Justia Federal District Court Opinions

This case is here on petition to review decision of the Tax Court reported in 29 T.C. 262. This court has jurisdiction under Sections 7482(a) and 7483 of the Internal Revenue Code of 1954, 26 U.S. C.A. §§ 7482(a), 7483.

Broadly stated, the controversy is focused upon the amount of foreign tax credit to which the petitioner is entitled for the years 1948 to 1953 inclusive.

Mutual insurance companies, such as petitioner, are subject to special tax treatment. There are three sections of the 1939 Internal Revenue Code, 26 U.S.C.A. applicable herein. Section 207 provides two alternative tax bases applicable to the type of mutual insurance companies with which we are concerned. "Normal-tax net income," derived from net investment income, is taxed at specified normal and surtax rates [§ 207(a) (1)], or "gross amount of income" [interest, dividends, rents, and net premiums, minus dividends to policy holders, minus interest which is exempt under § 22(b)(4)], is taxed at one per cent [§ 207 (a) (2)]. The alternative producing the greater tax establishes tax liability [§ 207(a)]. Section 205 provides that the amount of income, war-profits, and excess-profits taxes imposed by foreign countries shall be allowed as a credit against the tax of a domestic insurance company taxed under Section 201, 204, or 207. The amount of the credit, however, is limited by Section 131. Section 131(b)(1) of the 1939 Code, which is the "bone of contention" here, prescribes the formula to be applied in limiting and determining the foreign tax credit. It provides that "(t)he amount of the credit taken under this section shall be subject to each of the following limitations: (1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed, * * * in the case of a corporation, the same proportion of the tax against which such credit is taken, which the taxpayer's normal-tax net income from sources within such country bears to its entire normal-tax net income for the same taxable year."¹ (Emphasis added.) Thus, the taxpayer's normal-tax net income from Canadian sources becomes the numerator of the credit-limiting fraction and the taxpayer's entire normal-tax net income becomes the denominator.

Petitioner, a Minnesota corporation, is a mutual insurance company (other than a life or a marine insurance company and other than an interinsurer or reciprocal underwriter). It is authorized to and in fact did transact business throughout the United States and the Dominion of Canada during the period in question and had no income from any source outside those two countries. During all of the six years here involved, petitioner accrued income taxes to the Dominion of Canada on the "underwriting profits" of its Canadian business pursuant to the applicable Canadian laws in effect during those years. The "underwriting profits" which formed the basis for petitioner's Canadian income and old age security taxes consisted of the premiums earned in Canada, on the basis of full unearned premium reserve, less claims and expenses incurred in Canada and dividends paid to policyholders in that country. Petitioner was not required by Canadian law or regulations, and in fact did not include in its income tax base any investment income, rents or gains from the sale or exchange of capital assets. The Canadian tax picture, as stipulated and simplified, is as follows:

                  Canadian Taxable Income and Tax Paid

        (Taxable income in Canada based on "underwriting profits," i. e.,
      excess of premiums earned in Canada over claims, and expenses
      incurred in Canada, and dividends paid to Canadian stockholders.)

  Year  Taxable Income  Income Tax  Old Age Tax2    Tax Rate

  1948   $ 60,645.66          $ 18,102.73                              30%
  1949    160,909.49            45,974.12                              33%
  1950    240,198.01            75,992.44                          33% to 9/1; 38%
                                                                       after 9/1
  1951    149,698.52            64,387.49                              45.6%
  1952    305,756.96           154,587.43        $6,183.49         50% + 2% old age
  1953    431,870.61           200,925.41         8,871.22         47% + 2% old age

As required by the provisions of Section 207, supra, petitioner computed its United States income tax liability for the years 1948 and 1949 on the second alternative, i. e., on the basis of its gross investment income and net premiums, § 207 (a) (2). (This alternative produced the greater tax for those years.) For the remaining years (1950 to 1953 inclusive), petitioner's income tax was computed on the basis of its net investment income, or upon the first of the alternatives, § 207 (a) (1). (For those years this alternative produced the greater tax.) Petitioner's income taxable in the United States, as developed from stipulated facts, may be summarized as follows:

                              U. S. Taxable Income

                                                                   Combined Normal
                                                                    & Surtax Rate
                                    Net (Investment) Income           Applicable
        Gross income from all           from all sources             to § 207(a)
  Year  sources [§ 207(a) (2)]          [§ 207(a) (1)]                (1) income

  1948      $ 9,964,421.80        $251,125.27  [ 21,178.33]*       38%**
  1949       10,621,660.73         274,519.85  [ 37,445.28]             38%**
  1950       12,295,834.45         304,042.62  [ 48,404.74]             42%
  1951       15,088,636.07         327,212.47  [ 66,104.24]             50¾%
  1952       18,114,464.24         387,363.73  [ 92,252.17]             52%
  1953       19,813,999.65         460,769.92  [111,759.99]             52%