Great-West Life Assur. Co. v. United States

Decision Date05 May 1982
Docket NumberNo. 114-79T.,114-79T.
Citation678 F.2d 180
PartiesThe GREAT-WEST LIFE ASSURANCE COMPANY v. The UNITED STATES.
CourtU.S. Claims Court

Edward J. Schmuck, Washington, D. C., attorney of record, for plaintiff. James V. Heffernan, Jeffery P. Capron and Sutherland, Asbill & Brennan, Washington, D. C., of counsel.

Bruce W. Reynolds, Washington, D. C., with whom was Asst. Atty. Gen. Glenn L. Archer, Jr., Washington, D. C., for defendant. Theodore D. Peyser, Washington, D. C., of counsel.

Before KASHIWA, KUNZIG* and SMITH, Judges.

KASHIWA, Judge:

This case is before the court on the parties' cross motions for summary judgment. After hearing oral argument, we allow defendant summary judgment.

There are no issues of material fact, as the parties have stipulated thereto. Plaintiff is a life insurance company organized under the laws of Canada and licensed to do business by 44 states and the District of Columbia. Plaintiff reserves, as it must under various state regulations, a portion of its assets in trusteed accounts within the United States. Included among the assets in the trusteed accounts are numerous bonds of, and certificates of deposit with, various Canadian borrowers. The Canadian borrowers fall generally into the following categories: (1) the Government of Canada or its political subdivisions; (2) corporations owned by the Government of Canada or its political subdivisions; (3) public utilities (which may be either publicly held or owned by a governmental body); (4) various other publicly held corporations; and (5) public and private banks from which plaintiff held short-term certificates of deposit.

Plaintiff received $1,446,683.05 in 1967, $1,687,112.45 in 1968, and $1,928,606.37 in 1969 as interest from these Canadian borrowers. For those taxable years, plaintiff determined this interest was "effectively connected" with its United States life insurance business and subject to tax as "gross investment income" under 26 U.S.C. (Internal Revenue Code of 1954, hereafter I.R.C. or Code) § 804(b)(1).1 Plaintiff so reported the interest and paid the relevant tax.

Subsequently, plaintiff concluded that Article XII, as amended, of the Double Tax Convention Between the United States and Canada exempted this interest from all United States tax. Plaintiff timely filed refund claims for the 1967, 1968, and 1969 tax years; this suit ultimately followed. As the parties agree the interest paid plaintiff on the trusteed obligations is otherwise taxable under I.R.C. § 804(b)(1), the primary2 issue presented herein is whether Article XII exempts that Canadian corporate interest. If not, plaintiff's suit must fail.

I.

Canada and the United States first entered a treaty concerning income taxes in 1937. See Income Tax Convention and Protocol Between Canada and the United States, August 13, 1937, 50 Stat. 1399, T. S. No. 920. That treaty was terminated on April 30, 1941, and contained no provision relating to interest. A second treaty, the Double Taxation Convention Between the United States and Canada, June 15, 1942, 56 Stat. 1399, T. S. No. 983, included a provision relating to interest:

ARTICLE XII
Dividends and interest paid on or after the effective date of this Convention by a corporation organized under the laws of Canada to individual residents of Canada, other than citizens of the United States of America, or to corporations organized under the laws of Canada shall be exempt from all income taxes imposed by the United States of America.

In 1951, the second treaty was amended by the Supplemental Convention on Double Taxation Between the United States and Canada, November 21, 1951, 2 U.S.T. 2235, T.I.A.S. No. 2347. Following amendment, Article XII read:

ARTICLE XII
1. Dividends and interest paid by a corporation organized under the laws of Canada to a recipient, other than a citizen or resident of the United States of America or a corporation organized under the laws of the United States of America, shall be exempt from all income taxes imposed by the United States of America.
2. Dividends and interest paid by a corporation organized under the laws of the United States of America whose business is not managed and controlled in Canada to a recipient, other than a resident of Canada or a corporation whose business is managed and controlled in Canada, shall be exempt from all taxes imposed by Canada.3 Footnote omitted.

Despite later modification to other provisions of the treaty, Article XII as amended in 1951 continued in effect during the tax years here in question.

II.

