Prudential Insurance Company of America v. United States

• Decision Date: 07 June 1963
• Docket Number: No. 55-59.,55-59.
• Citation: 162 Ct. Cl. 55,319 F.2d 161
• Parties: The PRUDENTIAL INSURANCE COMPANY OF AMERICA v. The UNITED STATES.
• Court: U.S. Claims Court

162 Ct. Cl. 55, 319 F.2d 161 (1963)

The PRUDENTIAL INSURANCE COMPANY OF AMERICA v. The UNITED STATES.

No. 55-59.

United States Court of Claims.

June 7, 1963.

Francis A. Goodhue, Jr., New York City, for plaintiff. Arthur E. Schmauder, Frank G. Koch, Newark, N. J.; John H. Perkins, Jr., Peter J. Sturtevant, Dewey, Ballantine, Bushby, Palmer & Wood; and Arnold I. Burns, New York City, were on the briefs.

Earl L. Huntington, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner, and Mitchell Samuelson, Washington, D. C., were on the brief.

Paul F. Myers, John E. Skilling, Washington, D. C.; Joseph H. Collins, George E. Walton, Bernard G. Hildebrand, Gerard J. Talbot, New York City, Robert H. Myers, and Williams, Myers & Quiggle, Washington, D. C., filed a brief for the Metropolitan Life Insurance Company, amicus curiae.

Before JONES, Chief Judge, and WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.

DURFEE, Judge.^*

This is an action to recover an alleged overpayment by plaintiff of Federal income tax for the calendar year 1949. Plaintiff is a mutual life insurance company organized under the laws of the State of New Jersey. In 1949, it was engaged in the insurance business in the United States and Canada.

During the year 1949, plaintiff paid a tax imposed by the Provinces of Ontario and Quebec of two percent on the insurance premiums collected that year from policyholders residing in the respective provinces. Plaintiff also paid the same tax imposed by the Dominion of Canada on premiums collected in 1949 from policyholders residing in Canada outside of the Provinces of Ontario and Quebec. By payment of these premiums taxes, plaintiff was excused from payment of Canadian income taxes by express provisions of law within each of the three Canadian jurisdictions. The combined total alien premium tax payment amounted to $558,513.57. Plaintiff's first claim is that by virtue of Internal Revenue Code provisions, $304,855.84 of this total Canadian tax payment was allowable as a credit against its United States income tax for 1949, but was wrongfully assessed and collected by the Collector of Internal Revenue. Plaintiff seeks recovery of this amount plus interest as a "foreign tax credit" under sections 131(a) and (h) and 205 of the 1939 Code.

Section 131(a) as amended, provided in 1949 that the income tax of a domestic corporation "* * * shall be credited with * * * the amount of * * * any * * * income taxes paid or accrued during the taxable year to any foreign country * * *." For the purposes of this section (131), the term "income * * * taxes shall include a tax paid in lieu of a tax upon income * * otherwise generally imposed by any foreign country."

The provision for a foreign tax credit for a tax paid "in lieu of a tax upon income" in subsection (h) of section 131 of the Code was added to this section by section 158(f) of the Revenue Act of 1942, 56 Stat. 798, 858. The reason for this enactment was clearly stated by the Senate Finance Committee, (S.Rep. No. 1631, 77th Cong. p. 131):

"Your committee believes further amendments should be made in section 131. Under that section as it now stands, a credit is allowed against United States tax for income * * * taxes paid or accrued to any foreign country * * *. In the interpretation of the term `income tax,\' the Commissioner, the Board, and the courts have consistently adhered to a concept of income tax rather closely related to our own, and if such foreign tax was not imposed upon a basis corresponding approximately to net income it was not recognized as a basis for such credit. Thus if a foreign country in imposing income taxation authorized, for reasons growing out of the administrative difficulties of determining net income or taxable basis within that country, a United States domestic corporation doing business in such country to pay a tax in lieu of such income tax but measured, for example, by gross income, gross sales or a number of units produced within the country, such tax has not heretofore been recognized as a basis for a credit. Your committee has deemed it desirable to extend the scope of this section. Accordingly, subsection (f) of section 160 provides that the term `income * * * taxes\' shall * * * include a tax paid by a domestic taxpayer in lieu of the tax upon income * * * which would otherwise be imposed upon such taxpayer by any foreign country or by any possession of the United States. * * *" Emphasis supplied.

This statement is a clear expression of intent to widen the judicial interpretation that had previously been given to the term "income taxes" in subsection (a) of section 131 as being limited to foreign taxes based on net income, (i. e. on gain or profit), in order to include a tax measured by gross income or gross sales as a basis for tax credit.

