Decision will be entered for the respondent.
Held, the tax imposed upon mutual insurance companies (other than life or marine), computed under
*653 OPINION.
Respondent determined a deficiency in the 1952 income tax liability of the Penn Mutual Indemnity Company in the amount of $ 12,566.76. The sole issue is whether
Francis R. Smith, the Insurance Commissioner of the Commonwealth of Pennsylvania, is the statutory receiver of Penn Mutual Indemnity Company and as such, successor in right, title, and interest to its assets and liabilities.
The company was incorporated in 1929 under the laws of Pennsylvania and became subject to the Insurance Company Law of that State (Act of May 17, 1921, P.L. 682.) The company was authorized under its charter, as amended, to transact business in Pennsylvania, "covering risks as insurance carrier, generally defined as casualty risks including public liability, plate glass insurance, burglary, workman's compensation, as well as issuing contracts of fidelity and surety, and fire and comprehensive insurance contracts."
The company, at all times relevant, was authorized to transact business and issue contracts of insurance covering various risks within Pennsylvania only, and at all times confined its activities as an insurance carrier within the territorial limits of Pennsylvania. At no *654 time was it authorized or licensed by the United States or any Federal body or agency to transact business or issue *148 or write contracts of insurance.
As a result of operations for the calendar year 1952, the company had a total "gross income" of $ 16,791.21 and "net premiums" of $ 1,239,884.49 for a "gross amount of income" of $ 1,256,675.70. 1*149 It also had underwriting losses which exceeded its gross amount of income by $ 206,198.12, which losses are not recognized as a deduction under
The parties have agreed that the company "was a mutual insurance company under
The business of insurance has proven over the years an extremely difficult subject for Federal taxation. The determination of what should constitute "income" in the case of insurance companies, combined with differences in the methods of doing business of mutual and stock companies, has presented the Congress with problems of unusual complexity.
Prior to 1942 most mutual insurance companies other than life were exempt from Federal income tax as a result of an exemption contained in section 101(11) of the 1939 Code. In 1942, Congress proceeded to an extensive revision of the income tax treatment of all insurance companies.
*655 The Revenue Act of 1942, as passed by the House, limited the existing exemption of mutual insurance companies to companies of a designated size; at the same time, it imposed a tax measured by underwriting and investment income similar to that which had been applicable to stock insurance companies other than life since 1921. See H. Rept. No. 2333, 77th Cong., 2d Sess., pp. 27-28, 113-118. However, the Senate Finance Committee apparently felt that the provisions formulated to adapt that scheme of taxation to *151 mutual companies were unworkable, and it appeared unable to develop any satisfactory technique to achieve the desired end within the framework of the House plan of taxation. See S. Rept. No. 1631, 77th Cong., 2d Sess., p. 31. Accordingly, the committee proposed an entirely different scheme of taxation, S. Rept. No. 1631,
The new taxing provisions thus appearing in the Revenue Act of 1942 constituted a complete revision of
*657 The basic pattern of the new system adopted in 1942 was described by the Senate Finance Committee as follows (S. Rept. No. 1631,
In the case of mutual insurance companies other than life or marine which are not granted exemption under section 101(11), 5*160 it is proposed to subject such companies to income tax at the regular corporate rates on their net investment income or to a special tax of 1 percent on the gross amount received from interest, dividends, rents, and net premiums, minus dividends to policyholders, minus the interest which under section 22(b)(4) is excluded from gross income, whichever is the greater * * * [Italics supplied.]
*658 (A) 1 per centum of the amounts so computed, or 2 per centum of the excess of the amount so computed over $ 75,000, whichever is the lesser, over
(B) the amount of the tax imposed under Subchapter E of Chapter 2.
The reference in subparagraph (B) to "Subchapter E of Chapter 2" is a reference to the excess profits tax, and since no such tax was applicable here, subparagraph (B) played no part in the present computation, which consisted merely of 1 per cent of the "gross amount of income."
In this case the computation under *161
At the outset we may briefly dispose of the contention raised in the petition that the tax is "in effect, a license fee or charge to do business to which the United States is not entitled since it has not issued any license or grant to the taxpayer to operate or do business." The argument is wholly without substance. The United States has not sought to regulate the company, and the tax in question is part of a comprehensive revenue measure. Whether the business of the taxpayer can be subjected to Federal regulation has no bearing upon the validity of an exercise of taxing power with respect to that taxpayer.
An act of Congress is not lightly to be set aside, and doubt must be resolved in its favor. So much is familiar learning. Moreover, the presumption in favor of validity is particularly strong in the case of a revenue measure. As was stated many years ago by the Supreme Court in
It is always an exceedingly grave and delicate duty to decide upon the constitutionality of an act of the Congress of the United States. The presumption, as has frequently been said, is in favor of the validity of the act, and it is only when the question is free from any reasonable doubt that the court should hold an act of the lawmaking power of the nation to be in violation of that fundamental instrument upon which all the powers of the Government rest. This is particularly true of a revenue act of Congress. The provisions of such an act should not be lightly or unadvisedly set aside, although if they be plainly antagonistic to the Constitution it is the duty of the court to so declare. The power to tax is the one great power upon which the whole *163 national fabric is based. It is as necessary to the existence and prosperity of a nation as is the air he *659 breathes to the natural man. It is not only the power to destroy, but it is also the power to keep alive.
We cannot find that Congress has gone beyond permissible limits here.
In dealing with the scope of the taxing power the question has sometimes been framed in terms of whether something can be taxed as income under the
The power to tax was one of the great powers granted to the National Government by the Constitution. Indeed, a glaring weakness of the Articles of Confederation was the absence of an effective *164 taxing power and "was one of the causes that led to the adoption of the present Constitution."
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; * * *
The authority thus granted "is exhaustive and embraces every conceivable power of taxation." (Italics supplied.)
Congress cannot tax exports, and it must impose direct taxes by the rule of apportionment, and indirect taxes by the rule of uniformity. Thus limited, and thus only, it reaches every subject, and may be exercised at discretion.
In
The taxing power is given in the most comprehensive terms. The only limitations imposed are: That direct taxes, including the capitation tax, shall be apportioned; that duties, imposts, and excises shall be uniform; and that no duties shall be imposed upon articles exported from any State. With these exceptions, the exercise of the power is, in all respects, unfettered.
See also
Thus, where exports are not involved, the authority of Congress to impose a tax is plenary, except that direct taxes must be apportioned among the States according to population, and duties, imposts, and excises must be uniform throughout the United States. The latter requirement is not one of intrinsic equality; it is merely one of geographical uniformity, and is satisfied if the same rule for determining liability operates throughout the United States.
The question is not as to the existence of the power to tax the receipt of gross premiums, for that power certainly exists; rather, the issue is merely whether the tax must be apportioned according to population. In other words, in taxing gross premiums, as it has the power to do, must Congress impose that tax in such manner that the burden of the tax upon companies in each State will vary with the population of such State? If the tax is a duty, impost, or excise, the rule of apportionment does not apply; only if it is a "direct" tax does that rule come into play.
The "terms duties, imposts and excises are generally treated as embracing the indirect forms of taxation contemplated by the Constitution."
If the tax is a direct one, it shall be apportioned according to the census or enumeration. If it is a duty, impost, or excise, it shall be uniform throughout the United States. Together, these classes include every form of tax appropriate to sovereignty. Cf.
The wide and comprehensive nature of the category of indirect taxes, in striking contrast to the very narrow range within which "direct" taxes have been limited, is abundantly demonstrated by a hundred and seventy years of history and *169 an impressive number of decisions of the Supreme Court.
For many years after the adoption of the Constitution the term direct taxes was thought to be limited to capitation taxes and taxes upon real estate.
It appears to me, that a tax on carriages cannot be laid by the rule of apportionment, without very great inequality and injustice. For example: suppose, two states, equal in census, to pay $ 80,000 each, by a tax on carriages, of eight dollars on every carriage; and in one state, there are 100 carriages, and in the other 1000. The owners of carriages in one state, would pay ten times the tax of owners in the other. A. in one state, would pay for his carriage eight dollars, but B. in the other state, would pay for his carriage, eighty dollars.