The parties have stipulated that each of the literal requirements of Article XII have been met: the amounts at issue received by Great-West are "interest"; each item of interest was paid by "a corporation organized under the laws of Canada";4 and the recipient of interest (i.e., plaintiff) is neither "a citizen or resident of the United States of America"5 nor "a corporation organized under the laws of the United States." The inquiry, however, does not stop there, for the courts have long recognized treaties must be construed so as to enforce the intent of the contracting parties. As the Supreme Court said:

* * * It is a canon of interpretation to so construe a law or a treaty as to give effect to the object designed, and for that purpose all of its provisions must be examined in the light of attendant and surrounding circumstances. * * * The inquiry in all such cases is as to what was intended in the law by the legislature, and in the treaty by the contracting parties. In re Ross, 140 U.S. 453, 475, 11 S.Ct. 897, 904, 35 L.Ed. 581 (1891).

See Factor v. Laubenheimer, 290 U.S. 276, 294-295, 54 S.Ct. 191, 196, 78 L.Ed. 315 (1933). The actual language employed is of considerable relevance. But other factors,

* * * such as the court's sense of the conditions that existed when the language of the provision was adopted, its awareness of the mischief the provision was meant to remedy, and the treaty history available to it, * * * may lead the court to conclude that the language of the provision only imperfectly manifests its purpose, * * *. Reed v. Wiser, 555 F.2d 1079, 1088 (2d Cir. 1977), citing Eck v. United Arab Airlines, Inc., 360 F.2d 804, 812 (2d Cir. 1966).

Where that is so, Ross and its progeny require that the underlying purpose be given effect. Thus,

* * * in determining whether the taxpayer in a given case is protected by the terms of a treaty, * * * "it is necessary to examine not only the language, but the entire context of agreement." Johansson v. United States, 336 F.2d 809, 813 (5th Cir. 1964);6 citations omitted.

We discuss briefly that context.

III.

The determination of where income is derived or "sourced" is generally of no moment to either United States citizens or United States corporations, for such persons are subject to tax under I.R.C. § 1 and I.R.C. § 11, respectively, on their worldwide income. Likewise, the income of a resident alien individual is taxed under I.R.C. § 1 without regard to source.7 For nonresident aliens and foreign corporations, however, the sourcing of income is of critical importance.8

Since 1921,9 the United States has had provisions in its tax laws deeming interest and dividends paid by certain foreign corporations as United States source income, unless only a very low percentage of the payor's total income could be associated with the United States.10

Absent the provisions, such payments arguably would be sourced outside the United States by virtue of the payor's foreign incorporation. In that circumstance the United States, like most other nations, would generally tax such extranational income only when paid to those clearly within the United States taxing jurisdiction: United States citizens, alien individuals resident in the United States, and United States corporations.11See note 8, supra, and accompanying text. Deeming such extranational income to be sourced within the United States, on the other hand, subjects the recipient, regardless of citizenship, residence, or incorporation, to a United States tax. See notes 11 and 8, supra. Few sovereign nations other than the United States take such an expansive view of their jurisdiction to tax and not surprisingly, other nations have thought the deemed sourcing provisions controversial. This difference in view is more than academic, for the collection of a United States tax on such extranational income is unlikely without cooperation from the nation in which the payor is incorporated or in which the recipient may be found. Moreover, in an extreme form, such controversy could impair the exchange of information necessary to collect a United States tax on extranational income paid to those clearly within the United States' taxing jurisdiction. With these considerations in mind, the United States has occasionally agreed in its bilateral tax treaties to waive the United States taxes otherwise applicable through the deemed sourcing provisions.

That Article XII of the Canadian treaty constitutes one such waiver of taxation is clear from the Report by the Senate Committee on Foreign Relations, which accompanied the original treaty during ratification:

Under the existing law, if interest or a dividend is paid to a Canadian corporation, a withholding tax is collected when such interest or dividend is paid to the Canadian corporation. In addition, when the Canadian corporation pays interest or a dividend to its Canadian debt holders or shareholders, such interest or dividend is also subject to the United States income tax if the Canadian corporation derives more than a certain percentage of its gross income from United States sources. Both from a legal as well as a practical standpoint the authority to levy and collect such a tax from the Canadian debt holder or shareholder has been questioned. The collection of such a tax is extremely doubtful, since the Canadian debt holder or shareholder may have no property situated within the United States. Under
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