Case Name: Penn Mutual Indemnity Company (Dissolved), Francis R. Smith, Insurance Commissioner of the Commonwealth of Pennsylvania, Statutory Liquidator, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1959-06-15
Citations: 32 T.C. 653
Docket Number: Docket No. 55553
Parties: Penn Mutual Indemnity Company (Dissolved), Francis R. Smith, Insurance Commissioner of the Commonwealth of Pennsylvania, Statutory Liquidator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: TurNer, Harron, Opper, Tietjbns, Bruce, Atkins, and Muuronet, /</., agree with this concurring opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 32
Pages: 653–704

Head Matter:
Penn Mutual Indemnity Company (Dissolved), Francis R. Smith, Insurance Commissioner of the Commonwealth of Pennsylvania, Statutory Liquidator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 55553.
Filed June 15, 1959.
John T. Curtin, Esq., for the petitioner.
Morton A. Smith, Esq., for the respondent.

Opinion:
OPINION.
Raum, Judge:
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 section 207(a)(2) of the Internal Revenue Code of 1939 is constitutional as here applied. The facts have been stipulated.
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 tire territorial limits of Pennsylvania. At no time was it authorized or licensed by the United States or any Federal body or agency to transact business or issue 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 $1,256,675.7o. 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 section 207 (a) (2) of the Internal Revenue Code of 1939. The company filed its income tax return for the year 1952 with the district director of internal revenue at Philadelphia, Pennsylvania. The return disclosed a total tax due in the amount of $12,566.76, but by letter attached thereto, the company denied that this sum was owing on the ground that section 207(a) (2) of the Internal Revenue Code of 1939 was unconstitutional. Respondent thereafter determined a deficiency in the amount of $12,566.76.
The parties have agreed that the company "was a mutual insurance company under Section 207 of the Internal Revenue Code of 1939 and if the said Section 207 is constitutional, the deficiency is $12,566.76."
Section 207 of the Internal Revenue Code of 1939, as amended, established a system for the taxation of mutual insurance companies other than life or marine. Provisions for the taxation of stock insurance companies and mutual life or marine insurance companies are found in other, although closely neighboring, sections of the 1939 Code.
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.
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 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, sufra, pp. 31, 150-154, which the Senate approved. That plan was ultimately accepted by the conference committee, although modified in certain particulars not presently material. H. Rept. 2586, 77th Cong., 2d Sess., pp. 10-12. As thus modified, it was enacted into law in the provisions here for review.
The new taxing provisions thus appearing in the Revenue Act of 1942 constituted a complete revision of section 207 of the 1939 Code. Section 207, incorporating amendments made subsequent to the Revenue Act of 1942 which are applicable to 1952, the taxable year here involved, is set forth in the margin. These latter amendments were required primarily by changes in corporation income tax rates during the years subsequent to 1942 and did not alter the basic structure of the tax first imposed in 1942.
The basic pattern of the new system adopted in 1942 was described by the Senate Finance Committee as follows (S. Rept. No. 1631, supra at 151) :
In the case of mutual insurance companies other than life or marine which are not granted exemption under section lOlCll),[ ] 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.]
Section 207(a) levies a tax on every mutual insurance company (other than life or marine or a fire insurance company subject to tax under section 204) upon either one of two bases, whichever produces the greater amount of tax. The first base, embodied in section 207(a)(1), is net investment income to which is applied the rates applicable to corporation incomes generally. The second base, embodied in section 207(a) (2), is the "gross amount of income" from interest, dividends, rents, and net premiums, less dividends to policyholders and less wholly tax-exempt interest. If the base so computed exceeds $75,000, the tax is an amount 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.
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 section 207(a) (2) produced a greater liability than the one determined under section 207(a) (1); accordingly, the amount of tax levied by section 207 was fixed by subsection (a) (2). There is no disagreement between the parties that if section 207(a) (2) is constitutional, the computation of the company's 1952 tax liability is governed thereby, and the deficiency determined by the Commissioner is correct. No issue of statutory construction or application of the statute is here presented.
