State Tax Commission v. John Hancock Mut. Life Ins. Co.

• Decision Date: 08 December 1960
• Parties: STATE TAX COMMISSION v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 711

170 N.E.2d 711

341 Mass. 555

STATE TAX COMMISSION v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Nov. 9, 1960.

Decided Dec. 8, 1960.

Leo Sontag, Asst. Atty. Gen., for State Tax Commission.

Albert L. Hyland, Boston, for taxpayer.

Before WILKINS, C. J., and SPALDING, WILLIAMS, WHITTEMORE and CUTTER, JJ.

CUTTER, Justice.

The State Tax Commission appeals from a decision of the Appellate Tax Board granting to the insurance company an abatement of a part of the company's insurance excise assessed in 1957. This excise is imposed by G.L. c. 63, § 20 (as amended by St.1941, c. 509, § 5, and as affected by St.1943, c. 531, § 2), at the rate of 'one quarter of one per cent upon the net value of all policies in force on December thirty-first of the year preceding that in which the tax is payable, issued or assumed by such company on the lives of residents of this commonwealth * * *.' ¹

The company is a Massachusetts life insurance company. In its excise return filed in 1957, it excluded from the net value of its policies in force on December 31, 1956, $25,601,551, representing 'the Massachusetts portion of * * * [the company's] reserve liability for its assumption of cost under' an 'instrument * * * called a group annuity contract, numbered 6 GAC,' which had been issued in 1938 by the company 'as insurer' to itself 'as employer' in order to establish 'a retirement pension benefit plan for its [own] employees.' On June 21, 1957, a deficiency was assessed 'based entirely upon the inclusion of the * * * $25,601,551 in the net value of' the company's policies in force at the end of 1956. The company paid $65,411.96, the additional excise stated on the deficiency assessment bill to be due, and applied for a correction of the excise. It later appealed to the Appellate Tax Board when the commission failed to abate the additional excise. The case was heard on a statement of agreed facts.

By St.1943, c. 531, effective (see § 7) on January 1, 1944, the excises upon life insurance companies were revised to provide (see § 1) a new measure based upon premiums. See Commissioner of Corporations & Taxation v. Metropolitan Life Ins. Co., 327 Mass. 582, 583, 99 N.E.2d 866. Cf. Commissioner of Corporations & Taxation v. Aetna Life Ins. Co., 328 Mass. 404, 406-409, 104 N.E.2d 140. Section 2, however, provided that certain insurance companies, of which the company was one, were to continue ² to be taxed under § 20 as theretofore existing (see St.1941, c. 509, § 5) upon the 'net value of policies.' By G.L. c. 175, § 1, the term '[n]et value of policies' is defined as 'the liability of a company upon its insurance contracts * * * computed by rules of valuation established by sections nine to twelve, inclusive.' Section 9 requires that the insurance 'commissioner shall each year compute the * * * net value on December thirty-first * * * of every life company * * * with respect to * * * [described] policies or contracts * * * issued * * * prior to' January 1, 1948, 'in accordance with the following rules: * * * 8. The aggregate net value * * * shall be * * * the reserve liability of the company, to provide for which it shall hold funds of an amount equal thereto above all its other liabilities.'

By executing 6 GAC on December 28, 1938, the company established under c. 175, § 36, ³ its retirement pension benefit plan effective for all its employees as of May 1 1938. By St.1938, c. 218, § 1, effective ninety days after April 14, 1938, the substance of the third and fourth paragraphs had been inserted in § 36 to permit the payment of pensions 'under a group contract issued by it.'

6 GAC provides that 'the * * * company * * * agrees to pay to each of its employees entitled thereto, under the * * * provisions of this [c]ontract, a [r]etirement [a]nnuity for life in an amount based on the rates and schedules contained herein, and to pay such amounts as may become due in case of death or termination of employment of an employee covered hereunder * * *' and recites that it is issued 'to set forth the terms, the benefits, and the conditions of the pension system for its employees established by the [c]ompany under' § 36. Article V, § 1, of the provisions attached to 6 GAC provides that the company shall issue to itself, 'for delivery to each employee covered * * * an individual [c]ertificate containing * * * a statement of the benefits * * * under this [c]ontract and stating the name of the [death benefit] beneficiary.'

An employee may become covered under 6 GAC only by making written application and by agreeing to make the required contributions, which (see art. II, § 4) vary in relation to the character of employment and salary of the particular employee. Each employee's certificate recites that, 'subject to the * * * provisions of * * * 6 GAC,' he 'will be entitled to a [r]etirement [a]nnuity for life' if he remains covered until retirement, and summarizes the provisions of the contract.

