Opinion ID: 364034
Heading Depth: 1
Heading Rank: 1

Heading: The license fee

Text: 4 The state of South Carolina imposes on all domestic life insurance companies doing business within the state a license fee in an amount determined by the total premium income of the company. Specifically, § 37-130.1 of the Code of Laws of South Carolina (1962) in effect at the time provided that all domestic life insurance companies must pay a graded license fee of 2 percent of their total premium income or total premium receipts from insurance contracts issued to South Carolina residents, or paid from points within the state. The fee is subject to a maximum limitation of 5 percent of the net income of the company from all sources. In 1965, 2 percent of the South Carolina premiums received by Liberty Life amounted to $475,946.42, while 5 percent of its net income was only $222,911.93. Therefore, Liberty Life paid 5 percent of its net income as the graded license fee. 5 Net income includes investment income. Plaintiff reasoned that when the license fee was calculated with reference to net income, it was partly a tax on investment income; accordingly, it deducted 5 percent of its gross investment income (that is, $173,344.75) as an investment expense on its 1965 tax return. The Commissioner disallowed this deduction, and his disallowance was upheld by the district court. 6 The taxpayer makes three arguments in its appeal of this decision. The first is based on the fact that in every year since this statute was passed, Liberty Life has paid 5 percent of its net income rather than 2 percent of its total premium receipts. In order for the premium receipts to be the smaller figure, a life insurance company's net income would have to exceed 40 percent of its gross premium income. Since this was not true for Liberty Life and (it submits) is unlikely to be true for Any normally operated life insurance company, plaintiff argues that the intent of the statute, evidenced by its net effect in practice, must have been to impose a tax based, at least in part, on investment income. 7 The fallacy of this argument is that the statute on its face taxes only premium income, and there is nothing in the legislative history or elsewhere which contradicts the clear language of the law. It would have been a simple matter for the legislature to have levied a tax on net income had it desired to do so. It seems clear to us that the legislature did not so intend. Rather, the intent was to levy a tax on premium income and at the same time to fix a maximum limit for the tax so that it would not take too large a bite out of the net income of the insurance companies. This provision was doubtless intended to provide an incentive for insurance companies to do business in the state. Plaintiff's argument is rejected because we do not believe that the legislature intended to tax net income in such a roundabout way. 8 Second, plaintiff argues that the fee must have been in part a tax on investment income, since but for that income, the fee would have been less. Since the higher tax was occasioned by the inclusion of investment income in net income, says plaintiff, the amount of increase constituted a tax on investment income and should be deductible as an investment expense. This argument, however, is logically defective. The liability imposed by the statute is 2 percent of the gross premium income. The limitation to the 5 percent of net income under the statutory plan is simply a way of calculating how much of that liability the plaintiff actually has to pay. This much is clear from the language of the statute:   The additional and graded license fee imposed in this section shall not exceed five per cent of the net income of the company   . § 37-130.1, Code of Laws of S.C., 1962. 9 This language does not convert the premium fee into a tax on investment income. The fortuity that the legislature chose a formula which included investment income to determine the maximum limit of the tax does not alter the character of the fee itself. 10 Finally, plaintiff argues that since the fee is by far the largest sum it pays to the state each year, the charge is in reality a tax on the privilege of doing business All business, including investment business in the state. Plaintiff points to a comment in New World Life Ins. Co. v. United States, 88 Ct.Cl. 405, 435n, 26 F.Supp. 444, 459n (1939), Aff'd per curiam 311 U.S. 620, 61 S.Ct. 314, 85 L.Ed. 393 (1940), which suggests that a fee paid to a state for the privilege of doing business there might be apportioned to the investment department of the company. 11 This may be a correct statement of the law when the fee paid is genuinely unsusceptible of allocation to any particular part of the life insurance company's business. If the statute by its terms imposed the fee for the privilege of transacting business within the state, the plaintiff's argument would have some force. But this fee expense appears to be fully allocable. It is a fee based on premium income. The legislature has not chosen to tax (by way of a fee) investment income as well. This is a policy decision with which we need not be concerned, and which does not determine for us the character of the fee which the legislature imposed. Furthermore, as the Government suggests, South Carolina's imposition of an identical fee (2 percent of gross premiums) on foreign life insurance companies (§ 37-122, Code of Laws of S.C. (1962)) is strong evidence, if more were needed, that the tax on premiums is exactly what it appears to be, especially since the foreign companies' fee is not limited to 5 percent of net income. 4 12 In short, plaintiff's arguments have not convinced us that the South Carolina premium-based license fee is anything other than what it plainly appears to be. Consequently, the district court's holding on this issue is affirmed.