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. Steward Machine Co. v. Davis, 301 U.S. 548, 582; Flint v. Stone Tracy Co., 220 U.S. 107, 152-158. We pass therefore to a consideration of whether the challenged exaction is otherwise authorized under the taxing power.
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 Nicol v. Ames, 173 U.S. 509, 514-515:
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 national fabric is based. It is as necessary to the existence and prosperity of a nation as is the air he 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 16th amendment. This is an inaccurate formulation of the question and has led to much loose thinking on the sub j ect. The source of the taxing power is not the 16th amendment; it is article I, section 8, of the Constitution. It is important that these provisions be clearly understood. What is required is an understanding of fundamental principles. The familiar statement that "at this time we need education in the obvious more than investigation of the obscure" (Holmes, Collected Legal Papers, pp. 292-293), although made in a different context, is peculiarly applicable here.
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 taxing power and "was one of the causes that led to the adoption of the present Constitution." Springer v. United States, 102 U.S. 586, 595-596. See also The Federalist, Nos. 21, 30. It was in response to the perilous situation then existing that the Constitution conferred upon the Congress the power to tax in broad and sweeping terms. Article I, section 8, clause 1, provides:
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.) Brushaber v. Union Pac. R.R., 240 U.S. 1, 12. The power was subject to only one prohibition, namely, that no tax or duty may be laid upon exports (art. I, sec. 9, cl. 5); and only two qualifications were imposed upon the manner in which the power might be exercised: (1) Duties, imposts, and excises must be "uniform throughout the United States" (art. I, sec. 8, cl. 1, supra) ; and (2) capitation and other "direct" taxes must be apportioned among the States according to population (art. I, sec. 2, cl. 3, and art. I, sec. 9, cl. 4 ). The comprehensive and all- inclusive character of the taxing power was thus summarized by Chief Justice Chase in License Tax Cases, 5 Wall. 462, 471:
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 Pacific Insurance Co. v. Soule, 7 Wall. 433, the Court stated (p. 446):
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 Flint v. Stone Tracy Co., 220 U.S. 107, 153-154.
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. Knowlton v. Moore, 178 U.S. 41, 83-108; Flint v. Stone Tracy Co., 220 U.S. 107, 157; Brushaber v. Union Pac. R.R., 240 U.S. 1, 24; Florida v. Mellon, 273 U.S. 12, 17; Poe v. Seaborn, 282 U.S. 101, 117-118; Bromley v. McCaughn, 280 U.S. 124, 138; Steward Machine Co. v. Davis, 301 U.S. 548, 583. Accordingly, since the statute now under attack satisfies the uniformity requirement, the only possible objection to its validity can be that it is not apportioned among the States according to population. But the apportionment requirement attaches only to "direct" taxes, and if the tax provided for under section 207(a) (2) is not a "direct" tax that requirement is not applicable.
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." Flint v. Stone Tracy Co., 220 U.S. 107, 151. Therefore, if a tax is not a direct tax, it falls within the general category of indirect taxes, and it is a matter of no moment whether its classifica tion be further refined as a duty, or an impost, or an excise. As was said in Steward Machine Co. v. Davis, 301 U.S. 548, 581-582:
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. Burnet v. Brooks, 288 U.S. 378, 403, 405; Brushaber v. Union Pacific R. Co., 240 U.S. 1, 12. Whether the tax is to be classified as an "excise" is in truth not of critical importance. If not that, it is an "impost" (Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 622, 625; Pacific Insurance Co. v. Soule, 7 Wall. 433, 445), or a "duty" (Veazie Bank v. Fenno, 8 Wall. 533, 546, 547; Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 570; Knowlton v. Moore, 178 U.S. 41, 46).
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 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. Hylton v. United States, 3 Dall. 171; Springer v. United States, 102 U.S. 586, 602. The impracticability and unfairness of the apportionment requirement were early recognized in the Hylton case, in which the Supreme Court held that an unapportioned annual tax upon carriages was within the power of Congress. In the course of his opinion Justice Chase stated (3 Dall. 171, 174) :
It appears to me, tbat 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 Ms carriage, eighty dollars.
