International Business Machines Corp. v. U.S.

• Decision Date: 10 July 1995
• Docket Number: No. 94-5164,94-5164
• Citation: 59 F.3d 1234
• Parties: , 76 A.F.T.R.2d 95-5289, 95-2 USTC P 70,048 INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1234

59 F.3d 1234

17 ITRD 1969, 76 A.F.T.R.2d 95-5289,

95-2 USTC P 70,048

INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellee, v. The UNITED STATES, Defendant-Appellant.

No. 94-5164.

United States Court of Appeals Federal Circuit.

July 10, 1995.

James R. Atwood, Covington & Burling, Washington, DC, argued for plaintiff-appellee. With him on the brief was Andrew W. Singer.

Ernest J. Brown, Attorney, Tax Div., Dept. of Justice, Washington, DC, argued for defendant-appellant. With him on the brief were Loretta C. Argrett, Asst. Atty. Gen., and Gary R. Allen.

Before ARCHER, Chief Judge, PLAGER and BRYSON, Circuit Judges.

BRYSON, Circuit Judge.

This tax case raises a question concerning the constitutionality of a federal statute. The government, as appellant, acknowledges that a 1915 Supreme Court decision is directly on point and that, if the decision is still good law, the statute at issue must be held unconstitutional as applied. The government argues, however, that the 1915 decision has been undermined by subsequent Supreme Court authority, and it asks us to regard that case as no longer binding. We do not regard it as clear that the Supreme Court's more recent decisions have repudiated the 1915 decision. We therefore affirm the decision of the Court of Federal Claims invalidating the taxes at issue in this case.

I

During the pertinent tax years, 1975 through 1984, International Business Machines Corporation (IBM) sold information processing systems and related products to domestic and foreign customers. With respect to many of its foreign sales, IBM manufactured products in the United States, sold them to its foreign subsidiaries, and shipped them either directly to the foreign customers or to consolidation centers in the customers' countries. The products were shipped by common carrier from IBM's domestic manufacturing plants to domestic ports or airports, where they were loaded onto ships or airplanes. Upon arrival in the foreign country, the products were cleared through customs and shipped to the foreign customers or consolidation centers. Title to the products passed from IBM to its foreign subsidiaries when the goods cleared customs in the foreign countries. In some cases, IBM's foreign subsidiaries purchased insurance from foreign insurers for the products during their shipment; in those cases, both IBM and the foreign subsidiaries were listed as insured beneficiaries.

The Internal Revenue Service audited IBM's federal excise tax returns for 1975 through 1984 and determined that, as a beneficiary, IBM was subject to a four percent excise tax on the premiums paid to foreign insurers. The excise tax was assessed under the authority of 26 U.S.C. Sec. 4371, which imposes a four percent tax on each policy of casualty insurance issued by a foreign insurer to a domestic entity for risks or liabilities wholly or partly within the United States. Section 4371 applies only to insurance obtained from foreign insurers who are not subject to federal income tax; it was designed to offset the advantage that such insurers would otherwise have over domestic insurance companies that are subject to domestic income taxes. See H.R.Rep. No. 2333, 77th Cong., 2d Sess. 61 (1942).

IBM paid the assessed excise taxes and filed suit in the Court of Federal Claims, seeking a full refund of the taxes paid. In a thorough opinion on which we rely, the Court of Federal Claims held that the excise tax on premiums charged by foreign insurers, as applied to casualty insurance on goods in the export stream, was in effect a tax upon the exported products themselves and thus ran afoul of the Export Clause of the Constitution, Article I, Section 9, Clause 3. International Business Machines Corp. v. United States, 31 Fed.Cl. 500 (1994). In so holding, the court relied on the Supreme Court's decision in Thames & Mersey Marine Insurance Co. v. United States, 237 U.S. 19, 35 S.Ct 496, 59 L.Ed. 821 (1915), which struck down a similar tax on marine insurance policies.

The Court of Federal Claims rejected the government's argument that the analysis in the Thames & Mersey case has been repudiated in subsequent Supreme Court decisions, and that the excise tax imposed on foreign insurance policies should be upheld as a permissible tax of general application that does not discriminate against exports. Instead, the court concluded that casualty insurance is an integral part of commercial exportation, that the value of exported goods bears a close relationship to the value of insurance policies on those goods, and that the tax imposed in this case therefore amounted to a tax on exports, prohibited by the Export Clause.