'[A] portion of the cost * * * [of the plan] has been * * * and is now paid by the employees. The balance of the cost is assumed by the * * * [company] and is charged to its operating expense. This * * * is handled * * * by bookkeeping entries wherein the * * * [company] * * * monthly * * * charges to its * * * expenses its contribution * * * and * * * credits the corresponding total amount to the 'renewal group annuity premiums' account.' 6 GAC 'is similar * * * to * * * [other contracts] generally issued by the * * * [company] in the normal course of its business to employers, purchasing for their employees retirement group annuity contracts. [It] * * * is * * * administered * * * in substantially the same manner as [such other] group annuity contracts * * *. The duties * * * placed upon an outside employer under a normal group annuity contract are handled under 6 GAC by the * * * [company] * * * as employer, in its own personnel department.'

'The Massachusetts portion of the * * * [company's] reserve liability on December 31, 1956 * * * which arose out of the assumption of its part of the cost * * * was $25,601,551 * * *. The Massachusetts portion of the * * * reserve liability * * * [resulting from] the employees' contributions * * * was $4,660,680. This amount has been included in the net value of policies on the * * * excise tax return. The amount of tax paid on this (at 1/4 of 1%) amounted to $11,651.71.'

The excise 'is not a property tax although measured by property,' see Commissioner of Corporations & Taxation v. Aetna Life Ins. Co., 328 Mass. 404, 408, 104 N.E.2d 140, 142, but is imposed 'for the privilege of doing business in this Commonwealth.' See Commissioner of Corporations & Taxation v. Metropolitan Life Ins. Co., 327 Mass. 582, 584, 99 N.E.2d 866. See also Mutual Benefit Life Ins. Co. v. Commonwealth, 227 Mass. 63, 66, 116 N.E. 469; Commissioner of Ins. v. Commonwealth Mut. Liab. Ins. Co., 308 Mass. 385, 387, 32 N.E.2d 231. Under c. 63, § 28 (as amended through St.1953, c. 654, § 55), '[l]iability for the taxes imposed by' §§ 20 to 23 or by St.1943, c. 531, §§ 2 and 3, 'shall be incurred by * * * the transaction of business * * * within the calendar year preceding' the year of assessment. The excise measure of § 20 has borne a close relation to the volume of business. This has been true equally whether the measure has been 'two per cent upon all new and renewal premiums received,' as in the 1943 act, or 'one quarter of one per cent upon the net value of all policies in force,' as in the 1941 act.

The Appellate Tax Board concluded that the company's 'annuity contracts issued * * * to carry out its pension plan' revealed an 'absence of profit motive,' that the transactions 'did not constitute the carrying on of an insurance business with respect to which the excise * * * is imposed,' and that 'the tax is limited * * * to those policies which stem from the doing of such business.' The board pointed out the absence of an 'express [statutory] provision * * * which levies a tax on the net value of an employees' retirement pension plan as such.' This, says the board, 'raises a * * * doubt * * * whether the Legislature intended to tax the net value based on the annuity contract under the pension plan.' The board then, in granting the abatement, applied the well-established principles (see Gordon v. State Tax Comm., 335 Mass. 431, 435, 437, 140 N.E.2d 453; Allen v. State Tax Comm., 337 Mass. 502, 504, 150 N.E.2d 14; State Tax Comm. v. Gray, 340 Mass. 535, 165 N.E.2d 404 ^a) that tax statutes are to be strictly construed and that all doubts are to be resolved in favor of the taxpayer.

The board's view is supported by the only closely relevant decision which has come to our attention. See California Western States Life Ins. Co. v. State Bd. of Equalization, 151 Cal.App.2d 559, 312 P.2d 19. The employees' retirement plan there considered resembled the company's plan in general outline. California imposed an annual excise (similar in some respects to that found in G.L. c. 63, § 20, as amended in 1943) based upon the amount of gross premiums, less return premiums, received from each company's business done in California. The court recognized (at page 560, 312 P.2d at page 19) that the 'retirement plan * * * contains * * * many features * * * generally found in group annuity policies * * * regularly issued by insurers.' As the court remarked, 'The same could be said of any comprehensive retirement plan.' Nevertheless, the court concluded that the plan was not within the tax measure since 'the retentions * * * of a part of wages due participating employees were not premiums received * * * upon its business done' as the term was used in the tax statute and 'that * * * [the] retirement plan did not * * * constitute an insurance policy or an annuity contract within the meaning' of the statute. The court said (at page 561, 312 P.2d at page 20), 'Regardless of the noted...