Throughout the history of the country the term "direct" taxes has been given a narrow and restrictive interpretation, and un-apportioned 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 (License Tax Cases, 5 Wall. 462; cf. South Carolina v. United States, 199 U.S. 437); a tax on sales at commodity exchanges (Nicol v. Ames, 173 U.S. 509); a tax on the transfer or sale of securi ties (Treat v. White, 181 U.S. 264; Thomas v. United States, 192 U.S. 363; Provost v. United States, 269 U.S. 443); a tax on tbe issuance of State bank notes (Veazie Bank v. Fenno, 8 Wall. 533); a tax on manufactured tobacco having reference to its origin and intended use (Patton v. Brady, 184 U.S. 608); a tax on the manufacture and sale of oleomargarine (McCray v. United States, 195 U.S. 27); a tax on devolutions of title to real estate (Scholey v. Rew, 23 Wall. 331); a tax on the receipt of legacies (Knowlton v. Moore, 178 U.S. 41); a tax on transfers at death (New York Trust Co. v. Eisner, 256 U.S. 345); a tax on transfers inter vivos (Bromley v. McCaughn, 280 U.S. 124). In response to the contention in New York Trust Co. v. Eisner, supra, that the estate tax was invalid as an unapportioned direct tax upon property, the Supreme Court swept away all the logical arguments with the broad statement that "Upon this point a page of history is worth a volume of logic." 256 U.S. at 349.
Among the numerous indirect taxes imposed by Congress under article I, section 8, of the Constitution were the various income taxes levied for a period of nearly 10 years at about the time of the Civil War. Act of August 5, 1861, ch. 45, 12 Stat. 292, 309, 311; Act of July 1, 1862, ch. 119, 12 Stat. 432, 473, 475; Act of March 3, 1863, ch. 74, 12 Stat. 713, 718, 723; Act of June 30, 1864, ch. 173, 13 Stat. 223, 281, 285; Act of March 3,1865, ch. 78,13 Stat. 469, 479, 481; Act of March 10, 1866, ch. 15, 14 Stat. 4, 5; Act of July 13, 1866, ch. 184, 14 Stat. 98,137,140; Act of March 2,1867, ch. 169,14 Stat. 471, 477, 480; Act of July 14,1870, ch. 255,16 Stat. 256, 261. These taxes were not apportioned according to population; they were treated as indirect taxes and were held constitutional in a number of cases in the Supreme Court, notably in Springer v. United States, 102 U.S. 586, where the constitutional issue was fully discussed.
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 to gross premiums of insurance companies. Section 105 of the same statute declared that:
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 Pacific Insurance Company v. Soule, 7 Wall. 433, the Supreme Court sustained the tax upon insurance companies. It rejected the contention that the contested exaction was a direct tax that had to be apportioned. In pointing out the bizarre and inequitable consequences that would flow from the apportionment of the tax upon gross premiums the Court stated (p. 446) :
The consequences which would follow the apportionment 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. Kept. No. 1631, 77th Cong., 2d Sess., p. 151) imposed by section 207 (a) (2) of the 1939 Code which is here under attack.
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 Spreckels Sugar Refining Co. v. McClain, 192 U.S. 397. True, the statute had referred to the exaction as "a special excise tax." But its validity could not have turned upon a mere label. It should be perfectly clear that if the power exists, the name applied to a particular tax is of no consequence. The validity of an exercise of congressional power cannot depend upon the verbal tag affixed to it. "The name of the tax is unimportant." Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 580-581.
We think it clear that wholly apart from the 16th amendment section 207 (a) (2) is entirely within the all-inclusive taxing power of Congress under article I, section 8, and that the crippling and in equitable apportionment requirement has no application here. Nevertheless, since the 16th amendment is sometimes loosely and incorrectly treated as imposing certain limitations or restrictions upon the taxing power, we deem it important to show just what part the 16th amendment plays in relation to the taxing power.