II

This case presents the question whether the Supreme Court's analysis of the Export Clause in the Thames & Mersey case retains its vitality in the wake of subsequent Supreme Court decisions involving the Import-Export Clause, Article I, Section 10, Clause 2, in which the Court has modified its approach to issues arising under that Clause.

A

The Export Clause provides, in one sentence: "No Tax or Duty shall be laid on Articles exported from any State." Along with the Import-Export Clause, which prohibits any State, without the consent of Congress, from laying "any Imposts or Duties on Imports or Exports," the Export Clause was "one of the compromises which entered into and made possible the adoption of the Constitution." Fairbank v. United States, 181 U.S. 283, 21 S.Ct. 648, 45 L.Ed. 862 (1901).

At the Constitutional Convention, strong sentiments were voiced on the subject of export taxes. Representatives of the Southern States expressed concern that a Congress controlled by the more numerous and populous Northern States would impose burdensome levies on Southern exports. Charles Pinckney of South Carolina insisted that security against taxes on exports be included in the Constitution, on a par with security against the emancipation of the slaves. 2 The Records of the Federal Convention of 1787 95 (Max Farrand ed. 1927). According to Madison's notes, George Mason of Virginia likewise "urged the necessity of connecting with the power of levying taxes duties & c, ... that no tax should be laid on exports.... He hoped the [Northern] States did not mean to deny the Southern this security." Id. at 305. Concern over the risk of abuse of the power to tax exports was expressed even by a Northern delegate, Elbridge Gerry of Massachusetts, who stated his view that "the legislature could not be trusted with such a power. It might ruin the Country. It might be exercised partially, raising one and depressing another part of it." Id. at 307.

Acknowledging the importance of the Export Clause and its flat prohibitory language, the Supreme Court has consistently given the Clause a broad construction. In one of the first major decisions applying the Export Clause, the Court struck down a stamp tax imposed on bills of lading relating to goods designated for foreign export. Such a tax, the Court explained, "is in substance and effect equivalent to a tax on the articles included in that bill of lading, and, therefore, a tax or duty on exports, and in conflict with the constitutional prohibition." Fairbank v. United States, 181 U.S. at 312, 21 S.Ct. at 660.

In applying that test, the Court distinguished between taxes imposed on property prior to its entering the export stream and taxes imposed, directly or indirectly, on property during the export process. For example, in Cornell v. Coyne, 192 U.S. 418, 24 S.Ct. 383, 48 L.Ed. 504 (1904), the Court upheld a tax on filled cheese that was imposed prior to its exportation, holding that a nondiscriminatory tax on manufactured cheese was not unconstitutional simply because the manufacturer intended from the outset to export the cheese. By contrast, in United States v. Hvoslef, 237 U.S. 1, 35 S.Ct. 459, 59 L.Ed. 813 (1915), the Court struck down a tax imposed on charter parties for the carriage of cargo to foreign ports. As applied to the charter parties for export at issue in the case before it, the Court held that the tax was "nothing else than a tax on exportation" and thus prohibited by the Export Clause. Id. at 18, 35 S.Ct. at 464. It did not matter, the Court held, that the statute in question was not limited to charter parties for exports, but applied to charter parties generally; even if the statute in question created a nondiscriminatory tax of general application, it was unconstitutional to the extent that it was applied to charter parties for export, because in so doing, it had the prohibited effect of imposing a tax on exports. Id.

Two weeks after Hvoslef, the Supreme Court in the Thames & Mersey case struck down a stamp tax on policies of marine insurance to the extent that it applied to policies insuring exports. The Court put the question as whether "the tax upon such policies [is] so directly and closely related to the 'process of exporting' that the tax is in substance a tax upon the exportation and hence within the constitutional prohibition." 237 U.S. at 25, 35 S.Ct. at 498. Finding that marine insurance "is by virtue of the demands of commerce an integral part of the exportation," id. at 26, 35 S.Ct. at 499, the Court concluded that the tax at issue, as a practical matter, fell upon the exporting process and therefore was invalid under the Export Clause.

B

The government concedes that if Thames & Mersey is still good law, the assessments at issue in this case are invalid. In the government's view, however, subsequent decisions construing the Import-Export Clause have rendered Thames & Mersey analytically unsound. The government contends that the Export Clause should be interpreted not to outlaw taxes of general application, as long as they do not discriminate against exported goods or services relating to exports. The government therefore invites this court to disregard the Supreme Court's contrary analysis of the Export Clause in Thames & Mersey.

In...