Throughout the history of the country the term "direct" taxes has been given a narrow and restrictive interpretation, and unapportioned taxes over an extremely broad range have been sustained. Thus, notwithstanding the absence of apportionment, the Supreme Court has upheld a "license" or "special" tax upon dealers in certain commodities (
Among the numerous indirect taxes imposed by Congress under
However, in addition to the foregoing income taxes, there were a number of taxes upon gross receipts. Thus, section 104 of the Act of June 30, 1864, 13 Stat. at 276, imposed a gross receipts tax upon express companies as follows:
Any person, firm, company, or corporation carrying on or doing an express business, shall be subject to and pay a duty of three per centum on the gross amount of all the receipts of such express business.
Similarly, section 107 of the same statute laid a tax of 5 per cent "on the gross amount of all receipts of" telegraph companies. 13 Stat. at p. 276. Again, section 108 imposed a tax of 2 per cent "on the gross amount of all receipts" with respect to theatres, operas, circuses, museums, and other public exhibitions and performances. Moreover, of particular interest here is the tax provided for with respect *173 to gross premiums of insurance companies. Section 105 of the same statute declared that:
*663 That there shall be levied * * * a duty of one and a half of one per centum upon the gross receipts of premiums, or assessments for insurance from loss or damage by fire or by the perils of the sea, made by every insurance company. * * *
It should be noted that these were not taxes upon income in the sense that "gain" or "profit" might be an essential aspect of the subject matter taxed. They were simply taxes upon gross receipts, just as a sales tax is often measured by gross receipts from the goods sold and is applicable regardless of the profitable or unprofitable nature of the business. The foregoing gross receipts taxes were unapportioned, and their validity was challenged. In
The consequences which would follow the apportionment *174 of the tax in question among the States and Territories of the Union, in the manner prescribed by the Constitution, must not be overlooked. They are very obvious. Where such corporations are numerous and rich, it might be light; where none exist, it could not be collected; where they are few and poor, it would fall upon them with such weight as to involve annihilation. It cannot be supposed that the framers of the Constitution intended that any tax should be apportioned, the collection of which on that principle would be attended with such results. The consequences are fatal to the proposition.
These words are equally applicable to the "special tax of 1 per cent" (S. Rept. No. 1631, 77th Cong., 2d Sess., p. 151) imposed by
Similarly, section 27 of the Act of June 13, 1898, ch. 448, 30 Stat. 448, 464, imposed a tax of one-quarter of one per cent upon the gross receipts, in excess of $ 250,000, from the refining of sugar or petroleum or the operation of a pipeline. There was no provision for apportionment, but the tax was nevertheless sustained in
We think it clear that wholly apart from the
The story of the
But in spite of the limited scope of the holding in the Pollock case Congress was prevented from imposing a general tax upon all income without taking into account its obligation to provide for apportionment to the extent at least that the income was derived from property. It was to overcome this impossible situation that the
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The
In
Since we have concluded that the "special tax" imposed by
Finally, we recur to the statement in
It is but a decent respect due to the wisdom, the integrity and the patriotism of the legislative body, by which any law is passed, to presume in favor of its validity, until its violation of the Constitution is proved beyond all reasonable doubt.
*667 The same thought has been expressed in sweeping terms on a number of occasions. See, e.g.,
As the Court said further in
In deciding upon the validity of a tax with reference to these [constitutional] requirements, no microscopic examination as to the purely economic or theoretical nature of the tax should be indulged in for the purpose of placing it in a category which would invalidate the tax.
We think that the statute under attack is plainly within the power of Congress. But even if we were less sure, the foregoing standards for the adjudication of constitutional issues would compel us to uphold the tax. It may often be possible to generate doubts about the validity of a measure by piecing together words or concepts culled from various opinions or other writings. But such doubts cannot justify declaring an act of Congress unconstitutional while merely paying lip service to the presumption of validity. *184 That presumption is vital and real, and in such circumstances our duty is to uphold the statute, if there is any reasonable basis whatever for such action. That there is a most ample basis therefor in this case abundantly appears from the materials that we have considered above. We hold that
Decision will be entered for the respondent.
Murdock, J., concurring: Although the question of jurisdiction was decided correctly by an order of Judge Train, who heard this case, and is the subject of a footnote only in the majority opinion, nevertheless, since it is dealt with at great length in a dissent, it may be well to discuss this issue briefly. "The amount shown as the tax by the taxpayer upon his return" in section 271(a) must be read in the light of the rest of the Code in order to determine the intention of Congress, and when so read it seems reasonably clear that Congress meant the tax shown to be due by the taxpayer upon his return.
Turner, J., concurring: It is my opinion that the tax imposed by
Pierce, J., dissenting: Because of the importance of this case, in its bearing upon the statutory prerequisites to this Court's obtaining jurisdiction of income tax controversies, and also in its bearing upon the powers and duties of the Court in dealing with the issues presented in cases properly before it, I believe it appropriate to set forth the reasons for my dissent from the majority opinion. Such dissent is based on three principal grounds:
I.
This Court does not, in my opinion, have jurisdiction to decide the present case, on its merits. And I believe that the motion filed by respondent, to dismiss the case for lack of jurisdiction, should have been granted.
The reasons for such position are that, as is hereinafter shown, the Commissioner did not make any adjustment whatever, either to the amount of the taxable income reported by the petitioner corporation 1*669 on the income tax return which it filed for the taxable year involved, or to the applicable rate of tax which petitioner applied, or to the amount shown as the tax by the petitioner on said return. Thus, it is evident that the *187 Commissioner has not herein determined a "deficiency" within the meaning of section 271(a) of the 1939 Code; 2 that, in the absence of such determination by the Commissioner, there is no "deficiency" available for "redetermination" by this Court under section 272(a)(1); 3*188 and that there is no jurisdiction in this Court, under section 1101, 4 to adjudicate the merits of the controversy.
Moreover, as hereinafter further shown, the present controversy is not based on any contention of either party, that the Commissioner did make any determination that the amount of the tax imposed by chapter 1 of the Code exceeds the amount *189 "shown as the tax by the taxpayer upon his [its] return." The controversy is based, rather, on a "position" expressed by petitioner's counsel in a letter addressed to the director of internal revenue, that notwithstanding the completeness and correctness of the return in its relation to the applicable statute, payment of the tax was refused solely on the ground that such statute is unconstitutional. Section 272(a)(1) makes no provisions for adjudication by this Court of a case in which the tax has been completely and correctly returned, and in which no "deficiency" within the meaning of section 271(a) has been determined by the Commissioner.
The facts material to this jurisdictional question are as follows. The petitioner filed a "U.S. Mutual Insurance Company Income Tax *670 Return" for the taxable year involved, on which it showed: Gross income taxable under
Director of Internal Revenue
Philadelphia, Pa.
Dear Sirs:
Enclosed herein find return on Form 1120 M * * *.
While the return is made in the form as required, this company, as indicated in its last year's return takes the position that the imposition of an income tax against this company based upon its receipts of net premiums , as indicated in line 20 of that return, is invalid and unconstitutional.
* * * Therefore, under the circumstances, this company will not, under my advice, issue a check to the United States covering any part of the income tax based upon what we deem an invalid tax, to wit, the imposition of a 1% so-called income tax upon the net premiums * * * indicated in the return. [Emphasis supplied.]
* * * *
Respectfully yours,
/s/ Peter P. Zion
General CounselThereafter, the Commissioner mailed to the petitioner a notice in the usual form of a deficiency notice. In this, he gave recognition to the return as filed; he made no adjustment whatever to any of the items therein pertaining to the
| Adjustments [under sec. 207(a)(2)] -- 1952 | |
| Gross income disclosed by return | $ 1,256,675.70 |
| Adjustments to gross income | None |
| Gross income as adjusted | 1,256,675.70 |
| * * * * | |
| Computation of Tax -- 1952 | |
| Gross amount of income | $ 1,256,675.70 |
| Income tax liability computed at 1% | 12,566.76 |
| Balance of income tax liability | 12,566.76 |
| Tax assessed on return account #959005 | None |
| Deficiency in income tax | $ 12,566.76 |
| [Emphasis supplied.] | |
*671 This Court has heretofore held in
It should be noted that the definition of deficiency in the statute does not set out as a requirement that the taxes shown due on the return must be *192 assessed, but merely says "the amount shown as the tax by the taxpayer upon his return." * * *
This Court, of course, has no jurisdiction or control over the assessment or collection of taxes.
