Federated Mutual Implement & Hard. Ins. Co. v. CIR
| Decision Date | 04 May 1959 |
| Docket Number | No. 16057.,16057. |
| Citation | 266 F.2d 66 |
| Parties | FEDERATED MUTUAL IMPLEMENT & HARDWARE INSURANCE CO., a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Nicholas S. Kiefer, Chicago, Ill. (Hayner N. Larson, Minneapolis, Minn., was with him on the brief), for petitioner.
George F. Lynch, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson, and A. F. Prescott, Attorneys, Department of Justice, Washington, D. C., were with him on the brief), for respondent.
Before GARDNER, Chief Judge, and VOGEL and MATTHES, Circuit Judges.
This case is here on petition to review decision of the Tax Court reported in 29 T.C. 262. This court has jurisdiction under Sections 7482(a) and 7483 of the Internal Revenue Code of 1954, 26 U.S. C.A. §§ 7482(a), 7483.
Broadly stated, the controversy is focused upon the amount of foreign tax credit to which the petitioner is entitled for the years 1948 to 1953 inclusive.
Mutual insurance companies, such as petitioner, are subject to special tax treatment. There are three sections of the 1939 Internal Revenue Code, 26 U.S.C.A. applicable herein. Section 207 provides two alternative tax bases applicable to the type of mutual insurance companies with which we are concerned. "Normal-tax net income," derived from net investment income, is taxed at specified normal and surtax rates § 207(a) (1), or "gross amount of income" interest, dividends, rents, and net premiums, minus dividends to policy holders, minus interest which is exempt under § 22(b)(4), is taxed at one per cent § 207 (a) (2). The alternative producing the greater tax establishes tax liability § 207(a). Section 205 provides that the amount of income, war-profits, and excess-profits taxes imposed by foreign countries shall be allowed as a credit against the tax of a domestic insurance company taxed under Section 201, 204, or 207. The amount of the credit, however, is limited by Section 131. Section 131(b)(1) of the 1939 Code, which is the "bone of contention" here, prescribes the formula to be applied in limiting and determining the foreign tax credit. It provides that "(t)he amount of the credit taken under this section shall be subject to each of the following limitations: (1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed, * * * in the case of a corporation, the same proportion of the tax against which such credit is taken, which the taxpayer's normal-tax net income from sources within such country bears to its entire normal-tax net income for the same taxable year."1 (Emphasis added.) Thus, the taxpayer's normal-tax net income from Canadian sources becomes the numerator of the credit-limiting fraction and the taxpayer's entire normal-tax net income becomes the denominator.
Petitioner, a Minnesota corporation, is a mutual insurance company (other than a life or a marine insurance company and other than an interinsurer or reciprocal underwriter). It is authorized to and in fact did transact business throughout the United States and the Dominion of Canada during the period in question and had no income from any source outside those two countries. During all of the six years here involved, petitioner accrued income taxes to the Dominion of Canada on the "underwriting profits" of its Canadian business pursuant to the applicable Canadian laws in effect during those years. The "underwriting profits" which formed the basis for petitioner's Canadian income and old age security taxes consisted of the premiums earned in Canada, on the basis of full unearned premium reserve, less claims and expenses incurred in Canada and dividends paid to policyholders in that country. Petitioner was not required by Canadian law or regulations, and in fact did not include in its income tax base any investment income, rents or gains from the sale or exchange of capital assets. The Canadian tax picture, as stipulated and simplified, is as follows:
Canadian Taxable Income and Tax Paid
(Taxable income in Canada based on "underwriting profits," i. e
excess of premiums earned in Canada over claims, and expenses
incurred in Canada, and dividends paid to Canadian stockholders.)
