Summary
concerning the computation of the taxpayer's allowable foreign income tax credit
Summary of this case from Webster v. Comm'r of Internal Revenue (In re Estate of Ballard)Opinion
Docket Nos. 56498 59792.
1957-11-18
FEDERATED MUTUAL IMPLEMENT AND HARDWARE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Nicholas S. Kiefer, Esq., and Hayner N. Larson, Esq., for the petitioner. Stanley W. Ozark, Esq., and George E. Van Roekel, Esq., for the respondent.
Nicholas S. Kiefer, Esq., and Hayner N. Larson, Esq., for the petitioner. Stanley W. Ozark, Esq., and George E. Van Roekel, Esq., for the respondent.
Petitioner is a mutual insurance company taxable under section 207, I.R.C. 1939. During each of the years in issue, petitioner accrued income taxes to the Dominion of Canada on the underwriting profits resulting from its Canadian business. Held, because the parties have agreed that the denominator of the credit-limiting ratio prescribed in section 131(b)(1), I.R.C. 1939, consists of the entire United States and Canadian income from investments, the numerator of such fraction must contain only Canadian receipts from investments, which receipts would be income under section 207(b)(4), I.R.C. 1939.
OPINION.
WHITHEY, Judge:
Respondent determined deficiencies in petitioner's income tax for the years and in the amounts as follows:
+----------------------------+ ¦Docket No.¦Year ¦Deficiency¦ +----------+------+----------¦ ¦ ¦ ¦ ¦ +----------+------+----------¦ ¦ ¦( 1948¦$10,591.98¦ +----------+------+----------¦ ¦56498 ¦( 1949¦31,113.16 ¦ +----------+------+----------¦ ¦ ¦( 1950¦52,808.42 ¦ +----------+------+----------¦ ¦ ¦( 1951¦64,737.78 ¦ +----------+------+----------¦ ¦59792 ¦( 1952¦150,090.51¦ +----------+------+----------¦ ¦ ¦( 1953¦72,349.64 ¦ +----------------------------+
The deficiencies are due primarily to the respondent's action in reducing the credit available for foreign taxes by disallowing substantial amounts in the income taxes accrued by petitioner to the Dominion of Canada during the years involved.
The issue presented for our decision concerns the proper composition of the ratio to be utilized by petitioner during 1948 through 1953, as the credit-limiting fraction provided in section 131(b)(1) of the Internal Revenue Code of 1939.
The case was submitted upon a stipulation of facts which is hereby adopted as our findings of fact and which may be summarized as follows.
Petitioner is a corporation organized under the laws of the State of Minnesota and is authorized to transact business throughout the United States and in the Dominion of Canada. Petitioner's principal office is located at Owatonna, Minnesota. During the years 1948 through 1953, petitioner was a mutual fire and casualty insurance company subject to tax under section 207 of the 1939 Code; however, it was not an interinsurer or reciprocal underwriter within the meaning of subsection (a)(3) of that section.
Petitioner filed its Federal income tax returns for each of the years in issue with the director of internal revenue for the district of Minnesota at St. Paul, Minnesota. The returns for each year was filed on Treasury Department, Internal Revenue Service, Form 1120M. To each return was attached Treasury Department, Internal Revenue Service, Form 1118, entitled ‘Statement in Support of Credit Claimed by Domestic Corporation for Taxes Paid or Accrued to a Foreign Country or Possession of the United States.’ During each of the years here in question, petitioner kept its books and prepared its income tax returns on an accrual method of accounting. For the years 1948 and 1949, petitioner computed its income tax liability on the basis of its gross investment income and net premiums pursuant to section 207(a)(2) of the 1939 Code. During each of the remaining years here involved, petitioner's income tax was computed on the basis of its net investment income as determined under subsections (a)(1) and (b)(4) of section 207 of the Code.
During the years in issue, the petitioner transacted business in the Dominion of Canada. However, it did not transact business in any possession of the United States or in any foreign country other than the Dominion of Canada, and it did not derived any income from such other sources.