Other decisions of this and other courts, to the effect that the mailing of a so-called notice of deficiency is not sufficient to give this Court jurisdiction, if the Commissioner has not actually determined a "deficiency" within the meaning of section 271(a), include:
a taxpayer can invoke the jurisdiction of the Board [now the Tax Court of the United States] only when the Commissioner has determined a deficiency. This limitation inherent in Sec. 274 (a) (b) (e) and (g) of the Revenue Act of 1926 *672 [which provisions are substantially the same as those in section 272 of the 1939 Code] * * * has since been preserved *194 in all material respects and the courts have given it effect. * * *
* * * *
it seems clear that until the jurisdiction of the Board is further enlarged whatever procedural convenience might be attained by having a formal redetermination * * * [by the Board] must give way to the greater necessity for recognizing and giving effect to the limited statutory jurisdiction of the Board.
The fact that petitioner refused payment of the returned tax for reasons satisfactory to it, and the fact that it has taken the position that the applicable statute is unconstitutional, are wholly irrelevant in determining whether the essential prerequisites to this Court's acquiring jurisdiction have been met. The Congress has, in sections 271(a) and 272(a)(1), established objective standards governing this Court's jurisdiction, which are based solely on the return as filed, and upon the Commissioner's determination of a "deficiency" in respect of the "amount shown as the tax by the taxpayer upon his [its] return." Since these statutes are free from ambiguity, there is no room for a judicial construction based upon subjective positions adopted by the petitioner or its counsel; and any such construction would *195 violate the expressed policy of Congress.
Nor do the cases cited in the second footnote of the majority opinion, 5 lend support to the Court's denial of respondent's motion to dismiss the case for lack of jurisdiction. These cases were decided in a setting, and on the basis of facts and circumstances, wholly different from those here present; and none of them involved a contention that the controlling statute was unconstitutional. The first five of these cited cases arose under an earlier practice, now obsolete, where the Commissioner had denied claims in abatement in which the taxpayer had sought the benefit of exemptions, credits, or deductions provided by the statute for use in suitable situations; and the question presented was whether the amount of the tax returned was the gross tax shown, or the net tax after taking into consideration the claimed adjustments. Such claims in abatement have now been abolished. Sec. 273(j), 1939 Code. Others of said cited cases, i.e., Powell Coal Co. and Taylor cases, involved in one instance a situation pertaining to the effect of an amended return, and in the other instance a situation where the taxpayer had filed no return whatever. This *196 Court, in the later case of
If the freedom from liability were alleged to be attributable to a statutory provision legislatively granting exemption to a described class, such as personal *673 service corporations, or building and loan corporations, it would be clear that a determination had been made which upon proper notice would be the foundation of a proceeding within the Board's jurisdiction,
And finally the majority, in its acceptance *197 of jurisdiction in the instant case, has failed to observe the distinction between a controversy involving an originally returned tax in respect of which the Commissioner has not determined a "deficiency" within the meaning of section 271(a), and a controversy involving a "deficiency" administratively determined in respect of such originally returned tax. The procedures for handling these two classes of liability are entirely different. As to an originally returned tax, the Commissioner is authorized and required to assess the same, without notice to the taxpayer. See section 3640, 1939 Code; and the even more specific provisions of section 6201(a)(1), 1954 Code. The statute specifically prohibits any court from restraining the assessment or collection of the same. Sec. 3653, 1939 Code. And the taxpayer's remedy, in seeking relief from an originally returned tax which he believes to be illegal, lies in payment of the tax, filing a claim for refund, and bringing a suit in a District Court or in the Court of Claims, to get his money back.
On the other hand, *198 as regards a deficiency determined by the Commissioner in respect of the originally returned tax, section 272(a)(1) provides for giving notice of same to the taxpayer, and for the filing of a petition to this Court for a "redetermination of the deficiency." After the filing of such a petition, assessment of the deficiency is stayed until this Court's decision has become final; and, notwithstanding the provisions of section 3653, earlier assessment of the deficiency (as distinguished from the original tax) may be enjoined by a proceeding in the proper court.
In the instant case, the majority of the Court has accepted jurisdiction over a controversy as to the legality of the originally returned tax, which was completely and correctly reported by petitioner on its return, and in respect of which the Commissioner has not determined a "deficiency" within the meaning of section 271(a). The effect of this is to prevent prompt assessment of the correctly returned tax, notwithstanding the provisions of section 3653; and to disturb the existing balance between the jurisdictions of the various courts which are authorized to adjudicate tax controversies.
*674 As before stated, I think the respondent's *199 motion to dismiss the case for lack of jurisdiction, should have been granted.
II.
The second principal ground for my dissent from the majority opinion is that, assuming that the Court does have jurisdiction, it has failed to decide the issues raised by the pleadings.
The petitioner herein assigned only one error which, though stated rather indirectly, may fairly be construed to present the question of whether
The majority opinion has not decided any of these questions. Rather, it devotes principal attention to the extent of the plenary power of Congress under
But in the instant case which involves liability for income tax, it is unnecessary to consider whether Congress had power to lay such tax without apportionment , for such power is specifically granted under
Notwithstanding, that the tax here involved was laid on gross income under chapter 1 (relating to income taxes), that it was returned by petitioner on the prescribed Treasury form entitled "U.S. Mutual Insurance Company Income Tax Return," and that the so-called deficiency upon which the majority bases its jurisdiction is designated a "Deficiency in income tax," the majority opinion has nowhere determined that the "net premiums" subjected to tax actually were income. Nor has the majority opinion determined whether the income tax here imposed could validly be imposed on gross income, as distinguished from net income. Indeed, it is stated in the latter *202 portion of the majority opinion:
it seems unlikely that there is a constitutional requirement based upon the
In
This case presents the question whether, by virtue of the
It arises under the Revenue Act of September 8, 1916 * * * which, in our opinion, notwithstanding a contention of the government that will be noticed), plainly evinces the purpose of Congress to tax stock dividends as income * * *
* * * *
In order, therefore, that the clauses cited from
The principle of the Macomber case is still in effect, notwithstanding the expressed but unsuccessful attempt of the Government, in
In my view, the Court should have decided, one way or the other, whether the "net premiums" herein taxed as gross income, are (as stated in the Macomber case) "income * * * according to truth and *676 substance, without regard to form." And, if the majority had determined that such premiums are not income, it should have decided whether they constitutionally can, under an income tax statute, be taxed as income. If on the other hand the majority had determined that said premiums are income, it should further have decided whether they constitutionally can be taxed under an income tax statute, *204 on a gross income basis as distinguished from net income basis, under the particular circumstances of this case.
It is well settled that, under our judicial system, courts act only on "cases and controversies," involving issues which have been submitted to them by adverse parties.
I think it inappropriate for me, in this dissenting opinion, to express my views on these questions which the majority, in its opinion, has not decided.
III.
The third and final principal ground for my dissent is that, assuming this Court has jurisdiction to determine income tax liability herein, it does not, in my opinion, have jurisdiction to sustain the challenged tax as an excise, as the majority has done. The majority opinion states: "Thus, the challenged tax herein is * * * sustainable as an excise on carrying on an insurance business, * * *" (Emphasis supplied.)
But in the instant case, no excise tax has been laid, or been returned, or been determined to be owing. Nor has any issue regarding liability for an excise tax been raised *205 by the pleadings.
The challenged tax is, as before shown, imposed under
(a) Imposition of Tax. -- There shall be levied, collected and paid for each taxable year upon the income of every mutual insurance company [other than as specifically excepted] * * * a tax computed under paragraph (1) or paragraph (2) whichever is the greater * * * [Emphasis supplied.]
Also, as hereinbefore shown, the prescribed Treasury form on which the tax was returned by the petitioner was entitled "U.S. Mutual Insurance Company Income Tax Return (Form 1120M)"; and the only tax liability determined by the Commissioner was stated, in his so-called notice of deficiency, to be a "Deficiency in income tax."