Year Taxable Income1 Income Tax2 Old Age Tax2 Tax Rate
1948 $ 60,645.66 $ 18,102.73 30%
1949 160,909.49 45,974.12 33%
1950 240,198.01 75,992.44 33% to 9/1; 38%
after 9/1
1951 149,698.52 64,387.49 45.6%
1952 305,756.96 154,587.43 $6,183.49 50% + 2% old age
1953 431,870.61 200,925.41 8,871.22 47% + 2% old age
As required by the provisions of Section 207, supra, petitioner computed its United States income tax liability for the years 1948 and 1949 on the second alternative, i. e., on the basis of its gross investment income and net premiums, § 207 (a) (2). (This alternative produced the greater tax for those years.) For the remaining years (1950 to 1953 inclusive), petitioner's income tax was computed on the basis of its net investment income, or upon the first of the alternatives, § 207 (a) (1). (For those years this alternative produced the greater tax.) Petitioner's income taxable in the United States, as developed from stipulated facts, may be summarized as follows:
U. S. Taxable Income
Combined Normal
& Surtax Rate
Net (Investment) Income Applicable
Gross income from all from all sources to § 207(a)
Year sources § 207(a) (2) § 207(a) (1) (1) income
1948 $ 9,964,421.80 $251,125.27 21,178.33* 38%**
1949 10,621,660.73 274,519.85 37,445.28 38%**
1950 12,295,834.45 304,042.62 48,404.74 42%
1951 15,088,636.07 327,212.47 66,104.24 50¾%
1952 18,114,464.24 387,363.73 92,252.17 52%
1953 19,813,999.65 460,769.92 111,759.99 52%
We now reach the point where the parties fall into disagreement — application of the credit-limiting Section 131 (b) (1). Instead of using "normal-tax net income" (investment income) to arrive at a ratio to produce the foreign tax credit, petitioner contends it is entitled to employ the figure representing its net Canadian income, as taxed by Canada (underwriting profits) as the numerator of the fraction, and its normal-tax net income from all sources as the denominator. To illustrate: In its 1948 tax return, petitioner's Canadian income subject to Canadian tax was stated as $60,645.66 and the Canadian tax was stated as $18,193.70. Its reported normal-tax net income (net investment income) from all sources for that year was stated as $251,231.692 Petitioner used $60,645.66 as the numerator and $251,231.69 as the denominator of the credit-limiting fraction, which produced a ratio of 24.139%. The total tax liability to this country in 1948 was $99,700.87. This figure multiplied by the ratio of 24.139% produced a product well in excess of the actual tax paid to Canada, thus petitioner claimed the full amount of the Canadian tax, $18,193.70, as a credit. The Tax Court found that the formula adopted by petitioner was contrary to the statute, Section 131(b)(1) and deficiency assessments resulted.
Determination of the basic question, i.e., the amount of foreign tax credit to which petitioner is entitled, turns upon the meaning of credit-limiting Section 131(b)(1) of the 1939 Code. Commissioner takes the position that the term "normal-tax net income" as used in that section is limited to net investment income, and that in computing the amount of the foreign tax credit, for all of the years involved, and regardless of the United States tax basis, petitioner's net investment income from sources without the United States, in this case Canada, becomes the numerator of the credit-limiting fraction and its entire net investment income from all sources (United States and Canada) becomes the denominator. While conceding in its brief that "(b)y sections 207(b) (4) and 13 (a) `normal-tax net income' is in substance net investment income, with certain adjustments not presently material, (a)nd by sections 205 and 131(b), the total credit for foreign income taxes paid may not exceed that proportion of the United States tax which the taxpayer's `normal-tax net income' from Canadian sources is of all its `normal-tax net income,'" petitioner nevertheless insists that we should not adhere to the literal wording of the statute, but should construe it so as to bring about the purpose which motivated Congress in enacting the legislation.3 More precisely, petitioner contends that "(t)he sole purpose of the limitation was to eliminate such portion of the credit, if any, as was attributable to higher tax rates than those prevailing in the United States."
From legislative history, we recognize that in providing for corporate foreign tax credit, Congress was primarily attempting to "mitigate the evil of double taxation," and, incidentally endeavoring to encourage and facilitate corporate foreign enterprise. This was the pronouncement of the Supreme Court in Burnet v. Chicago Portrait Co., 285 U.S. 1, 52 S.Ct. 275, 76 L.Ed. 587, wherein the predecessor of Section 131 of the 1939 Code § 238, Revenue Act of 1921 was considered, and in which the history of the legislation was fully explored. See also, American Chicle Co. v. United...
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