Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co.

• Decision Date: 17 November 1981
• Citation: 428 N.E.2d 297,384 Mass. 607
• Parties: COMMISSIONER OF REVENUE v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY et al. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 297

428 N.E.2d 297

384 Mass. 607

COMMISSIONER OF REVENUE v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY et al.

¹

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Sept. 16, 1981.

Decided Nov. 17, 1981.

Stephen S. Ostrach, Asst. Atty. Gen., for plaintiff.

Robert W. Meserve and Mark A. Michelson, Boston (Robert J. McGee and John N. Garner, Boston, with them) for defendants.

Before HENNESSEY, C. J., and LIACOS, ABRAMS and LYNCH, JJ.

ABRAMS, Justice.

The Commissioner of Revenue appeals from a decision of the Appellate Tax Board (board), which granted three domestic insurance companies an abatement on an excise tax imposed by G. L. c. 63, § 22A, inserted by St. 1971, c. 555, § 27. ²

The three companies are domestic insurance companies within the meaning of § 22A. Each of the companies filed with the Commissioner of Insurance an annual statement of their financial condition pursuant to G. L. c. 175, § 25, and with the Commissioner of Revenue (Commissioner) ³ an excise tax return pursuant to § 22A for the year 1971. The excise tax returns reported a lesser amount of "total gross investment income" than the amount shown on Exhibit 3 of the annual statements. The Commissioner notified the companies that he intended to increase their gross investment incomes as reported pursuant to § 22A, and to assess them accordingly. ⁴ The companies paid the assessed tax and applied to the Commissioner for abatement of their 1971 excise. The Commissioner denied the applications and the companies appealed to the board.

Before the board, the companies challenged the constitutionality of § 22A claiming that if the board were to read § 22A literally, then the statute would be unconstitutional as an improper delegation of the legislative taxing power. The companies argue and the board agreed that since the Commissioner of Insurance has authority under G. L. c. 175, § 15, to determine the contents of the insurers' annual statement filed pursuant to § 25, and since the annual statement is used to determine the amount of excise tax, § 22A, in effect, gives the Commissioner of Insurance the discretion to determine the tax imposed. The board determined that the companies may have raised a valid constitutional claim. In order to avoid constitutional doubts, the board held that § 22A "does not preclude an inquiry into the nature of the items in issue to determine whether in law and in fact they are includable in the term 'total gross investment income' for excise tax purposes, although required to be reported in any event as bearing on the company's financial condition for regulatory purposes."

The board then independently examined eight categories of income (see note 4 supra) and determined that the eight categories were not "gross investment income" for tax purposes. ⁵ The board entered a decision granting the requested abatements.

1. The constitutionality of § 22A. The overall statutory pattern of § 22A does not involve the delegation of legislative authority. General Laws c. 175, § 25, permits the Commissioner of Insurance to determine the contents of the insurers' annual statement for the "purpose of eliciting a complete and accurate exhibit of the condition and transactions of the companies." Section 25 also allows the Commissioner of Insurance to adopt "the latest applicable form of annual statement approved by the National Association of Insurance Commissioners." The Commissioner of Insurance uses the information contained in this statement to discharge his "duty to exercise a broad surveillance over the operations of companies with a view to instituting procedures and recommending changes which might prevent or reduce the likelihood of unsuccessful ventures." Commissioner of Ins. v. First Nat'l Bank, 352 Mass. 74, 79-80, 223 N.E.2d 684 (1967).

The Commissioner of Insurance does not include or exclude items in the annual statement for the purpose of affecting the amount of the excise tax, but rather for the purpose of regulating the companies. His power to affect the amount of tax payable under the formula established by the Legislature is purely incidental to those regulatory powers. The taxing power remains with the Legislature as provided in the State Constitution. Part II, c. 1, § 1, art. 4, of the Massachusetts Constitution.