The story of the 16th amendment properly begins with Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 158 U.S. 601. Sections 27-37 of the Act of Congress received by the President April 15, 1894, and which became law without his approval (ch. 349, 28 Stat. 509) provided for a comprehensive general tax upon net income. There was no apportionment, and a sharply divided Court held the Act invalid in two respects that are material here. It held that to the extent that the tax was upon rents or income from real estate and to the extent that it was upon income from invested personal property, it was for present purposes equivalent to a direct tax upon the real estate or the invested personal property and was therefore invalid for want of apportionment. In other words, the apportionment requirement was held applicable by reason of the source of those two classes of income, since in the opinion of the majority, the income from those two sources was so closely identified with the sources themselves that a tax upon the income had to comply with the requirements applicable to a tax upon the property from which it was derived. It was only in this limited respect that the lack of apportionment was held fatal. The Court made it plain beyond any doubt that it was not reaching any such result in respect of a tax on "professional receipts," 157 U.S. at 579, or "on gains or profits from business, privileges, or employments," 158 U.S. at 635. The narrow scope of the holding in the Pollock ease has been repeatedly recognized. See Nicol v. Ames, 173 U.S. 509, 519-520; Knowlton v. Moore, 178 U.S. 41, 80; Spreckels Sugar Refining Co. v. McClain, 192 U.S. 397, 413; Flint v. Stone Tracy Co., 220 U.S. 107, 148.
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 16th amendment was adopted. It provides:
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 16th amendment thus merely provides that regardless of the source of the income no apportionment is required. It is no new grant of power to tax income, "an authority already possessed and never questioned." Brushaber v. Union Pac. R.R., 240 U.S. 1, 17-18. Nor was it necessary in order to lift the apportionment requirement in respect of most types of income; for the apportionment requirement, even under the Pollock case, applied only to income from property. But it was necessary to remove the apportionment requirement as to income from property and to make clear that, whatever the source, income could be taxed without the crippling effect of apportionment. As the Court in the Brushaber case said (240 U.S. at 18): "[T]he whole purpose of the Amendment was to relieve all income taxes when imposed from apportionment from a consideration of the source whence the income was derived."
In Stanton v. Baltic Mining Co., 240 U.S. 103, the Supreme Court again made it clear that (pp. 112-113) "the Sixteenth Amendment conferred no new power of taxation but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived, that is by testing the tax not by what it was — a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed." The Court condemned as improper an approach to the 16th amendment which treated it as a new grant of power with the consequence that limitations in that new grant were a restriction upon its exercise. The 16th amendment merely made it clear that income taxes, regardless of the source of the income, were not subject to the apportionment requirement. It in no way subtracted from or diminished the all-inclusive power already provided for in article I, section 8. It would be ironic indeed if the amendment, which was intended to enlarge the preexisting taxing power by unfettering it from a crippling restriction, were to be interpreted so as to create new limitations upon its exercise. In Stanton v. Baltic Mining Co., supra, the Court overrode an objection to the 1913 income tax as applied to a mining company where the taxpayer complained that the allowance of a depletion deduction in the amount of only $150,000 in the face of actual depletion of $750,000 converted the tax into one upon property which was therefore invalid because not apportioned. The Court brushed the argument aside, sustaining the tax not only with the assistance of the 16th amendment, but also upon the ground that it was valid "independently of the effect of the operation of the Sixteenth Amendment." It cited Stratton's Independence v. Howbert, 231 U.S. 399, in support of its conclusion that the tax could be sustained as a true excise on the results of the business of carrying on mining operations. 240 U.S. at 114. But while it is true that the tax in Stratton's Independence v. Howbert was eo nomine an excise, such was not the case of the 1913 income tax sustained in the Stanton case. Thus, the challenged tax herein is similarly sustainable as an excise on carrying on an insurance business, and is certainly as much an indirect tax as was the one upheld without apportionment in Pacific Insurance Co. v. Soule, 7 Wall. 433. The power of Congress to impose the tax without apportionment depends upon whether it in fact falls within the broad category of indirect taxes and not upon whether Congress has used the magic words "excise" or "duty" or "impost." Steward Machine Co. v. Davis, 301 U.S. 548, 581-582. Cf. Wisconsin v. J. C. Penny Co., 311 U.S. 435, 443-444; Lawrence v. State Tax Commission, 286 U.S. 276, 280.