In such circumstances, it is obvious that
As regards the majority's emphasis on the power of Congress to impose an excise tax on the net premiums without apportionment, the Supreme Court aptly stated in
Moreover, this Court has no jurisdiction or authority to determine liabilities for excise taxes on the carrying on of a business. No such jurisdiction is conferred by section 1101 of the 1939 Code (see footnote 4), wherein the scope and limits of the jurisdiction of this Court are specifically defined. Also, subtitle A of the Internal Revenue Code of 1939, which is designated "Taxes Subject to the Jurisdiction of the Board of Tax Appeals," does not include excise taxes on carrying on a business. The imposition of excise taxes on business is provided for in subtitles B and C; and as to such excises this Court has not been given jurisdiction.
In my view, the majority's above-mentioned holding that "the challenged tax herein is * * * sustainable as an excise on carrying *207 on an insurance business" (emphasis supplied) is outside the limits of this Court's statutory jurisdiction.
Train, J., dissenting. I respectfully dissent.
In my opinion,
Although disagreeing with the conclusion reached by the majority opinion, I agree with the analysis of the problem contained therein, and I believe that the opinion provides a significant service in clearing away certain misconceptions concerning the nature and scope of the Federal taxing power. Certainly, the
Despite this fact, I think it fair to say that there is a widespread belief, not without support in the case law, that the
Section 23 makes no provision for the cost of goods sold, but the Commissioner has always recognized, as indeed he must stay within the Constitution, that the cost of goods sold must be deducted from gross receipts in order to arrive at gross income. No more than gross income can be subjected to income tax upon any theory. * * *
Again, in 1 Mertens, Law of Federal Income Taxation sec. 5.06, it is declared:
While there has been considerable theoretical difficulty in determining when an increment in *209 capital has been realized so as to be taxable, there is substantial agreement that amounts received as a return of capital or investment are not income within the general meaning of that term and may not be taxed under the
So stated, this reasoning is without basis in the Constitution as is ably demonstrated by the majority opinion. Once it has been determined that a particular tax is imposed on something which is not income, that determination in and of itself decides nothing insofar as the constitutional validity of the tax is concerned. The inquiry must be pushed further. A tax imposed on that which is not income is nonetheless valid unless it is a direct tax unapportioned. Thus, the key question is whether the tax is direct or indirect. If it is indirect, as decided by the majority in the instant case, then it is constitutionally irrelevant whether or not the tax is limited to "income." Moreover, if there is no requirement implicit in the
Accepting this analysis as correct, a case such as that before us here may be approached properly in either of two ways. First, the initial *679 inquiry may be to whether the tax is direct or indirect. If found to be the latter, then the inquiry need proceed no further and the tax is valid, assuming uniformity of application. If, on the other hand, the tax is found to be direct under this same approach, then and only then is it necessary to determine whether it is a tax on "income" and, thus, by virtue of the
All of these premises assume the tax in question to meet the requirement of uniformity of application. There is no question but that the tax involved here does meet that requirement. Moreover, it is equally clear that the tax is not apportioned.
Since either approach set out above is logically correct, I have adopted the second simply because, initially at least, it leads onto what seems to be more familiar ground, namely, the nature of "income."
While the majority opinion sets out in full detail the statutory provisions involved, I believe it appropriate to make clear at the outset that the computations under
The primary contentions of the parties can be stated briefly. The petitioner maintains that the tax in question as applied to it is invalid as an income tax because, in failing to allow a deduction for underwriting losses, it taxes gross receipts and is not limited to either gross income or net income. The respondent contends that the tax is valid as an income tax because it is a tax on gross income, not gross receipts, and that in arriving at taxable income Congress has the power to limit or condition deductions from gross income. (It is perhaps noteworthy that the argument of both parties assumes that the validity of the tax turns upon whether or not it is limited to "income" within the meaning of the
In
In expressing thus my reliance on the principle announced in
The distribution, therefore, was held not a taxable event. In that context -- distinguishing gain from capital -- the definition [in Eisner v. Macomber] served a useful purpose. But it was not meant to provide a touchstone to all future gross income questions.
However, the Court went on to point out in the latter case that "[here] we have instances of undeniable accessions to wealth, clearly realized, and *214 over which the taxpayers have complete dominion." (
Moreover, the dissenting opinion of Mr. Justice Douglas in
The rule of Eisner v. Macomber has been reaffirmed on so many occasions that citation of the cases to this effect would be unnecessarily burdensome. To depart from the rule at this late date would ignore the sound principles upon which that case was decided and would throw into confusion the fundamental income tax structure and law as it has developed in the almost half century which has elapsed since adoption of the
The petitioner filed its 1952 return on Treasury Department Form 1120M, entitled "U.S. Mutual Insurance Company Income Tax Return." Its computation of "Gross Amount of Income (under
| [ITEM] | |
| 19. Total gross income in items 1 to 3, inclusive | $ 16,791.21 |
| 20. Net premiums | 1,239,884.49 |
| 21. Total gross amount of income from interest, dividends, | |
| rents, and net premiums (item 19 plus item 20) | $ 1,256,675.70 |
| 22. LESS: Dividends to policyholders | |
| 23.Interest wholly exempt from tax * * * | |
| 24. Gross amount of income (item 21 minus the sum of items | |
| 22 and 23) | $ 1,256,675.70 |
The "Total gross income" *217 referred to above in item 19 was made up as follows:
| Interest | $ 16,091.21 |
| Dividends | 700.00 |
| Rents | |
| Total | 16,791.21 |
The tax at 1 per cent of the gross amount of income was computed at $ 12,566.76, petitioner denying liability for this amount.
*682 Petitioner's 1952 return with respect to the tax computation under
| Investment expenses | $ 36.00 |
| Taxes | 22.26 |
| Real estate expenses | 6,053.82 |
| Interest | 655.15 |
| Total expenses | 6,767.23 |
None of these latter amounts is permitted as a deduction in the computation of the gross amount of income under
In 1952, the petitioner incurred losses on its policies (sometimes hereafter referred to as underwriting losses), which exceeded its gross amount of income ($ 1,256,675.70) by $ 206,198.12. Adding the two amounts together, it can be seen that petitioner incurred underwriting losses in 1952 in the amount of $ 1,462,873.82. It is in the failure to permit these underwriting losses to be excluded or deducted in computing the tax base under
Respondent argues that petitioner's *218 contention is erroneous because deductions are a matter of legislative grace and that Congress may grant them or withhold them as it sees fit in arriving at the net to be taxed. From this principle, he concludes that Congress may validly deny a deduction for underwriting losses even though premium receipts are included in the tax base. The proposition that deductions are a matter of legislative discretion is so well established that it requires no reaffirmation.
The income tax is not a tax on gross receipts (
*683 The record before us does not disclose any details of the method of operation of the petitioner. We do not have a copy of its charter, or of its bylaws, or a sample of its policies. Nevertheless, while I recognize that there are a variety of ways in which mutual insurance companies may operate under the laws of the several States, I assume that petitioner possessed the general characteristics common to such companies. "The theory of a mutual insurance company is, that the premiums paid by each member for the insurance of his property constitute a common fund, devoted to the payment of any losses that may occur."
Here the net premiums collected in 1952 were insufficient to pay the policy losses incurred in the same year. Those losses were not estimated losses but were actual and realized in the year in question. How the losses were met, the record does not disclose. However, premiums were collected for the purpose of paying losses, and while we may conjecture reasonably that the amount of the premiums was fixed somewhat in excess of the normal loss expectancy in order to meet ordinary expenses and to provide a reserve against extraordinary contingencies, the fundamental nature of the premiums remains, namely, a fund for the payment of losses.
