St. Paul Fire & Marine Ins. Co. v. Reynolds

• Decision Date: 09 March 1942
• Docket Number: No. 108 Civil.,108 Civil.
• Parties: ST. PAUL FIRE & MARINE INS. CO. v. REYNOLDS, Collector of Internal Revenue.
• Court: U.S. District Court — District of Minnesota

44 F. Supp. 863

ST. PAUL FIRE & MARINE INS. CO. v. REYNOLDS, Collector of Internal Revenue.

No. 108 Civil.

District Court, D. Minnesota, Third Division.

March 9, 1942.

Frank C. Hodgson, of Oppenheimer, Hodgson, Brown, Donnelly & Baer, all of St. Paul, Minn., for plaintiff.

Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., for defendant.

BELL, District Judge.

The question in this case is whether the insurance premium taxes paid by the plaintiff in Canada as required by the "Special War Revenue Act of 1915," as amended, of that country for the years 1933, 1934, 1935 and 1936 may be deducted from the plaintiff's Federal income taxes in the United States for those years respectively under the provisions of Section 131(a) (1) of the Revenue Acts of 1932 and 1934, 26 U.S.C.A. Int.Rev.Code § 131(a) (1).

The plaintiff is a Minnesota corporation and during the taxable years mentioned was engaged in writing certain forms of insurance, other than life, in the Dominion of Canada. In its tax returns to the United States for those years it applied as a credit against its income taxes the premium taxes which it paid to Canada under the Special War Revenue Act of 1915, as amended. The Commissioner allowed the premium tax as a deduction from income on the theory that it was a business expense, but disallowed it as a credit against taxes. A deficiency was assessed for each year. The deficiencies were paid, refunds claimed, and this suit is to recover for disallowance thereof.

The Revenue Acts of the United States in force during those years allowed a tax credit "In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; * * *." Section 131(a) (1), Revenue Acts 1932 and 1934.

The Special War Revenue Act of 1915 of Canada, as amended, in effect during the years mentioned, provided: "Every company authorized under the laws of the Dominion of Canada, or of any province thereof, to transact the business of insurance, other than a mutual company carrying on business on the premium deposit plan and an exchange, shall pay to the Minister a tax of one per centum upon the net premiums received by it in Canada, less net premiums paid for re-insurance to companies to which this subsection applies, during the year 1932 and each calendar year thereafter." Section 14(1) of Part III, Revision 1927.

It is the tax imposed by this Canadian statute and paid by the plaintiff that it claims as a credit on its income tax in the United States for the years mentioned. To be entitled to the credit the premium tax of Canada must be interpreted as an income tax as that term is defined by the laws of the United States. In Biddle v. Commissioner, 302 U.S. 573, 58 S.Ct. 379, 381, 82 L.Ed. 431, the Court said: "At the outset it is to be observed that decision must turn on the precise meaning of the words in the statute which grants to the citizen taxpayer a credit for foreign `income taxes paid.' The power to tax and to grant the credit resides in Congress, and it is the will of Congress which controls the application of the provisions for credit. The expression of its will in legislation must be taken to conform to its own criteria unless the statute, by express language or necessary implication, makes the meaning of the phrase `paid or accrued,' and hence the operation of the statute in which it occurs depends upon its characterization by the foreign statutes and by decisions under them."

Some well recognized principles governing interpretation of taxing statutes will be helpful. The general rule requiring adherence to the letter of the statute applies with strictness to taxing acts. Crooks v. Harrelson, 282 U.S. 55, 51 S.Ct. 49, 75 L.Ed. 156. In case of doubt, taxing statutes are construed in favor of the taxpayer. Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211. Whether deductions shall be allowed depends on legislative grace; and only where there is a clear provision authorizing it can any particular deduction be allowed. New Colonial Ice Company v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348. Statutory provisions granting exemptions are to be strictly construed. United States v. Stewart, 311 U.S. 60, 61 S.Ct. 102, 85 L.Ed. 40. Those who seek exemption from a tax must be able to present more than a doubt or ambiguity. Bank of Commerce v. Tennessee, 161 U.S. 134, 16 S.Ct. 456, 40 L.Ed. 645; Id., 163 U.S. 416, 16 S.Ct. 1113, 41 L. Ed. 211. Exemptions from taxation cannot rest upon mere implications. United States Trust Company v. Helvering, 307 U.S. 57, 59 S.Ct. 692, 83 L.Ed. 1104; Trotter v. Tennessee, 290 U.S. 354, 54 S.Ct. 138, 78 L.Ed. 358. Broad statutory exemptions frequently have been construed narrowly and confined to situations where the subject matter of the exemption was directly involved. Hale v. Iowa State Board of Assessment and Review, 302 U.S. 95, 58 S.Ct. 102, 82 L.Ed. 72.

The term "income tax" as used in Section 131(a) (1) has a well defined meaning which may be ascertained by an examination of the decisions of the United States courts. The Supreme Court in Stratton's Independence, Limited, v. Howbert, Collector, 231 U.S. 399, 34 S.Ct. 136, 140, 58 L.Ed. 285, said: "`Income' may be defined as the gain derived from capital, from labor, or from both combined." In Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 193, 64 L.Ed. 521, 9 A.L.R. 1570, the Court said: "`Income may be defined as the gain derived from capital, from labor, or from both combined,' provided it be understood to include profit gained through a sale or conversion of capital assets." According to these definitions the term "Income" as used in the Revenue Acts includes only gain or profit as a basis for income taxation and they exclude gross receipts or gross income as such a basis. The insurance premiums on which the taxes in Canada were based were not gain or profit but constituted a portion of the plaintiff's gross receipts or gross income; and, on the business producing them, a gain may have been derived or a loss may have been sustained. Irrespective of the gain or loss element in the premiums, the tax is measured, not by income, either net or gross, but by net premiums...