National Life Ins. Co. v. United States, M-163.

• Citation: 4 F. Supp. 1000
• Decision Date: 06 November 1933
• Docket Number: No. M-163.,M-163.
• Parties: NATIONAL LIFE INS. CO. v. UNITED STATES.
• Court: Court of Federal Claims

4 F. Supp. 1000

NATIONAL LIFE INS. CO. v. UNITED STATES.

No. M-163.

Court of Claims.

November 6, 1933.

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Guy Patten, of Washington, D. C. (A. R. Serven and John W. Smith, both of Washington, D. C., and Burton P. Sears, of Chicago, Ill., on the brief), for plaintiff.

Edward H. Horton and W. W. Scott, both of Washington, D. C. (Lisle A. Smith, of Washington, D. C., on the brief), for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.

LITTLETON, Judge.

The first question relates to the right of plaintiff, an insurance company, and the National Life Building Company, an ordinary corporation, to file consolidated returns for each of the years 1923 to 1926, inclusive, and have the tax for such years computed upon such consolidated net income. We think the commissioner correctly held that a life insurance company, either life or other than life or mutual, was not entitled under the Revenue Act of 1921 (42 Stat. 227, 240) and subsequent acts to file consolidated returns with an ordinary corporation taxable under the provisions of the acts applicable to corporations generally, or to have its tax determined on the basis of such consolidation. This action of the commissioner has been approved in Fire Companies Building Corp., 23 B. T. A. 550, 553, affirmed (C. C. A.) 54 F.(2d) 488, 489, and Cincinnati Underwriters Agency Co. v. Commissioner (C. C. A.) 63 F.(2d) 309. With these decisions we entirely agree. They both dealt with the year 1926, in which the tax rate of the two corporations was different; but we think the fundamental and underlying reason for denying affiliation between an insurance company and an ordinary corporation existed for 1921 and subsequent years because of special treatment and classification by Congress of insurance corporations.

In the Fire Companies Building Corporation Case, supra, the court said: "Obviously logic must not stifle understanding, and some modus vivendi must be found. In such cases courts choose that alternative which most nearly conforms to the general purpose, so far as they can glean it. U. S. v. Katz, 271 U. S. 354, 46 S. Ct. 513, 70 L. Ed. 986; Hellmich v. Hellman, 276 U. S. 233, 48 S. Ct. 244, 72 L. Ed. 544, 56 A. L. R. 379. It appears to us rather that the general language of the section 240-a was subject to an exception in this case, than that the amorphous consolidated income should be taxed at either rate. It is idle to protest against such liberties; courts have taken them from time immemorial, and must do so if the business at hand is to go on." In the Cincinnati Underwriters Agency Company Case, supra, the court pointed out that: "There would be much force in the petitioner's contention were it possible to give it effect without defeating the legislative intent of other provisions of the act. One of such purposes, as appears from provisions made exclusively applicable to insurance companies, was to segregate such companies from other corporations for tax purposes." The court further held, in connection with the company's contention that the revenue department had permitted affiliation between insurance corporations and other corporations under the acts prior to 1926, that there were provisions even in the earlier acts which made it impracticable to permit affiliation and that there was no justification for the department's practice under those acts.