The definition of "net premiums" 1 provided in
*684 The record *222 does not disclose what reserves the petitioner possessed but we may infer reasonably that its interest income of $ 16,091.21 and its dividend income of $ 700 represented earnings on such a reserve. I also assume that the reserve, whatever its amount may have been, represented the accumulated excess in prior years of petitioner's premium receipts over underwriting losses and after the payment of the expenses of the operation. Since the very purpose of a reserve is to provide a fund out of which liabilities to policyholders can be met, does that fact provide a valid basis for arguing that Congress may tax current premium receipts as "income" without making allowance for current underwriting losses? Stated another way, do the totality of current premium receipts constitute gain, irrespective of current underwriting losses, simply because the taxpayer possesses a reserve built up in prior years out of which those losses, or part of them, may be met? I do not think so. The reserve exists to pay losses which cannot be met by premium receipts. In a very real sense it represents the "capital" of the mutual insurance company, the pooled resources of its members. To use the existence *223 of such a reserve to support the treatment of premium receipts as gains irrespective of underwriting losses would be equivalent to, and just as illogical as, computing the taxable gains of a manufacturer without allowance for losses on the ground that the manufacturer can provide for those losses out of capital. A tax base so constructed becomes a tax on capital, or potentially so, and that I have never understood the income tax to be. In any event, the argument is unconvincing because the section in question makes no provision with respect to reserves and the tax applies irrespective of whether a reserve in fact exists and irrespective of whether underwriting losses exceed the total of premium receipts and reserves both.
It might be suggested that losses are properly a charge first against reserves and from that assumption argued that current premium receipts may be taxed in their entirety as "income" without taking those losses into consideration. However, I consider such reasoning to be without merit. If annual additions to the reserve were allowed as a deduction from premium receipts in computing the tax base, I might take a different view. Under that circumstance, it might *224 not be necessary to permit the deduction of actual losses in the tax year because properly chargeable to reserves, but such a system presupposes that the taxpayer would be permitted to deduct an annual addition to reserves and that this section does not do. It is true that a taxpayer who employs a bad debt reserve method of accounting must charge actual bad debts in the tax year against that reserve rather than against current receipts, but at the same time he is entitled to deduct a reasonable addition to the bad debt reserve. No such allowance is *685 provided here. On the contrary, the operation of
What the underwriting experience of this petitioner was in prior years or what its income, if any, was, we do not know, and I do not see that we are concerned with such questions. The income tax is based upon the annual concept of income and, in the complete absence of any expression of contrary congressional intent *225 here, I assume that
It is true that the tax with which we are here concerned is applied at a very low rate, a fact which may furnish a temptation to overlook deficiencies which might otherwise be more serious in their practical effect. However, just as it is not within the judicial province to inquire as to the propriety of a given rate of tax selected by Congress once it is established that the subject of the tax itself is within the taxing power of Congress, so I believe a corollary principle to be that, once it is determined that a given tax is not within the constitutional power of Congress, the rate of tax cannot be considered as affecting its invalidity. A tax which is beyond the power of Congress to levy, is invalid irrespective of the rate at which applied. *226 Likewise, if the tax is within the power of Congress, then Congress may, in its own judgment, select any rate to apply. Any other rule would, in effect, place the courts in the position of deciding at what point a tax rate becomes unreasonable, of substituting their judgment for that of Congress in an area where the elected representatives of the people should have sole responsibility. In any event, a particular tax rate does not in itself necessarily provide a fair measure of the burden of a tax, or the reasonableness of that burden. Here, the 1 per cent tax rate provided by
In support of the view that this tax can be construed as falling only on "income," it might be further argued that
Thus the true net income tax has appealing operating advantages. There is no tax payable for years of over-all loss, and there is an automatic offset of any underwriting loss against investment gain in years of over-all profit. The present tax formula for mutuals has neither of these economically sensible attributes. A mutual insurer with an underwriting loss is taxed upon its net investment income even though its underwriting loss exceeds that investment net. Indeed, *228 in a year of heavy losses the dividends to policyholders must commonly be reduced, thus increasing the "net premium" income base for the one per cent gross income tax despite the fact that gross premium writings show no gain. This can result in an economic idiocy, since in a year of over-all loss, the mutual insurer's "income" tax burden will not decline from that borne in a profit year, and it may actually increase both proportionately and absolutely.
The tax computed under
Alternatively, it might be suggested that any going business, including a mutual insurance company, can be presumed to have income and that the computation under
The petitioner argues that its losses are akin to the "cost of goods sold" to a manufacturer. The principle is well established, as the respondent agrees, that a manufacturer is entitled to deduct the cost of his materials from gross sales receipts in arriving at gross taxable income.
A mutual insurance company is not a mercantile business having a cost of goods sold, but is engaged in the business of selling a contract right or promise to perform certain acts upon the happening of a contingency. A mutual insurance company does not have an inventory or stock of goods. In the instant case Penn Mutual, as are all mutuals, consists of a group of persons banding together and pooling contributions to protect members from loss in case certain hazards should beset them.
Obviously, petitioner is not a mercantile business having a cost of goods sold, as such. However, there is nothing in the law which limits deductions from gross receipts to cost of goods sold on the part of a manufacturer. Indeed, the statute itself makes no provision for such a deduction, but rather its allowance arises from the implicit and long-established nature of income itself within the meaning of the
To say that items of gross income may be taxed is not the same *231 as to say that under all circumstances the courts would countenance a tax on gross receipts. The terms "gross income" and "gross receipts" are not synonymous. "Gross receipts" is a broader term, including within it receipts which may constitute capital as well as income, and, as shown above, returns of capital may not be taxed.
A contract of insurance is an agreement by which one party for a consideration promises to pay money or its equivalent, or to do an act which is valuable to the insured, upon the destruction, loss, or injury of something in which the other party has an interest. Vance, Insurance 83 (3d ed.). While the analogy is certainly not completely apposite, the payment by an insurance company of valid claims under its policies is little different in its practical effect, in my view, from the delivery of goods by a mercantile company. The payment of claims is what the company is selling. It is the very essence of the business in which it is engaged. In the words of the respondent himself, this taxpayer is "engaged in the business of selling a contract right." To argue that it does so at no cost to itself is to ignore reality and to indulge in a form of economic fantasy. *232 Its cost, in the clearest sense, is *688 represented by the amounts it pays out in satisfaction of claims of policyholders. The fact that here the cost is incurred subsequent to the sale while that of the manufacturer normally is incurred prior to the sale of goods cannot change the fundamental nature of the payment as "cost." Thus, while admittedly we are not dealing here with a mercantile business selling goods, I fail to see any distinction in principle.
If a mutual company operating on a pure system of assessments levied no assessments in a given tax year because its members had incurred no losses in that year, I suppose no one would suggest that it had any "income" within the meaning of the
The respondent also argues, on brief, that by the section in question Congress did not tax underwriting gains and, therefore, "in its sound discretion was certainly entitled to deny a deduction for underwriting losses." Elsewhere in his briefs, respondent asserts, "Since underwriting gains were not taxed, it certainly appears reasonable that underwriting losses were not allowed as deduction." I can only conclude that these statements are based upon a misconception of
The net premiums received by the petitioner do not by themselves constitute gains to it. I conclude, therefore, that
In the latter case, involving losses, the Supreme Court had the following to say:
In determining what constitutes income substance rather than form is to be given controlling weight. Eisner v. Macomber, supra, 206 (40 S. Ct. 189).
* * * The *235 transaction here in question did not result in gain from capital and labor, or from either of them, or in profit gained through the sale or conversion of capital. The essential facts set forth in the complaint are the loans in 1911, 1912, and 1913, the loss in 1913 to 1918 of the moneys borrowed, the excess of such losses over income by more than the item here in controversy, and payment in the equivalent of marks greatly depreciated in value. The result of the whole transaction was a loss.
* * * *
The contention that the item in question is cash gain disregards the fact that the borrowed money was lost, and that the excess of such loss over income was more than the amount borrowed. When the loans were made and notes given, the assets and liabilities of defendant in error were increased alike. The loss of the money borrowed wiped out the increase of assets, but the liability remained. The assets were further diminished by payment of the debt. The loss was less than it would have been if marks had not declined in value; but the mere diminution of loss is not gain, profit, or income.
The question still remains of whether
I am not unaware of the fact that distinguished authorities have suggested what may be a contrary view. For example, in his dissenting *690 opinion in
The
Thus, the Pollock decision did not declare that any income tax would be a direct tax but limited its decision on this point to taxes on income from real estate and taxes on income from invested personal property. The Court specifically declared, at page 635:
We have considered the act only in respect of the tax on income derived from real estate, and from invested personal property, and have not commented on so much of it as bears on gains or profits from business, privileges, or employments, in view of the instances in which taxation on business, privileges, or employments has assumed the guise of an excise tax and been sustained as such.
