Court Opinion

ID: 3321983
Source: CourtListenerOpinion
Date Created: 2016-07-05 17:39:33.188991+00
Date Added: 2024-06-11T12:35:43.552553
License: Public Domain

The fundamental contention of the appellant, which is sustained by the majority opinion, is that the investment income of a life insurance company does not include profits resulting from sale or maturity of ledger or capital assets. It is held that a tax upon the amount received from the sale of any such asset above what it cost is a tax upon the property of the company instead of upon its income. To this proposition I do not assent. An important purpose for which an insurance company acquires, holds, and converts investment assets is that it may profit not only by the current dividends or interest received therefrom, but also by increase in value above cost which can be realized upon by a sale or at maturity. Such transactions are an integral part of the corporation's business; gains resulting therefrom are a part of its profits. "The suggestion that the entire proceeds of the conversion should be still treated as the same capital, changed only in form and containing no element of income *Page 26 
although including an increment of value, we reject at once as inconsistent with the general purpose of the act. Selling for profit is too familiar a business transaction to permit us to suppose that it was intended to be omitted from consideration." Doyle v.Mitchell Bros. Co., 247 U.S. 179, 183, 38 Sup. Ct. 467,62 L.Ed. 1054.
The case just cited related to the Federal Corporation Excise Tax Act, but the conception expressed therein, and in other similar cases, that profit accruing from a conversion of capital assets is to be regarded as income, is equally applicable to the situation before us. So, also, is the manner indicated of determining the amount of gain, by withholding from the gross proceeds "an amount sufficient to restore the capital value," and treating the balance as profit and as income. It is to be conceded that increases in value reflected merely by adjustments on the books do not constitute taxable income until the gains become an "increase of wealth in hand out of which money may be taken to satisfy the enforced pecuniary contributions levied to help bear the public expenses. It does not comprehend increase in the value of capital investment discernible only by estimation and not otherwise. It refers simply to an increase in value realized by sales or conversion of capital assets." Bingham v.Commissioner of Corporations and Taxation,249 Mass. 79, 81, 144 N.E. 77. This limitation is recognized and expressly respected in the act under consideration, which taxes, only, investment income "actually received" during the year covered by the return. This provision is significant, further, of an intention to tax income other than "interest, dividends, [and] rents" as to which items a specification that they be "actually received" is manifestly superfluous. I maintain, therefore, that the scope of the term "income" *Page 27 
includes gains accruing from sources comprehended by the item here in dispute, viz., "profit on sale or maturity of ledger assets."
I am also unable to agree that the statute is not to be construed as contemplating the inclusion of this item in the computation of the tax imposed thereby. The majority concede that, in passing the Act of 1919, the General Assembly was mindful of the report of the special commission, rendered in 1913, and would naturally resort to the annual statements made to the insurance commissioner for information in determining the basis of taxation upon income. I think that these considerations have not been accorded the weight and significance to which they were entitled, in construing the Act. The recommendation of the commission proposed a tax upon gross receipts from interest and rents and premiums from Connecticut business. The Act passed eliminated the element of premium receipts, limited the taxable income to that "actually received during the year," but included not only the interest and rents mentioned in the commission plan, but also "all other investment income." This addition militates against the contention that income from interest, dividends and rents, only, is intended to be taxable.
The most natural and reliable sources of information in ascertaining what elements constitute investment income of an insurance company are the classifications prescribed by the state insurance executives and the practical interpretation thereof by the insurance companies themselves in making the annual reports of their financial standing for the information of the insurance authorities and the general public. Inspection of those forms and reports clearly indicates that profits on sale or maturity of ledger assets *Page 28 
were both included in, and regarded and treated as, investment income.
The forms of these reports required to be filed with the insurance commissioner, in 1919 and since, include under "INCOME" detailed specifications of premiums received, several classifications of gross interest, gross dividends on stocks, and gross rent from company's property, also "Gross profit on sale or maturity of ledger assets" and "Gross increase, by adjustment, in book value of ledger assets." Under "DISBURSEMENTS" items of "Gross loss on sale or maturity of ledger assets" and "Gross decrease, by adjustment, in book value of ledger assets" are included. On page nine of the form in use in 1919, under "Investment Exhibit," appeared items of profit and loss on sales, and increase and decrease in book value, of ledger assets, referring to corresponding items on page two. In the form of this report used for the year 1927, under an "EXHIBIT OF THE CHANGES IN SURPLUS FOR THE YEAR ACCORDING TO CLASSES OR LINES OF BUSINESS," the showing of "INCOME" is divided into three classifications: "(70) Premiums; (71) Investment (less investment expenses); (72) Other Income."
The stipulated facts disclose that it has been the practice of the appellant, in making up this "Exhibit," to include in the item (71) of Investment Income the figures representing "Gross profit on sale or maturity of ledger assets" and "Gross increase, by adjustment, in book value of ledger assets," as they appeared in the statement of "INCOME" on page two of the form, and to include under "DISBURSEMENTS," in this Exhibit, the gross losses and the gross decrease of the same nature. It is a reasonable inference that in the 1919 Act the General Assembly had reference to, and intended, investment income in the sense, and of the scope, disclosed by these elaborate and carefully conceived *Page 29 
and executed statements, which were, so far as appears, the most suitable and authoritative information available to the legislature upon the subject of the constituents, as applied to insurance companies, of the basis of the new plan of taxation.
The state treasurer, comptroller and tax commissioner constitute the board of equalization. It appears from the stipulated facts that when the board met (on March 31st, 1920) to check and correct the first statements made under the Act of 1919, the question of inclusion of these items, for purposes of taxation, was considered, and it was decided that the income received by the sale, maturity or adjustment in book value of a company's ledger assets was investment income, but it was the opinion of the board that the increase or decrease, by adjustment, in the book value of ledger assets, such as accrual of discount and amortization of bonds, was not income "actually received." It is stipulated, also, that "the board has sought to apply the rule so adopted in all cases." The construction thus given the statute by the state tribunal charged with administering it is entitled to weight and significance. Kern River Co. v. UnitedStates, 257 U.S. 147, 42 Sup. Ct. 60; Swendig v.Washington Water Power Co., 265 U.S. 322,44 Sup. Ct. 496; Logan v. Davis, 233 U.S. 613,34 Sup. Ct. 685.
Discussion as to the method and accuracy of the computation of the correction appealed from appears to be relevant to the only reserved question answered by the majority opinion only as relates to the practicability of ascertainment of the amount of income derived from sale or maturity of ledger assets. Strictly, the profit from this source consists of the excess of the sale or redemption price above the original cost, unaffected by intervening adjustments of book values, so *Page 30 
that the entire profit would be taxable as income received during the year in which it was realized upon. However, at the meeting above mentioned, the board of equalization adopted the policy of permitting the companies at their option to include adjustments in and have reflected in the amount of taxable income, the increase or decrease as it accrued "instead of in one lump sum on the sale or maturity of ledger assets." In cases where this alternative has been accepted and consistently complied with, the profit subject to tax for the year of sale or maturity would be the excess of the amount realized above the adjusted book value as included in the last preceding report, the remainder of the increase over cost having been included and absorbed in the income taxed in the preceding years. There appears to be no serious difficulty in computing the element of taxable income, on either basis.
For the foregoing reasons I maintain that profit on sale or maturity of ledger assets is investment income within the meaning of Chapter 337 of the Public Acts of 1919.
In this opinion BANKS, J., concurred.