This legislative purpose in adding "taxes paid in lieu of" income taxes for foreign income tax credit was recognized by the United States Court of Appeals for the Ninth Circuit in the case of Northwestern Mut. Fire Ass'n v. Commissioner of Internal Revenue, 181 F.2d 133 (9th Cir., 1950). That case involved the question whether the premiums taxes paid by a United States mutual fire insurance company to the Dominion of Canada for 1942 and 1943 could be credited against its Federal income taxes for those years under section 131(h) of the Internal Revenue Code of 1939, as amended. The court said (181 F.2d p. 135):

"2 * * * The report of the Senate Finance Committee on proposed § 131(h) expressly states that foreign taxes measured by `gross sales\' would constitute a credit. * * Manifestly gross sales have no relation to profits. Gross sales are however analogous to `net premiums.\' * * *

"3 Both the language and the legislative history of Int.Rev.Code, § 131(h), force us therefore to conclude that the Canadian `net premium\' tax imposed upon petitioner, like the American counterpart imposed by Int.Rev.Code, § 207(a) (2), was `in lieu of a tax upon income\' within the meaning of Int. Rev.Code, § 131(h). It follows that petitioner is entitled to the credits claimed in the returns for tax years 1942 and 1943, and that the deficiencies assessed by the Commissioner were erroneous."

Defendant has attempted to distinguish this case from the present one because gross premiums of fire insurance companies involved in the Northwestern Mut. Fire Ass'n case, supra, were includable in gross income for Federal tax purposes, whereas premiums on life insurance, presently involved, are not included in the income of a life insurance company for Federal taxation. This distinction was eliminated by the language of the Senate Finance Committee Report previously quoted, which expressly contemplated that the scope of section 131(a) was to be extended to include "a tax in lieu of such income tax but measured, for example, by gross income, gross sales, or a number of units is supplied within the county." Emphasis supplied. Whatever legal distinctions were drawn prior to enactment of this amendment as to the basis for taxing the income of fire insurance companies as distinguished from life insurance premiums collected in determining foreign income tax credit, the life insurance premiums taxes paid by plaintiff in Canada were measured by gross income or by gross sales.

The Ontario premiums tax for 1949 was imposed by section 4 of The Corporations Tax Act of Ontario (3 Geo. VI (1939), c. 10, as amended). That section declared in subsection (1) that "Every insurance company shall pay a tax in respect to life insurance premiums of two per centum calculated upon the gross premiums received during the fiscal year from policyholders resident in Ontario," excluding premiums returned and certain other items. The same statute provided in subsection (1) of section 14 that "* * * every incorporated company * * * which transacts business in Ontario, shall for every fiscal year of such company pay a tax of seven per centum calculated upon the net income of the incorporated company;" but subsection (3) (h) of section 14 expressly provided that "Any incorporated company paying taxes under this Act as * * * an insurance company" should not be subject to the tax imposed by section 14. Therefore, plaintiff was excused from paying the Ontario tax calculated on the net income of corporations because it was an insurance company paying a premiums tax under another section of the same statute. It seems obvious that if the Ontario premiums tax was not an "income" tax, it was certainly a tax paid "in lieu of" income tax and, therefore, that it clearly came within the scope of subsection (h) of section 131 of the Internal Revenue Code of 1939, as amended.

The premiums tax which plaintiff paid to the Province of Quebec for 1949 was imposed by subdivision 3 of section 3 of the Quebec Corporation Tax Act (11 Geo. VI (1947), c. 33). This subdivision imposed on "every insurance company, a tax of two per centum on every premium received by the company * * * in respect of the business transacted in Quebec." Other subdivisions of section 3 (it contained a total of 19 subdivisions) imposed taxes of various kinds on other types of companies, such as banks, loan companies, navigation companies, etc. Then section 6 of the same statute provided that "every company * * * contemplated by subdivisions 1, 4, 5, 6, 7, 8, 11, 13, 14, 15, 16, 17, 18 and 19 of section 3 * * * shall pay annually a tax equivalent to seven per centum of the net revenue of their respective financial year * * *." The failure of section 6 in the portion just quoted to refer to subdivision 3 of section 3, covering insurance companies, had the effect of excusing insurance companies from the payment of the 7 percent tax on net revenue imposed by section 6.

The premiums tax which plaintiff paid to the Dominion of Canada in 1949 was payable under the Dominion's Excise Tax Act (Rev.Stat. of Can. 1927), c. 179, as amended)...