Nevertheless, despite this limitation upon the scope of the opinion, the Court found that, since so many of the income tax provisions were invalid and since all of the income tax provisions together constituted "one entire scheme of taxation," all of the income tax provisions were void.
The Pollock decision itself represented an expansion by the *239 Supreme Court of its earlier decisions as to what constituted a direct tax within the meaning of the Constitution. As early as 1796, the Court had decided in
The majority opinion discusses in some detail Supreme Court decisions involving the validity of various Civil War taxing statutes, particularly
Among the considerations involved in the determination of the nature of the tax under
It seems to me that the question of whether or not a particular tax is an excise is basically the same question as whether it is direct or indirect. If found not to be direct, it can make no difference whether it is an excise or something else. I certainly subscribe to the statement in the majority opinion that the "validity of an exercise of congressional power cannot depend upon the verbal tag attached to it." It would be preposterous to have the Federal taxing power circumscribed by the artificialities of mere form. Nevertheless, I believe that the intent of Congress as evidenced by the statute itself and its legislative history is of significance in determining the nature of the tax imposed.
In
That every person, firm, corporation, or company carrying on or doing the business of refining petroleum, or refining sugar, or *243 owning or controlling any pipe line for transporting oil or other products, whose gross annual receipts exceed two hundred and fifty thousand dollars, shall be subject to pay annually a special excise tax equivalent to one quarter of one per centum on the gross amount of all receipts of such persons, firms, corporations, and companies in their respective business in excess of said sum of two hundred and fifty thousand dollars. * * *
Rejecting the argument that the tax so imposed was a direct tax, the Court interpreted the quoted provision in these words (
Clearly the tax is not imposed upon gross annual receipts as property, but only in respect of the carrying on or doing the business of refining sugar. It cannot be otherwise regarded because of the fact that the amount of the tax is measured by the amount of the gross annual receipts. The tax is defined in the act as "a special excise tax," and, therefore, it must be assumed, for what it is worth, that Congress had no purpose to exceed its power under the Constitution, but only to exercise the authority granted to it of laying and collecting excises.
*693 The *244 tax imposed oncorporation incomes by the Act of 1909 and upheld by the Supreme Court in
While the mere declaration contained in a statute that it shall be regarded as a tax of a particular character does not make it such if it is apparent that it cannot be so designated consistently with the meaning and effect of the act, nevertheless the declaration of the lawmaking power is entitled to much weight, and in this statute the intention is expressly declared to impose a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or company. * * *
Can the tax computed under
Alternatively, can the tax be considered as an excise tax on the receipt of premiums? Recognizing that such a tax is commonly imposed by the States, which have no constitutional limitations in terms of direct taxes, I fail to see how
I am unable to find any persuasive evidence here that the tax in question is an excise tax. Indeed, all of the evidence is to the contrary.
The tax does not apply to corporations if the gross amount received during the taxable year from interest, dividends, rents, and premiums, including deposits and assessments, does not exceed $ 75,000. Therefore practically all the farmers' and other small and local mutual companies will not be required to file income tax returns or pay income taxes. It is estimated that over 80 percent of all mutual companies will be exempt from filing returns under this provision. [Emphasis supplied.] 6*248
Similarly, Chairman Doughton of the Committee on Ways and Means, in explaining the conference report to the House described
In determining whether
It moreover rests upon the wholly fallacious assumption that looked at from the point of view of substance a tax on the product of a mine is necessarily in its essence and nature in every case a direct tax on property because of its ownership unless adequate allowance be made for the exhaustion of the ore body to result from working the mine. We say wholly fallacious assumption because independently of the effect of the operation of the
The apparent meaning of the quoted language would seem to be that any tax on a mining corporation, and presumably on any other business entity, is per se an excise tax, sustainable as such without regard to the limitations normally demanded of an income tax. Yet
Since, in my opinion, the tax here involved is nothing more or less than a tax on gross receipts, to hold it to be an excise tax in the complete absence of any real indicia of such a tax could only be grounded on the premise that a tax on the gross receipts of a business is per se an excise tax and sustainable as such. Certainly, to seize upon the phrase "special tax" employed in one instance in the lengthy Senate Finance Committee report 8 on
Indeed, even though the tax were specifically denominated an "excise" in the statute, that fact alone, while entitled to great weight in determining the intent of Congress, could not preclude a holding that it is direct and thus must be apportioned. As declared by the Supreme Court in
Moreover, in addition, the conclusion reached in the Pollock Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled *252 to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it. * * * [Emphasis supplied.]
Thus, whether called an excise or not, a direct tax is still subject to the constitutional requirement of apportionment.
It is true, as pointed out earlier in this opinion, that the Supreme Court in the Pollock case limited its opinion to a decision that taxes on the income from real estate and on the income from invested personal property were direct taxes. It refused to decide whether taxes on the "gains or profits from businesses, privileges, or employments" (emphasis supplied) were equally direct taxes. In fact, the Court's opinion leaves the distinct impression that it might not have considered them as such had it been confronted squarely by the issue but would have sustained them as excises. Since the petitioner here is certainly a "business," must we conclude *253 in conformity with the above-quoted dictum that the tax computed under
Is this view contrary to Pacific Insurance Co. v. Soule; Spreckels Sugar Refining Co. v. McClain; Stanton v. Baltic Mining Co., all supra
I have indicated earlier the view that, since
This general question has been considered in so many cases heretofore decided that we do not deem it necessary to consider it anew upon principle. It was held in
Are we to understand that these two cases, taken together, stand for the principle that a tax on the gross receipts of a business is inherently an indirect tax? If so, then candor requires me to admit that my own conclusions in the instant case are plainly inconsistent therewith. On the other hand, does the fact that in its Spreckels decision the Supreme Court attached great weight to the announced intention of Congress to levy an excise together *256 with the fact that it there interpreted its earlier decision in Pacific Insurance Co. v. Soule as being based upon a similar consideration, permit the conclusion that the statutes there involved are distinguishable from that with which we are here concerned? This question forces us to return to the troublesome inquiry of whether the form of the tax carries with it real constitutional *698 significance. Certainly, the decided cases suggest that it does and yet this is a rationale which I find difficult to accept. I would suppose that constitutional limitations upon the Federal taxing power might be designed to accomplish any number of purposes, such as insulating certain subjects from the exercise of that power or reserving the taxation of those subjects to the States, but whatever their purpose, I think we must assume that the limitations were intended to be real and not directed to form alone. If, for example, the purpose of a given limitation is to reserve the exercise of a particular power to tax to the States, what possible difference does it make, in terms of whether the prerogative of the States is being invaded thereby, if the tax in question is levied as an excise tax, income *257 tax, or just as a plain tax? So long as the base and the rate are identical, the substantive effect and the real nature of the tax must remain the same, no matter what it is called.
Inability to accept the result in the Pacific Insurance Co. and Spreckels cases as having been based upon form alone might seem to lead inevitably to the principle stated above that a tax on gross receipts is inherently an indirect tax and, thus, valid in the absence of apportionment and irrespective of whether there is "income" or not. Yet, adoption of this alternative would seem to be directly contrary to the rationale implicit in
*699 The majority opinion upholds the validity of
It is familiar doctrine that deductions are a matter of legislative grace * * *, and it seems unlikely that there is a constitutional requirement based upon the
As I stated previously, under the majority's approach, the question of whether the tax is limited to "income" is constitutionally irrelevant once it is determined that it is not direct.
Moreover, aside from the passing reference to it as a "special tax," which I have indicated can hardly be considered to carry with it real constitutional significance, the majority decision that this is an indirect tax clearly does not seem to turn upon a determination that it is an excise. True, the opinion cites
If it is true that a tax on the receipts of a business is per se indirect, irrespective of whether imposed in terms as an income tax or as an excise tax or otherwise, then it is certainly true that there is no constitutional bar with respect to the taxation of business receipts without any allowance for cost of goods sold, *261 without any allowance for losses incurred, and without allowance for recovery of capital. Certainly, the statute involved in Spreckels permitted no adjustment for such items. However, if one believes, as I do, that these items and others *700 of a similar nature are constitutionally protected, then I think it necessary to take issue with the concept of "indirect" taxation embraced by the majority here. I have already agreed that it is incorrect to conceive of the
I cannot accept a conclusion that the receipts of a business taxpayer are entitled to a different constitutional protection than are the receipts of a nonbusiness taxpayer. Such a distinction would be untenable in principle as well as impractical of application in many instances. *262 We are all too familiar with the difficulties inherent in the determination of whether an individual is engaging in business or not. Nowhere in the Constitution do I find any warrant for such a distinction. Moreover, since recovery of capital is most frequently involved in what are business or business-type transactions, the drawing of such a distinction would simply make any constitutional restriction with regard to such an item quite meaningless.
