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 'the 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 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 1  Income Tax 2  Old Age Tax 2      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% k 2% old age
  1953           431,870.61    200,925.41       8,871.22  47% k 2% old age