Although the Commissioner of Insurance may incidentally affect the amount of the tax payable, he may not do so except through acts of independent legal significance. "It may ... be laid down as a general proposition that where a legislature enacts a specific rule for fixing a rate of taxation, by which rule the rate is mathematically deduced from facts and events occurring within the year and created without reference to the matter of that rate, there is no abdication of the legislative function, but, on the contrary, a direct legislative determination of the rate." Michigan Cent. R.R. v. Powers, 201 U.S. 245, 297, 26 S.Ct. 459, 464, 50 L.Ed. 744 (1906). Thus, "(t)he fact that (a) deduction allowed to a Federal savings and loan association is determined by a Federal agency decision concerning reserve requirements is not an unconstitutional delegation of legislative powers in violation of ... the Declaration of Rights of the Constitution of the Commonwealth.... In numerous instances a taxpayer's obligation is affected by the conduct of other persons, but those other persons are not exercising the authority of the Legislature to tax. Their action may influence the amount of tax payable, but the taxing power has not been delegated to them" (emphasis added). First Fed. Sav. & Loan Ass'n v. State Tax Comm'n, 372 Mass. 478, 491, 363 N.E.2d 474 (1977). See Parker Affiliated Cos. v. Department of Revenue, --- Mass ---, ---, Mass.Adv.Sh. (1981) 77, 87, 415 N.E.2d 825 ("the prospective incorporation of Federal tax law does not constitute impermissible delegation of legislative authority").

The companies claim that three Opinions of the Justices support the board's conclusion that § 22A creates "constitutional doubts." We do not agree. Those opinions involved pending legislation in which the Justices concluded that the legislative authority to enact substantive measures had been delegated. See, e. g., Opinion of the Justices, 334 Mass. 716, 134 N.E.2d 892 (1956) (power to appropriate funds); Opinion of the Justices, 328 Mass. 674, 105 N.E.2d 565 (1952) (power to make structural changes in the form of town government); Opinion of the Justices, 239 Mass. 606, 133 N.E. 453 (1921) (power to establish offense to be punished by fine or imprisonment). See Corning Glass Works v. Ann & Hope, Inc. of Danvers, 363 Mass. 409, 294 N.E.2d 354 (1973). In each of these instances the delegation of legislative authority was the major thrust of the pending legislation. We believe that § 22A differs markedly from the legislation under consideration in those Opinions of the Justices.

However, the Legislature has "(g)reat latitude of discretion ... in determining ... the standard or measure to be adopted as the foundation of the proposed excise (tax)." Connecticut Mut. Life Ins. Co. v. Commonwealth, 133 Mass. 161, 163 (1882). In adopting Exhibit 3, the Legislature determined the standard of measure to be used. Hence, G. L. c. 63, § 22A, is not an improper delegation of the legislative power to tax.

2. The meaning of "total gross investment income" in § 22A. In the absence of constitutional doubts our task is to determine what the Legislature intended to subject to the excise tax by use of the words "total gross investment income earned during the preceding calendar year, as reported in its annual statement." There is nothing in G. L. c. 63, or its legislative history, which is instructive.

The insurance companies assert that the Legislature intended to use gross investment income, in the tax sense, only to the extent that it is required to be reported in the annual statement. Thus, an item would become part of the excise tax measure only if it was both an item of actual gross income, as defined for tax purposes, and was required to be reported in the annual statement. Since the board was concerned with the constitutionality of § 22A, it adopted the companies' argument and went on to consider eight separate items of income included by the companies in Exhibit 3 but excluded on their excise return (see note 4 supra).

Our analysis begins with the underlying premise that the excise tax imposed on the insurance companies by § 22A is an excise tax, not an income tax. The tax measure includes items that are not "income" to the companies in the traditional sense, such as imputed home office rent, amortization of Federal investment tax credits, and earnings on assets held in connection with employee and agents' pension plans; and excludes items which are income in the traditional sense, such as capital gains. The fact that the measure of the tax mentions "gross investment income" as reported in the annual statement does not divest the tax of its excise character. As we said in Associated Indus. of Mass., Inc. v. Commissioner of Revenue, 378 Mass. 657, ---, Mass.Adv.Sh. (1979) 2027, 2038, 393 N.E.2d 812: "The fact that a tax on the exercise of a privilege is adjusted in whole or in part to property values does not deprive the tax of its character as an excise." The tax at issue is imposed on the insurers for the privilege of doing business in the Commonwealth. State Tax Comm'n v. John Hancock Mut. Life Ins. Co., 341 Mass. 555, 559, 170 N.E.2d 711 (1960). Black's Law Dictionary 506 (5th ed. 1979). Section 22A does not impose a limited income tax. Rather, it sets out a workable measure, a yardstick to calculate the value of the privilege of doing business in Massachusetts.

The only limitation upon the Legislature's use of its excise taxing power is that the tax be reasonable. Connecticut Mut. Life Ins. Co. v. Commonwealth, supra at 163. "States are permitted to make fair approximations of the value of ......