250 F.Supp. 130 (S.D.Cal. 1965), 62-332, Occidental Life Ins. Co. of California v. United States

Docket Nº:62-332.
Citation:250 F.Supp. 130
Party Name:OCCIDENTAL LIFE INSURANCE COMPANY OF CALIFORNIA, a California corporation, Plaintiff, v. UNITED STATES of America, Defendant.
Case Date:December 14, 1965
Court:United States District Courts, 9th Circuit, Southern District of California

Page 130

250 F.Supp. 130 (S.D.Cal. 1965)



UNITED STATES of America, Defendant.

No. 62-332.

United States District Court, S.D. California.

Dec. 14, 1965

Page 131

O. L. Frost, Jr., John G. Gemmill, Robert M. Sweet, Stanley Abrams, Forster, Gemmill & Farmer, Los Angeles, Cal., for plaintiff.

Manuel L. Real, U.S. Atty., Loyal E. Keir, Asst. U.S. Atty., Chief, Tax Division, Martin B. Cowan, Atty., Dept. of Justice, Los Angeles, Cal., for defendant.

CURTIS, District Judge.

This is a suit for the refund of federal income taxes and interest for the taxable years 1954 and 1955. Jurisdiction is conferred upon this court by Title 28 U.S.C.A. 1340 and 1346(a) (1).

Plaintiff is a stock life insurance company, organized under the laws of the State of California, its principal place of business being in Los Angeles. During the calendar years in question, it was engaged in the insurance business in the United States, Canada and other parts of the world, and it was and is a life insurance company as that term is defined in § 801(a) of the Internal Revenue Code of 1954.

This action presents the following two principal questions:

1. Is a tax upon life insurance premiums imposed upon the plaintiff by the Dominion of Canada and the Province of Quebec an 'income tax' or a 'tax paid in lieu' thereof, either one of which are allowable as foreign tax credits within the meaning of §§ 841, 901 and 903 of the Internal Revenue Code of 1954?

2. In making the 'adjustments for certain reserves'-- as required by § 805 of the Internal Revenue Code of 1954 and as defined by § 806-- in the computation of its 1954 life insurance taxable income, was plaintiff required to include under the category of 'unpaid losses' amounts representing accrued, but unpaid, policy liabilities as well as amounts representing unaccrued claims?


Section 901(b) of the Internal Revenue Code of 1954 provides that a domestic corporation shall be allowed, as a credit against its general income tax, the amount of any income taxes paid or accrued during the taxable year to any foreign country. 1

Section 903 provides that the term 'income taxes' shall include any tax paid 'in lieu of a tax paid on income' otherwise imposed by any foreign country. 2

Section 841 provides in effect that the provisions of §§ 901 and 903 shall extend to life insurance companies.

During the years 1953 and 1954 the Province of Quebec imposed a tax of 2 percent on the net premiums received by non-resident stock life insurance companies

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in Quebec, and during the same period the Dominion of Canada likewise imposed a 2 percent tax on the net premiums received by non-resident stock life insurance companies in other portions of Canada. Since the plaintiff is a cash basis taxpayer, these taxes, although levied in 1953 and 1954, were actually paid in the years 1954 and 1955, and therefore enter into a computation of plaintiff's United States income taxes for the respective years of payment, namely, 1954 and 1955, the years which are now in question in this action.

Plaintiff first contends and strongly urges that the net premiums taxed by both Quebec and the Dominion of Canada are part of the gross income of life insurance companies, and it points out that for a hundred years Congress has habitually measured income taxes on insurance companies in whole or in part upon premiums. When Congress first enacted the foreign tax credit provisions in 1918, premiums were considered to be an item of income of insurance companies for tax purposes. Commissioner of Internal Revenue v. Monarch Life Ins. Co., 114 F.2d 314 (1st Cir. 1940). Plaintiff concludes that, since gross income has been recognized as a proper basis for taxation by Congress and our courts, a tax upon net premiums is actually an income tax within concepts generally recognized in this country. Although under the law applicable to the years here in issue, gross income and premium income were not then being taxed, nevertheless a tax thereon imposed by a foreign country was an income tax. There are several cases to the contrary. Continental Insurance Company v. Commissioner, 40 B.T.A. 540 (1939); St. Paul Fire & Marine Ins. Co. v. Reynolds, 44 F.Supp. 863 (Dist.Ct.Minn.1942).

In Northwestern Mut. Fire Ass'n v. Commissioner of Internal Revenue, 181 F.2d 133 (9th Cir. 1950), the court assumed, without holding, that premiums taxes were not income taxes since not measured by net income, and it was apparently the tendency of the courts to follow this narrow concept which gave rise to the passage of § 131(h) of the Internal Revenue Code of 1939 which became § 903 of the Internal Revenue Code of 1954. The Senate Committee reports as a reason for the enactment of this section as follows:

'In the interpretation of the term 'income tax' the Commissioner, Board and the courts have consistently adhered to a concept of income tax rather closely related to our own, and if such foreign tax was not imposed upon a basis corresponding approximately to net income, it is not recognized as a basis for such credit.' (Report, Senate Finance Committee, 77th Cong.2d Sess. S. Rep. 1631, pp. 131 and 132).

Although much can be said in defense of plaintiff's first contention, there is rather substantial authority to the contrary. And since it seems reasonably clear that the premium tax in question was imposed both by the Province of Quebec and the Dominion of Canada in lieu of income taxes generally imposed upon others, I prefer to base my ruling upon the latter ground.

Let us first consider the problem arising in the Province of Quebec. During the years in question Quebec had in effect a 'Corporation Tax Act', Section 3 3 of which, entitled 'Taxes on Paid Up

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Capital and Places of Business' classifies corporations doing business in Quebec into some 19 separate categories and imposes a different tax upon each of a character appropriate to the peculiarities of each class of taxpayer. Subdivision 1 of Section 3 imposes generally upon 'ordinary companies' (other than companies specially taxed under other subdivisions of Section 3) a tax of 1/10 of one percent of the amount of paid up capital, plus $50.00 for each place of business in the cites of Montreal and Quebec and $25.00 for each place of business in other municipalities, subject to certain adjustments therein provided. Most categories of taxpayers are taxed upon some percentage of paid up capital or reserve funds, together with a flat amount for each place of business. However subdivision 3 relating to insurance companies, while imposing no tax on paid up capital or places of business, imposes a tax of two percent on net premiums received by a stock life insurance company on business done in the Province.

In Section 6 of the Act, an additional 'income tax' of seven percent is imposed generally upon all corporations with few exceptions, one of which is life insurance companies as to which no income tax is imposed under this section. Under these circumstances this court is called upon to decide whether the imposition of the tax as provided by Section 3 upon life insurance companies is imposed in lieu of income taxes. The statute itself is silent as to any legislative intent.

Taxing authorities and courts have had much difficulty in attempting to impose income taxes on life insurance companies. Although premiums were at one time included in gross income for tax purposes under our laws, this was deemed to be unsatisfactory and was discontinued. We must assume, I think, that the legislative council and Assembly in Quebec in enacting the Corporation Tax Act...

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