 1943) to total gross income in its returns from all sources for those years ($6,715,077.99 for 1942 and $7,044,271.09 for 1943), the amounts of the credits so computed were $5,076.60 and $5,399.84 for the years 1942 and 1943, respectively. These claimed credits were disallowed by respondent in the deficiency notice.

In its claims for refunds for 1942 and 1943 and in ‘The Statements in Support of Credit for Foreign Taxes‘ which were attached thereto, petitioner claimed that the credit for each year should be computed and determined upon the basis which the ratio of the ‘normal tax net income‘ from sources in Canada bears to the ‘normal tax net income‘ from all sources, i.e., in the ratio which the ‘normal tax net income‘ of $126,451.85 from all sources for the year 1942; and in the ratio which the ‘normal tax net income‘ of $40,943.06 from Canadian sources bears to ‘normal tax net income‘ of $151,828.23 from all sources for the year 1943.

The questions presented by the pleadings and the evidence in this proceeding are:

(1) Whether petitioner is entitled to a foreign tax credit under the provisions of section 131 of the Internal Revenue Code on account of the tax on its net premiums received in the Dominion of Canada and imposed by and paid to that country for the taxable years 1942 and 1943 pursuant to the provisions of the...