Penn Mut Life Ins Co. v. Lederer

• Decision Date: 04 February 1918
• Docket Number: 3724.
• Citation: 247 F. 559
• Parties: PENN MUT. LIFE INS. CO. v. LEDERER, Collector of Internal Revenue.
• Court: U.S. District Court — Eastern District of Pennsylvania

247 F. 559

PENN MUT. LIFE INS. CO. v. LEDERER, Collector of Internal Revenue.

No. 3724.

United States District Court, E.D. Pennsylvania.

February 4, 1918

[Copyrighted Material Omitted]

George Wharton Pepper, of Philadelphia, Pa., for plaintiff.

Francis Fisher Kane, of Philadelphia, Pa., for defendant.

DICKINSON District Judge.

Trial by jury was, by stipulation made in accordance with the acts of Congress on the subject, waived by the parties. The facts in the sense of the evidentiary facts, are not in controversy, nor indeed is there much, if any, conflict over the ultimate fact findings. The case is really one involving only a question of law arising out of differences in the interpretation of the Revenue Act of October 3, 1913, and is to all substantial intents and purposes a case stated. The atmosphere in which, under the present war conditions, every responsible interpreter of revenue laws finds himself induces a disposition to incline to that interpretation of the revenue laws which will result in producing revenue. Congress, however, is to be presumed to have been influenced by a like attitude, and to have taxed everybody and everything which were deemed proper subjects of taxation. There is, in consequence, no call upon the courts to extend by construction the taxable lists as made up by Congress. Neither of these observations, however, involves the thought of a change in the proper rule of the construction of statutes.

We have been reminded by counsel for the plaintiff that the accepted rule is, as the doctrine is sometimes phrased, 'that taxing statutes are to be strictly construed. ' Care must be exercised in the use of this phrase, as of all other general expressions, so as not to permit the true doctrine to be misunderstood. It does not mean, as it is sometimes thoughtlessly assumed to mean, that the courts, in construing such statutes, should lean strongly toward the taxpayer, and add the weight of all their power and authority to a resistance to the collection of the tax. The doctrine is more fundamental, and has a historical basis to be found in the political history of our people. It is the American doctrine that the people govern themselves, and a vital part of that principle is that they, and they only, tax themselves. No tax can in consequence be imposed except by their representatives in Congress, and a further negative consequence is that no tax can be imposed by the courts or the executive, through judicial or administrative construction of statutes. This is the sense in which tax laws are to be strictly construed. When, however, Congress has indicated its purpose and intent to tax, the tax must be paid, and the courts cannot refuse to enforce that purpose and intent merely because, in the expression of its will, Congress has failed to dot or to cross some of the letters which make up the written words in which that mandate is recorded. In this sense laws for the raising of revenue are not to be strictly construed, but are to be given that construction which is given to remedial statutes. In other words, the doctrine is a broad and not a picayune one.

With this prelude, we come to the reading of this statute. It clearly contains the general command to this plaintiff, and other like corporations, to pay a tax. We cannot understand just what payment is commanded to be made, unless we first understand what these corporations are and the nature of the business which they transact. This is in an emphatic sense part at least of the subject-matter of the law. It will be found that they are somewhat complex in character and their business partakes of a like complexity.

The 'mathematician' of the plaintiff has presented this phase of the question in a very intelligible and clear-cut way by presenting groups of typical transactions in a numbered series, so that we can get, at almost one glance, a view of all the phases which the general question presents. It will contribute something to our clarity of view if we take up one by one the consideration of each of these elements into which the character of these corporations and the general business they do may be analyzed.

In the first place, they are insurance companies; but they are as well mutual insurance companies. This means they receive premiums, but these premiums are limited to the actual cost of the insurance. The practical conduct of such a business requires of them to exact the advance payment of an estimated reasonably safe maximum premium, and to return to the policy holders the excess after the actual cost of the insurance is known. This may be and is properly done annually. The elements which go to make up this excess we do not see to be of importance, although they do have some illustrative value. The practical workings of this plan make evident a result, which is indeed suggested by the plan itself, that the premium receipt and the excess return seldom take place within the limits of the same fiscal or calendar year, although a year would measure the time interval. The receipt of the advance premium suggests the further thought, which actual practice confirms, that the policy holder may not desire the return of his excess refund, but may wish to apply it to what is called 'the purchase of additional insurance.' To provide for this the contract has ingrafted upon it the thought of the face amount payable under the policy automatically increasing accordingly. Although called (and properly so) life insurance companies, they do not always adhere strictly to this plan; but it is modified to the extent of being made an insurance, not against death, but against death occurring within a named term of years, and the insured sum becoming payable at the end of the period. The language of life insurance thus comes to furnish us with the terms 'plain life' and 'endowment' policies. The essentials of the plan are not, however, changed by this.

At this stage in the recital of what is done, the hearer would doubtless be impressed with the thought that the policy holder, having once made his election, was bound by it, and could not afterwards demand the refund to which he would have otherwise been entitled. Whatever the contractual or other right of the company to retain the money, it does not (and the motive for this is apparent) insist upon, but accords, the free right of the policy holder to withdraw at any time the whole or any part of what we will call his 'deposit.' The use of this word serves to present the thought that the company, having these deposit moneys, has put them at work, and there is in consequence an accretion by way of interest or other profits, and that this also belongs to the depositor. The companies thereupon become or partake of the nature to this extent of savings fund companies, and are subjected to the administrative expenses which are thereby incurred. The introduction of paid-up policies and other forms of matured insurance contracts, in which there is the thought of the maturing, in the sense of the fixing, of the obligation to pay at a future time without further premium payments, and also in the sense of the obligation to pay at once, adds to these companies some of the characteristics of building associations, and the leaving with the company of insurance moneys then demandable, with the allowance of interest thereon or other return, the issue of trust certificates and the added feature to policies of not paying a round sum to the beneficiary, but granting him an annuity instead, as well as other modifications of the simple life insurance contract, all give a complexity to the character and business of these companies, such as that even an otherwise concise statement of them would run into undue length.

One other of such modified forms of contract does, however, have perhaps a direct relation to the legal question before us. These companies, to the extent to which their practical dependence upon the laws of the different states in which they do business will permit, make of themselves managers of a lottery. This springs from the issuance of tontine, semitontine, and other modified forms of what is known as tontine insurance. The essential thought is that these accumulations of moneys, in part contributed by a given group or class of policy holders and in part accretions to the moneys thus contributed, are shared in whole or part, not by the contributors, but by the persistent livers and premium payers among them. Their title, such as it is, is by right of survivorship.

This gives us a sufficiently adequate idea of the corporations which Congress sought to tax and of the business done by them. Let us, in further aid to a proper interpretation attempt to get the viewpoint of the draughtsman of the act. What may be called the first or original draftsman had evidently a clear-cut, well-defined idea of whom and what he intended to tax, and had in mind an orderly and logically developed method of reaching the amount of the tax. What he had in mind to tax was what is understood by the phrase 'net income.' To reach this he took into account gross income, excluding therefrom, however, certain elements or items, and from this remainder he permitted to be deducted certain other clearly defined elements or items, and the balance was to be the taxable net income. This distinction between what was to be excluded by not being included in gross income, and what was to be deducted from the gross income thus stated, was preserved throughout what may be recognized as the original draft of he act. A mere verbal contrast of 'not including' with 'deducting' would call for the comment of 'distinction without difference'; but there is none the less a real practical difference worked through and by the distinction. The distinction, however,...