Certainly, the Pollock decision required no such distinction. While the opinion indicated that a tax on the gains and profits of businesses, privileges, and employments would be an indirect tax, there is no suggestion in the opinion that a tax on property in the hands of those so engaged would not be a direct tax invalid in the absence of apportionment to the same extent as if held by persons not so engaged. Indeed, the particular taxpayer as against which the validity of the tax was tested was a bank. That it was the type of property rather than who owned it which was the test applied by the Court was indicated by Mr. Justice Harlan in his dissent at
And it is now the law, as this day declared, that under the Constitution, *263 however urgent may be the needs of the Government, however sorely the administration in power may be pressed to meet the moneyed obligations of the nation, Congress cannot tax the personal property of the country, nor the income arising either from real estate or from invested personal property, except by a tax apportioned among the States, on the basis of their population, while it may compel the merchant, the artisan, the workman, the artist, the author, the lawyer, the physician, even the minister of the Gospel, no one of whom happens to own real estate, invested personal property, stocks or bonds, to contribute directly from their respective earnings, gains, and profits, and under the rule of uniformity or equality, for the support of the government. [Second emphasis supplied.]
The severest contemporaneous criticisms of the Pollock decision were directed to the fact that it resulted in different kinds of income being *701 accorded different constitutional protections, in income from real estate, stocks, and bonds being elevated to a preferred position. 9 It was to remove this very distinction that the
While the majority opinion makes no attempt to define a "direct" tax, it gives considerable weight to the suggestion that to require apportionment of the tax here involved would have "bizarre and inequitable consequences." While one can hardly take exception to such a characterization, I do not consider that it furnishes a very significant criterion of the nature of the tax. It is not a logical argument to say that a particular tax cannot be construed to be direct simply because it may be impractical to impose it by apportionment. The Supreme Court specifically rejected the same argument in the Pollock case. To levy a Federal tax on real estate by apportionment among the States according *265 to population would certainly lead to disparate results as between different taxpayers, but it has always been accepted that such a tax would be direct and would have to be apportioned.
There is no suggestion in the majority opinion that it rejects any of the traditionally accepted views as to the meaning of "direct" taxes. Thus, while the opinion does not offer any definition of the term, I would suppose that it would adhere to the principles laid down in Pollock and elsewhere that capitation taxes, taxes on real estate, taxes on personal property, and taxes on the receipts from real estate and personalty are direct taxes which must be apportioned save to the extent the particular tax is limited to income and, thus, freed of apportionment by the
I assume that the cases do not require the elevation *267 of real estate, or the receipts therefrom, to a preferred position under the Constitution. Pollock made it clear that personal property was entitled to at least equivalent treatment, and in
In any event, as I have stated previously, we need not concern ourselves here with the source *268 of the receipts involved in the instant case because they are themselves property. If the tax computed under
To decide that gross receipts are property is not to signal a new point of departure in delineating the scope of the Federal taxing power but simply establishes a logical basis for the often-announced doctrine that an income tax on gross receipts, to the extent that it *703 falls on that which is not "income," is invalid. Indeed, no other conclusion is possible if one is convinced that such receipts in excess of "income" are not within the Federal taxing power except by apportionment. Nor would the principles suggested by myself disturb the basic scheme of Federal income taxation as embodied in the Internal Revenue Code.
I realize that in the recent case of
If we enforce as federal policy the rule espoused by the Commissioner in this case, we would come close to making this type of business taxable on the basis of its gross receipts, while all other business would be taxable on the basis of net income. If that choice is to be made, Congress should do it. * * *
The Court had before it the question of whether amounts paid by professional bookmakers as wages and rent were deductible from gross income as ordinary and necessary business *270 expenses. In their tax computation, the taxpayers presumably had already applied section 23(h) of the 1939 Code which permitted the deduction of gambling losses to the extent of the gambling gains. Thus, there was no question involved in the Sullivan case of a tax on gross receipts but simply of deductions from gross income.
I certainly agree with the majority that there is a strong presumption in favor of the validity of a taxing statute and that doubts must be resolved in favor of its validity, and I cannot dispute the fact that some decisions of the Supreme Court appear to support the majority view. However, I am satisfied that the great weight of authority is contrary to that view and is largely embodied in decisions of the Supreme Court handed down subsequent to those relied upon by the majority. One fact is abundantly clear and that is that the scope of the Federal taxing power does not lend itself to dogmatism or categorical opinion. The concept of taxable income is at best "elusive and restless."
On the question of jurisdiction, I agree thoroughly with the concurring opinion of Judge Murdock.
Footnotes
1. This sentence is substantially as stipulated by the parties, and possible confusion that may arise therefrom is attributable to the sense in which the terms quoted above are used. The term "gross income" is used apparently to mean gross income from investments. On the other hand, the term "gross amount of income" appears to refer to the special statutory base, specified in
section 207(a)(2), I.R.C. 1939 (see footnote 4, infra↩), which includes net premiums as well as investment income.2. The Government filed a motion to dismiss the present proceeding for lack of jurisdiction, which was denied. Such denial was in accord with well-established practice in this tribunal.
Continental Accounting & Audit Co., 2 B.T.A. 761">2 B.T.A. 761 , 763-764;John Moir, 3 B.T.A. 21">3 B.T.A. 21 , 22;United States Fidelity & Guaranty Co., 5 B.T.A. 23">5 B.T.A. 23 , 26;Powell Coal Co., 12 B.T.A. 492">12 B.T.A. 492 , 497;Edward J. Lehmann, 21 B.T.A. 664">21 B.T.A. 664 , 671;Fred Taylor, 36 B.T.A. 427">36 B.T.A. 427 , 429↩.3. Reenacted in substantially identical form as
sections 821- 823 of the Internal Revenue Code of 1954↩ .4.
SEC. 207 . MUTUAL INSURANCE COMPANIES OTHER THAN LIFE OR MARINE.(a) Imposition of Tax. -- There shall be levied, collected, and paid for each taxable year upon the income of every mutual insurance company (other than a life or a marine insurance company or a fire insurance company subject to the tax imposed by section 204 and other than an interinsurer or reciprocal underwriter) a tax computed under paragraph (1) or paragraph (2) whichever is the greater and upon the income of every mutual insurance company (other than a life or a marine insurance company or a fire insurance company subject to the tax imposed by section 204) which is an interinsurer or reciprocal underwriter, a tax computed under paragraph (3):
(1) If the corporation surtax net income is over $ 3,000 a tax computed as follows:
(A) [No provision.]
(B) Taxable Years Beginning After March 31, 1951, and Before April 1, 1954. -- In the case of taxable years beginning after March 31, 1951, and before April 1, 1954 --
(i) Normal tax. -- A normal tax of 30 per centum of the normal-tax net income, or 60 per centum of the amount by which the normal-tax net income exceeds $ 3,000, whichever is the lesser; plus
(ii) Surtax. -- A surtax of 22 per centum of the corporation surtax net income in excess of $ 25,000.
(2) If for the taxable year the gross amount of income from interest, dividends, rents, and net premiums, minus dividends to policyholders, minus the interest which under section 22(b)(4) is excluded from gross income, exceeds $ 75,000, a tax equal to the excess of --
(A) 1 per centum of the amounts so computed, or 2 per centum of the excess of the amount so computed over $ 75,000, whichever is the lesser, over
(B) the amount of the tax imposed under Subchapter E of Chapter 2.
* * * *
(4) Gross amount received over $ 75,000, but less than $ 125,000. -- If the gross amount received during the taxable year from interest, dividends, rents, and premiums (including deposits and assessments) is over $ 75,000 but less than $ 125,000, the amount ascertained under paragraph (1), paragraph (2)(A) and paragraph (3) shall be an amount which bears the same proportion to the amount ascertained under such paragraph, computed without reference to this paragraph, as the excess over $ 75,000 of such gross amount received bears to $ 50,000.