Since we have concluded that the "special tax" imposed by section 207(a)(2) upon mutual insurance companies (other than life or marine) is fully authorized by article I, section 8, and that it is not a "direct" tax requiring apportionment, it becomes unnecessary to consider whether the 16th amendment effectively dispenses with the apportionment requirement in this case. Nevertheless, even if it were necessary to make that inquiry, we think there is much force to the contention that even if the apportionment requirement were otherwise applicable it does not apply here by virtue of the 16th amendment, and that the failure of Congress to provide for deduction of underwriting losses does not prevent the 16th amendment from dispensing with the apportionment requirement here. It is familiar doctrine that deductions are a matter of legislative grace (Stanton v. Baltic Mining Co., 240 U.S. 103; Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 304; Helvering v. Independent Life Ins. Co., 292 U.S. 371, 381; New Colonial Co. v. Helvering, 292 U.S. 435, 440; White v. United States, 305 U.S. 281, 292; Commissioner v. Sullivan, 356 U.S. 27, 28), and it seems unlikely that there is a constitutional requirement based upon the 16th amendment calling for the deduction which petitioner insists is indispensable to the validity of the unap-portioned tax. However, that is an issue that we need not reach.
Finally, we recur to the statement in Nicol v. Ames, 173 U.S. 509, 514-515, to the effect that the presumption is in favor of the validity of an act of Congress, "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." Similarly, in Ogden v. Saunders, 12 Wheat. 213, 270, the Supreme Court said:
It is but a decent respect due to tbe 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
The same thought has been, expressed in sweeping terms on a number of occasions. See, e.g., Sinking Fund Cases, 99 U.S. 700, 718 ("Every possible presumption is in favor of the validity of a statute, and this continues until the contrary is shown beyond a rational doubt."); Trade-Mark Cases, 100 U.S. 82, 96 ("[A] due respect for a co-ordinate branch of the government requires that we shall decide that it has transcended its powers only when that is so plain that we cannot avoid the duty."); Legal Tender Cases, 12 Wall. 457, 531 (" '[A]n act of the legislature is not to be declared void unless the violation of the Constitution is so manifest as to leave no room for reasonable doubt ? 55 ^
As the Court said further in Nicol v. Ames, supra at 515-516:
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. 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 section 207(a) (2) is constitutional, and that the deficiency determined by the Commissioner must be approved.
Beviewed by the Court.
Decision will be entered for the respondent.
This sentence is substantially; as stipulated by tbe parties, and possible confusion that may arise therefrom is attributable to tbe 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.
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, 763-764; John Moir, 3 B.T.A. 21, 22; United States Fidelity & Guaranty Co., 5 B.T.A. 23, 26; Powell Coal Co., 12 B.T.A. 492, 497; Edward J. Lehmann, 21 B.T.A. 664, 671; Fred Taylor, 36 B.T.A. 427, 429.
Reenacted in substantially identical form as sections 821-823 of the Internal Revenue Code of 1954.
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)f(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) GEOSS AMOUNT BECBIVBD OVEE $7B,000, BUT DESS THAN $12B,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 (li), paragraph (2) (A) and paragraph (3) shall be an amount which bears the same proportion to the amount ascertained under such para« graph, 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 tbe ease 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 subpara-graph, or for tax-free interest allowed by subsection (b)(4)(A), exceeds 3% 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(1), 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.
(E) 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. — Eor 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).
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.
Article I, section 9, clause S. — No Tax or Duty shall be laid on Articles exported from any State.
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.
Article I, section 9, clause 4. — No Capitation, or other direct, Tax shaU be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
See also 1 Story, Constitution of united States, see. 955 (4th ed., 1873) ; 1 Kent, Commentaries 256; Miller, Constitution 237 (1891). Cf. Rawle, Constitution 80 (2d ed., 1829); Pomeroy, Constitutional Law, see. 277 (3d ed., 1888) ; Sergeant, Constitutional Law 305 (1830); 1 Hare, American Constitutional Law 250 (1889).