A short statement with reference to the consolidated returns' provision and the treatment of insurance corporations under the 1921 and subsequent acts will, we think, serve further to support the above-mentioned conclusions of the court that the earlier acts, as well as the 1926 act (26 USCA § 993 and note), did not permit the consolidation of insurance corporations with ordinary corporations. In Brewer's Lessee v. Blougher, 14 Pet. 178, at page 198, 10 L. Ed. 408, it was pointed out by the court that: "It is, undoubtedly, the duty of the court to ascertain the meaning of the legislature, from the words used in the statute, and the subject-matter to which it relates; and to restrain its operation within narrower limits than its words import, if the court are satisfied that the literal meaning of its language would extend to cases which the legislature never designed to embrace in it." The consolidated returns' section, 240 of the Revenue Act of 1918 (40 Stat. 1081), was enacted at a time when insurance corporations were treated for tax purposes under the revenue statutes the same as ordinary domestic corporations; however, in the Revenue Act of 1921, approved November 23, 1921 (42 Stat. 252, § 230 et seq.), a material change was made by Congress in the basis of computing the net income of life insurance corporations. At the urgent request of such corporations special provisions were enacted for the determination of taxable income of such corporations consisting solely of investment income, that is, income from interest, dividends, and rents. Underwriting income, that is, premium receipts, was no longer included in gross income under the Revenue Act of 1921 and subsequent acts, and the deductions allowed life insurance companies, as well as those allowed insurance companies, other than life or mutual, differed materially from those allowed ordinary corporations. Thus, under the Revenue Act of 1921 and subsequent acts, deductions for losses on sale of capital assets were not allowed to life insurance companies and companies other than life or mutual. This material change in the basis of computing the net income of life insurance companies was considered by this court at length in Massachusetts Mutual Life Insurance Co. v. United States, 56 F.(2d) 897, 900, 901, wherein we recognized the peculiar plan or system, complete in itself and differing in many material respects from that relating to the taxation of ordinary domestic corporations, for the taxation of insurance companies. This special treatment of insurance companies so effectively placed them outside the class of ordinary domestic corporations entitled to file consolidated returns under the statute that it was no longer practicable to compute the tax payable by an insurance corporation on the basis of consolidation thereof with that of an ordinary corporation, other than an insurance company, and we think this special treatment manifests a purpose on the part of Congress to exclude insurance companies from the class of ordinary business corporations entitled to file consolidated returns as effectively as if a statement to that effect had been inserted in the act. Although the language of section 240 was not changed so as specifically to exclude insurance companies, neither was the language of other sections, equally broad, changed. In many sections of the 1921 and subsequent acts can be found language which, under the general definitions, is broad enough to include insurance companies, but, inasmuch as insurance companies were given special treatment as to income and deductions, no one would claim that they were included in these sections relating to corporations generally. When insurance companies were given special treatment in the Revenue Act of 1921 and subsequent acts, and their income and deductions specifically defined in a manner materially different from the income and deductions of ordinary domestic corporations, the definitions of the term "corporation" and the term "domestic" and the language of section 240, that "for the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, * * *" contained in the Revenue Act of 1918 (40 Stat. 1082), were not changed but were carried forward into the Act of 1921 (42 Stat. 260) and subsequent acts. But because of a different system for the taxation of insurance companies provided in the act of 1921 and subsequent acts, these definitions and the quoted provision of the consolidated-returns section no longer had the same application to insurance companies they previously had and do not require the liberal application contended for by plaintiff. Massachusetts Mutual Life Insurance Co. v. U. S., supra.

The foregoing conclusion on the question of consolidation disposes of the plaintiff's claim for a reduction from gross income of amounts paid by it to the National Life Building Company as rentals for space occupied by plaintiff in a building owned by the building company. Plaintiff did not own the building. It was owned by the building company, a separate and distinct corporation, to which plaintiff paid rent and no amount was included in the income of plaintiff under the provisions of section 245 (b) of the Revenue Act of 1926 (26 USCA § 1004 (b) as rental value of space occupied. The question involved in Independent Life Insurance Co. of America, 17 B. T. A. 757, is therefore not present in this case. The rental paid by plaintiff to the building company was not deductible from plaintiff's gross income under the statute and the commissioner correctly denied such deduction.

Plaintiff's net income as determined without consolidation with the building company was taxed by the commissioner at the rates imposed upon insurance companies and, in view of our conclusion that the commissioner correctly denied affiliation, the question of the rate of tax is no longer in the case.

The next question is whether plaintiff and the commissioner correctly included in gross income for 1923 to 1926, inclusive, accrued interest on mortgage loans, which mortgages were foreclosed and the properties purchased by plaintiff at foreclosure sales during the respective years for the amount of the mortgage...