* * * *
(b) Definition of Income, Etc. -- In the case of an insurance company subject to the tax imposed by this section --
(1) Gross investment income. -- "Gross investment income" means the gross amount of income during the taxable year from interest, dividends, rents, and gains from sales or exchanges of capital assets to the extent provided in section 117;
(2) Net premiums. -- "Net premiums" means gross premiums (including deposits and assessments) written or received on insurance contracts during the taxable year less return premiums and premiums paid or incurred for reinsurance. Amounts returned where the amount is not fixed in the insurance contract but depends upon the experience of the company or the discretion of the management shall not be included in return premiums but shall be treated as dividends to policyholders under paragraph (3);
(3) Dividends to policyholders. -- "Dividends to policyholders" means dividends and similar distributions paid or declared to policyholders. The term "paid or declared" shall be construed according to the method regularly employed in keeping the books of the insurance company;
(4) Net income. -- The term "net income" means the gross investment income less --
(A) Tax-free Interest. -- The amount of interest which under section 22(b)(4) is excluded for the taxable year from gross income;
(B) Investment Expenses. -- Investment expenses paid or accrued during the taxable year. If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this subparagraph shall not exceed one-fourth of 1 per centum of the mean of the book value of the invested assets held at the beginning and end of the taxable year plus one-fourth of the amount by which net income computed without any deduction for investment expenses allowed by this subparagraph, or for tax-free interest allowed by subsection (b)(4)(A), exceeds 3 3/4 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year;
(C) Real Estate Expenses. -- Taxes and other expenses paid or accrued during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder of a company upon his interest as shareholder, which are paid or accrued by the company without reimbursement from the shareholder, but in such cases no deduction shall be allowed the shareholder for the amount of such taxes;
(D) Depreciation. -- A reasonable allowance, as provided in section 23(l), for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence;
(E) Interest Paid or Accrued. -- All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this chapter.
(F) Capital Losses. -- Capital losses to the extent provided in section 117 plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or exchange are not greater than the excess, if any, for the taxable year of the sum of dividends and similar distributions paid to policyholders, losses paid, and expenses paid over the sum of interest, dividends, rents, and net premiums received. In the application of section 117(e) for the purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser:
(i) the corporation surtax net income (computed without regard to gains or losses from sales or exchanges of capital assets); or
(ii) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders.
(c) Rental Value of Real Estate. -- The deduction under subsection (b)(4)(C) or (b)(4)(D) of this section on account of any real estate owned and occupied in whole or in part by a mutual insurance company subject to the tax imposed by this section, shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this subsection) as the rental value of the space not so occupied bears to the rental value of the entire property.
(d) Amortization of Premium and Accrual of Discount. -- The gross amount of income during the taxable year from interest, the deduction provided in subsection (b)(4)(A), and the credit allowed against net income in section 26(a) shall each be decreased by the appropriate amortization of premium and increased by the appropriate accrual of discount attributable to the taxable year on bonds, notes, debentures or other evidences of indebtedness held by a mutual insurance company subject to the tax imposed by this section. Such amortization and accrual shall be determined (1) in accordance with the method regularly employed by such company, if such method is reasonable, and (2) in all other cases, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary.
* * * *
(f) Double Deductions. -- Nothing in this section shall be construed to permit the same item to be twice deducted.
(g) Credits Under Section 26. -- For the purposes of this section, in computing normal tax net income and corporation surtax net income, the credits provided in section 26 shall be allowed in the manner and to the extent provided in sections 13(a) and 15(a).↩
5. Section 101(11), which had previously exempted most mutual insurance companies other than life, was rewritten so as to limit the exemption to small companies; but in seeking to attain that objective the Senate used a different formula from the one approved by the House.
6. Article I, section 9, clause 5. -- No Tax or Duty shall be laid on Articles exported from any State.↩
7. Article I, section 2, clause 3. -- Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons. * * *
8. Article I, section 9, clause 4. -- No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.↩
9. See also 1 Story, Constitution of United States, sec. 955 (4th ed., 1873); 1 Kent, Commentaries 256; Miller, Constitution 237 (1891). Cf. Rawle, Constitution 80 (2d ed., 1829); Pomeroy, Constitutional Law, sec. 277 (3d ed., 1888); Sergeant, Constitutional Law 305 (1830); 1 Hare, American Constitutional Law 250 (1889).
1. A statutory liquidator of Penn Mutual Indemnity Company is now the substituted petitioner herein.↩
2. SEC. 271. DEFINITION OF DEFICIENCY.
(a) In General. -- As used in this chapter in respect of a tax imposed by this chapter [chapter 1 -- income tax], "deficiency" means the amount by which the tax imposed by this chapter exceeds the excess of --
(1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus (B) the amounts previously assessed (or collected without assessment) as a deficiency, over --
(2) the amount of rebates, as defined in subsection (b)(2), made. [Emphasis supplied.]
In the instant case, there were no amounts previously assessed as a deficiency, and no rebates.↩
3. SEC. 272. PROCEDURE IN GENERAL.
(a)(1) Petition to Board of Tax Appeals [now called Tax Court of the United States]. -- If in the case of any taxpayer, the Commissioner determines that there is a deficiency [which term is defined in section 271(a)] in respect of the tax imposed by this chapter, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within ninety days after such notice is mailed * * * the taxpayer may file a petition with Board of Tax Appeals for a redetermination of the deficiency↩. * * * [Emphasis supplied.]
4. SEC. 1101. JURISDICTION.
The Board and its divisions shall have such jurisdiction as is conferred on them by chapters 1 [income tax], 2 [additional income taxes], 3 [estate tax], and 4 [gift tax] of this title [Internal Revenue Title], by Title II and Title III of the Revenue Act of 1926, 44 Stat. 9 [relating to income tax and estate tax], or by laws enacted subsequent to February 26, 1926.↩
5. The cases cited by the majority are:
Continental Accounting & Audit Co., 2 B.T.A. 761">2 B.T.A. 761 , 763-764;John Moir, 3 B.T.A. 21">3 B.T.A. 21 , 22;United States Fidelity & Guaranty Co., 5 B.T.A. 23">5 B.T.A. 23 , 26;Powell Coal Co., 12 B.T.A. 492">12 B.T.A. 492 , 497;Edward J. Lehmann, 21 B.T.A. 664">21 B.T.A. 664 , 671;Fred Taylor, 36 B.T.A. 427">36 B.T.A. 427 , 429↩.1. The use of the word "net" is misleading to the extent that it may imply gain after the allowance of deductions as in the case of "net income." The premiums here are "net" only in the sense that return premiums to policyholders are taken out because they are not part of the actual total premiums finally collected. The following quotation from
Mutual Benefit Life Insurance Co. v. Herold, 198 F. 199">198 F. 199 , 205 (1912), concerning excess premiums returned to policyholders is relevant although that case involved a mutual level premium life insurance company:This excess payment represents, not profits or receipts but an overpayment -- an overpayment because, being entitled to his insurance at cost and having paid more than it cost, he [the policyholder] is equitably entitled to have such excess applied for his benefit. It makes no difference what this excess is called. * * *
SeePenn Mutual Life Insurance Co. v. Lederer, 252 U.S. 523↩ (1920) .2. Scott, "Casualty Insurers,"
44 Va. L.R. 935, 937, 938↩ (1958) .3. Act of Aug. 27, 1894; ch. 349, sec. 27, 28 Stat. 509, 553.↩
4. Ch. 6, sec. 38, 36 Stat. 112.↩
5. Act of June 13, 1898, ch. 448, sec. 27, 30 Stat. 448, 464.↩
6. 88 Cong. Rec., 77th Cong., 2d Sess., p. 7795.
7. 88 Cong. Rec., 77th Cong., 2d Sess., p. 8456.↩
8. Report of the Committee on Finance, U.S. Senate, to accompany H.R. 7378, S. Rept. No. 1631, 77th Cong., 2d Sess., pp. 150-154.↩
9. For a discussion of this background, see S. Rept. No. 2140, Part 2, 76th Cong., 3d Sess., p. 33 et seq↩.