New York Life Ins. Co. v. Anderson

• Decision Date: 14 January 1920
• Docket Number: 50.
• Citation: 263 F. 527
• Parties: NEW YORK LIFE INS. CO. v. ANDERSON, Internal Revenue Collector.
• Court: U.S. Court of Appeals — Second Circuit

263 F. 527

NEW YORK LIFE INS. CO. v. ANDERSON, Internal Revenue Collector.

No. 50.

United States Court of Appeals, Second Circuit.

January 14, 1920

James H. McIntosh, of New York City, for plaintiff.

Francis G. Caffey, U.S. Atty. (Addison S. Pratt, Special Asst. U.S Atty., of counsel), for defendant.

For opinions below, see 257 F. 576; 262 F. 215.

Plaintiff is a purely mutual life insurance company organized under the laws of the state of New York. As such it became liable to pay a tax to the United States for the year 1910, pursuant to section 38 of the Act of August 5, 1909 (36 Stat. 112). To ascertain the amount of said tax, plaintiff was called on to report, and did report, what it alleged to be its 'entire net income.'

By provisions of this section such net income 'shall be ascertained by deducting from the gross amount of the income of such * * * insurance company, received within the year from all sources, * * * (2) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, * * * ' The statutory requirements for annual return require statement of 'the total amount of all losses actually sustained during the year and not compensated by insurance or otherwise, stating separately any amounts allowed for depreciation of property. * * * ' The plaintiff, having made return as aforesaid to the defendant in his official capacity, paid the tax computed on the net income stated in said return.

At a later date the Commissioner of Internal Revenue disputed the correctness of the computation and (in effect) directed that the return be amended in such wise as to greatly increase the apparent net income of plaintiff, and to give rise to a tax over and above the amount already paid of $73,277.54. Thereupon the defendant demanded payment of this additional sum, and on February 3, 1912, plaintiff paid it under coercion and after due protest.

This action was brought to recover the amount so paid. The complaint sets forth the details of the reassessment at length, and shows just what items it conceives to have been illegally exacted. Plaintiff verified its complaint. The answer denies positively and on oath every allegation of the complaint, except plaintiff's incorporation defendant's official character, and the jurisdiction of the court. By the agreed statement of facts submitted to the trial judge it admittedly appears that in the return as amended under official coercion there were certain clerical errors and some mistakes of law which entitled plaintiff to some recovery viz. at least $694.53.

It further appeared that plaintiff, having before this suit appealed to the Commissioner pursuant to R.S. Sec. 3220 (Comp. St. Sec. 5944), for the refund of said $73,277.54 such appeal was rejected, except as to said sum of $694.53. There is no evidence that plaintiff either sought to collect this small amount of money or that either collector or Commissioner tendered it. On all the facts stipulated the District Court substantially reassessed the tax to the satisfaction of neither party, and each took a writ of error.

Plaintiff complains: (1) That the court answered in the negative the following question: When such securities as stocks and bonds are the property of such a taxpayer as the plaintiff, much of whose business consists in dealing in and owning the same, is the amount of their market depreciation during the taxing year that 'reasonable allowance for depreciation of property' which the statute authorizes as a deduction?

Plaintiff further assigns it as error: (2) That the court, under such pleadings as above outlined, increased plaintiff's apparent net income by taking away deductions allowed by defendant and the commissioner, and, having in this case computed an additional tax thereon, used the same as a set-off to diminish plaintiff's recovery.

Defendant complains: (1) That the court held dividends, or apportionment of surplus due to plaintiff's policy holders, and (by their directions) applied on account of renewal premiums, to be nontaxable. (2) Because interest was allowed upon the aforesaid sum of $694.53.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

HOUGH Circuit Judge (after stating the facts as above).

We are reminded that the tax in question is not 'in any proper sense an income tax,' but is an excise on plaintiff's conduct of business in a corporate capacity. Anderson v. Forty-Two Broadway Co., 239 U.S.at page 72, 36 Sup.Ct. 17, 60 L.Ed. 152. This truth does not affect the present litigation, for we are concerned, in respect of the major proposition argued, not with what income is, but what shall be, deducted from an admitted gross income.

The major issue here is the permissibility of deducting losses in value of the securities constituting the major portion of plaintiff's assets. That plaintiff is an insurance company is an accident, having no relation to the interpretation of the statute. It is but a happening that the business of such a corporation requires the maintenance of relatively enormous amounts of 'securities' as the basis of its operation, and an asset sufficiently stable to answer the legal requirements of numerous states and countries, yet sufficiently liquid to respond to the needs of the holders of maturing policies.

It is here admitted that, judged by any standard familiar to business men, the securities of plaintiff were worth at the end of 1910 several million dollars less than they were at the beginning of that year. It is further admitted that, not only was it the business custom of plaintiff to revalue its securities in accordance with the market annually, but that such procedure was and is a reasonable business conservatism, and a frequent, though not universal, statutory requirement.

Under this taxing act the question is not strictly whether depreciation in market value is a loss, but whether, when Congress specifically includes within 'losses actually sustained within the year, * * * a reasonable allowance for depreciation of property,' depreciation does not become a loss, no matter what persons other than Congress may think on the subject.

We have no doubt that this loss in market value is depreciation. The word means, by derivation and common usage, a 'fall in value; reduction of worth'; and it seems to us to require mention only to prove that the average citizen, for whom statutes are assumed to be made, would judge depreciation of his own bonds by the opinion of the public, however thoroughly convinced of the ultimate wisdom of holding onto what had depreciated.

This definition, as applied to securities, has been accepted in National Bank v. Baker, 27 Ill.App.at page 359, and the view of the scope of the word has been judicially indicated in Von Baumbach v. Sargent, etc., Co., 242 U.S.at page 524, 37 Sup.Ct. 201, 61 L.Ed. 460, where it is said that calling the taking of ore from a mine depreciation would be 'a strained use of the term * * * as generally understood in business circles. ' The plain inference is that the phrase is used in the statute in a sense that would be generally understood in business circles, and we hold that the depreciation claimed by plaintiff in its return is used in that sense, and should have been allowed as a deduction.

To decide whether the trial judge was right in method when he adjusted or reassessed this tax from all the facts before him requires consideration of (1) the inherent nature of an action such as this under federal rulings and (2) the effect of modern code practice thereon.

That a taxpayer's suit of this sort is essentially an action of assumpsit for money had and received has been too long settled to admit of doubt. Philadelphia v. The Collector, 5 Wall. 720, 18 L.Ed. 614; Cary v. Curtis, 3 How. 236, 11 L.Ed. 576; Bailey v. Railroad Co., 22 Wall. 604, 22 L.Ed. 840. Any assumpsit of this kind is of an equitable nature and of comparatively modern growth. Its history is classically set forth by Story, J., in Cary v. Curtis, supra, and by Selden, J., in McKyring v. Bull, 16 N.Y. 297, 69 Am.Dec. 696.

Ingrafting equitable principles on the common-law...