During the years 1948 to 1953, inclusive, the petitioner accrued income taxes to the Dominion of Canada on the ‘underwriting profits' resulting from its Canadian business pursuant to the Income War Tax Act, the Income Tax Act, and the Old Age Security Act in effect in Canada during those years. The underwriting profits on which petitioner's Canadian income and old age security taxes were based consisted of the excess of the premiums earned in Canada, on the basis of full unearned premium reserve, over claims and expenses incurred in Canada and dividends paid to policyholders in Canada. Pursuant to the Canadian income tax regulations, no income from interest, dividends, rents, gains from the sale or exchange of capital assets, or any other investment income was required to be included in its income tax base. No deduction for the home office expenses attributable to petitioner's Canadian business was allowed. Petitioner's Canadian income and old age security taxes so accrued were for the years in the amounts as follows:
+------------------------------------+ ¦Year¦Income tax 1 ¦Old age ¦ +----+--------------+----------------¦ ¦ ¦ ¦security tax 1 ¦ +----+--------------+----------------¦ ¦ ¦ ¦ ¦ +----+--------------+----------------¦ ¦1948¦$18,102.73 ¦ ¦ +----+--------------+----------------¦ ¦1949¦45,974.12 ¦ ¦ +----+--------------+----------------¦ ¦1950¦75,992.44 ¦ ¦ +----+--------------+----------------¦ ¦1951¦64,387.49 ¦ ¦ +----+--------------+----------------¦ ¦1952¦154,587.43 ¦$6,183.49 ¦ +----+--------------+----------------¦ ¦1953¦200,925.41 ¦8,871.22 ¦ +----+--------------+----------------¦ ¦ ¦ ¦ ¦ +------------------------------------+
The foregoing income and old age security taxes accrued to the Dominion of Canada constituted income taxes accrued to a foreign country within the meaning of sections 131 and 205 of the 1939 Code.
During the years 1948 to 1953, inclusive, the underwriting profits on which the petitioner's income and old age security taxes accrued to the Dominion of Canada were based were as follows:
+----------------------------+ ¦Year ¦Taxable income 1 ¦ +------+---------------------¦ ¦1948 ¦$60,645.66 ¦ +------+---------------------¦ ¦1949 ¦160,909.49 ¦ +------+---------------------¦ ¦1950 ¦240,198.01 ¦ +------+---------------------¦ ¦1951 ¦149,698.52 ¦ +------+---------------------¦ ¦1952 ¦305,756.96 ¦ +------+---------------------¦ ¦1953 ¦431,870.61 ¦ +------+---------------------¦ ¦ ¦ ¦ +----------------------------+
Petitioner's gross income realized during the years in issue from dividends, rents, and gains from the sale or exchange of capital assets to the extent provided under section 117 of the 1939 Code, together with its investment expenses, real estate expenses exclusive of taxes, depreciation, taxes, interest paid or accrued, and capital losses, was as follows:
+---------------------------------------------------------------------------------+ ¦ ¦1948 ¦1949 ¦1950 ¦ +------------+----------------------+----------------------+----------------------¦ ¦ ¦Canadian ¦All sources¦Canadian ¦All sources¦Canadian ¦All sources¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦ ¦sources ¦ ¦sources ¦ ¦sources ¦ ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Dividends ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦$2,116.37 ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Rents ¦(1 ) ¦$3,326.96 ¦(1 ) ¦$9,190.96 ¦(1 ) ¦13,181.00 ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Capital ¦(1 ) ¦(1 ) ¦(1 ) ¦13,883.57 ¦(1 ) ¦(1 ) ¦ ¦gains ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦ ¦(1 ) ¦3,326.96 ¦(1 ) ¦23,074.53 ¦(1 ) ¦15,297.37 ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Investment ¦$2,163.10 ¦29,802.16 ¦$4,145.49 ¦35,222.54 ¦$5,207.13 ¦40,341.97 ¦ ¦expenses ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Real estate ¦(1 ) ¦1,759.24 ¦(1 ) ¦3,402.25 ¦(1 ) ¦1,515.56 ¦ ¦expenses ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Depreciation¦(1 ) ¦565.88 ¦(1 ) ¦2,256.64 ¦(1 ) ¦4,005.58 ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Taxes ¦(1 ) ¦559.06 ¦(1 ) ¦523.57 ¦(1 ) ¦3,358.23 ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Interest ¦ ¦ ¦(1 ) ¦ ¦ ¦ ¦ ¦paid or ¦(1 ) ¦ ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦ ¦accrued ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦Capital ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦ ¦losses ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+----------+-----------+----------+-----------+----------+-----------¦ ¦ ¦(2,163.10)¦(32,686.34)¦(4,145.49)¦(41,405.00)¦(5,207.13)¦(49,221.34)¦ +---------------------------------------------------------------------------------+
1951 1952 1953 Canadian All sources Canadian All sources Canadian All sources sources sources sources Dividends (1 ) $17,721.00 (1 ) $16,278.50 (1 ) $19,167.50 Rents (1 ) 13,172.50 (1 ) 33,071.03 (1 ) 34,654.79 Capital (1 ) (1 ) (1 ) (1 ) (1 ) (1 ) gains (1 ) 30,893.50 (1 ) 49,349.53 (1 ) 53,822.29 Investment $7,515.91 43,420.46 $9,782.37 46,249.05 $10,408.06 47,976.68 expenses Real estate (1 ) 2,024.93 (1 ) 10,907.10 (1 ) 12,227.88 expenses Depreciation (1 ) 4,096.76 (1 ) 6,573.05 (1 ) 6,506.62 Taxes (1 ) 3,427.96 (1 ) 4,290.85 (1 ) 6,044.03 Interest paid or (1 ) (1 ) (1 ) (1 ) (1 ) (1 ) accrued Capital (1 ) (1 ) (1 ) (1 ) (1 ) (1 ) losses (7,515.91) (52,790.11) (9,782.37) (68,020.05) (10,408.06) (72,755.21) None.
of the 1939 Code provides that the income taxes imposed by foreign countries shall be allowed as a credit against the income tax of a domestic insurance company taxable under section 201, 204, or 207, to the extent provided in section 131.
Section 131(b)
Petitioner's gross interest as determined by respondent within the meaning of section 207(b)(1) of the Code, the amount of interest excluded from gross income under section 22(b)(4) of the Code, and its credits as provided in section 26 of the Code for each of the years in issue are as follows:
+--------------------------------------------------------------------------------+ ¦ ¦1948 ¦1949 ¦1950 ¦ +-----------+----------------------+----------------------+----------------------¦ ¦ ¦Canadian ¦All ¦Canadian ¦All ¦Canadian ¦All ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦ ¦sources ¦sources ¦sources ¦sources ¦sources ¦sources ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦Dominion of¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Canada, ¦$14,521.53¦$14,521.53 ¦$31,129.19¦$31,129.19 ¦$41,717.67¦$41,717.67 ¦ ¦bonds ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦Canadian ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦railroads, ¦6,656.80 ¦6,656.80 ¦5,823.89 ¦5,823.89 ¦5,425.21 ¦5,424.21 ¦ ¦bonds ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦Canadian ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦provinces, ¦(1 ) ¦(1 ) ¦492.20 ¦492.20 ¦1,261.86 ¦1,261.86 ¦ ¦bonds ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦Municipals,¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦ ¦bonds ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦All United ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦States ¦(1 ) ¦270,606.29 ¦(1 ) ¦276,780.76 ¦(1 ) ¦326,608.13 ¦ ¦bonds ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦ ¦21,178.33 ¦291,784.62 ¦37,445.28 ¦318,156.70 ¦48,404.74 ¦375,012.87 ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦Less: ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦United ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦States ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦tax-exempt ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦bonds ¦(1 ) ¦10,927.96 ¦(1 ) ¦25,306.38 ¦(1 ) ¦35,147.37 ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦United ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦States ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦partially ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦exempt ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦bonds ¦(1 ) ¦372.01 ¦(1 ) ¦200.00 ¦(1 ) ¦100.00 ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦Dividend ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦received ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦credit ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦(1 ) ¦1,798.91 ¦ +-----------+----------+-----------+----------+-----------+----------+-----------¦ ¦ ¦(1 ) ¦(11,299.97)¦(1 ) ¦(25,506.38)¦(1 ) ¦(37,046.28)¦ +--------------------------------------------------------------------------------+
1951 1952 1953 Canadian All Canadian All Canadian All sources sources sources sources sources sources Dominion of Canada, $49,822.77 $49,822.77 $58,978.92 $58,978.92 $75,530.72 $75,530.72 bonds Canadian railroads, 5,640.70 5,640.70 5,858.23 5,858.23 5,806.40 5,806.40 bonds Canadian provinces, 9,651.11 9,651.11 22,890.19 22,890.19 25,917.27 25,917.27 bonds Municipals, 989.66 989.66 4,524.80 4,524.80 4,505.60 4,505.60 bonds All United States (1 ) 333,978.72 (1 ) 364,896.04 (1 ) 426,660.45 bonds 66,104.24 400,082.96 92,252.17 457,148.18 111,759.99 538,420.44 Less: United States tax-exempt bonds (1 ) 35,911.03 (1 ) 37,277.21 (1 ) 42,425.23 United States partially exempt bonds (1 ) (1 ) (1 ) (1 ) (1 ) (1 ) Dividend received credit (1 ) 15,062.85 (1 ) 13,836.72 (1 ) 16,292.37 (1 ) (50,973.88) (1 ) (51,113.93) (1 ) (58,717.60)
Petitioner claimed foreign tax credits on its income tax returns for each of the years in question as follows:
+-------------------------+ ¦Year ¦Credits claimed ¦ +------+------------------¦ ¦1948 ¦$18,193.70 ¦ +------+------------------¦ ¦1949 ¦45,720.12 ¦ +------+------------------¦ ¦1950 ¦71,353.65 ¦ +------+------------------¦ ¦1951 ¦65,162.43 ¦ +------+------------------¦ ¦1952 ¦148,665.05 ¦ +------+------------------¦ ¦1953 ¦71,171.78 ¦ +-------------------------+
Petitioner now claims overpayments of income tax for the years 1948 through 1953, in unspecified amounts. The petitioner now asserts that its allowable foreign tax credits for the years in issue should be as follows:
+--------------------------+ ¦Year ¦Credits asserted ¦ +------+-------------------¦ ¦1948 ¦$18,102.72 ¦ +------+-------------------¦ ¦1949 ¦45,974.12 ¦ +------+-------------------¦ ¦1950 ¦75,992.44 ¦ +------+-------------------¦ ¦1951 ¦64,387.49 ¦ +------+-------------------¦ ¦1952 ¦160,770.92 ¦ +------+-------------------¦ ¦1953 ¦209,796.62 ¦ +--------------------------+
The respondent has determined that petitioner is entitled to foreign tax credits for Canadian taxes for the years and in the amounts as follows:
+-----------------+ ¦Year ¦Amount ¦ +------+----------¦ ¦1948 ¦$7,545.07 ¦ +------+----------¦ ¦1949 ¦12,893.67 ¦ +------+----------¦ ¦1950 ¦17,470.69 ¦ +------+----------¦ ¦1951 ¦(1 ) ¦ +------+----------¦ ¦1952 ¦(1 ) ¦ +------+----------¦ ¦1953 ¦350.00 ¦ +-----------------+ 1None.
On stipulation the respondent has conceded that petitioner is entitled to credits for foreign taxes for the years and in the amounts as follows:
+------------------+ ¦Year ¦Amount ¦ +------+-----------¦ ¦1951 ¦$28,748.81 ¦ +------+-----------¦ ¦1952 ¦41,713.31 ¦ +------+-----------¦ ¦1953 ¦51,492.95 ¦ +------------------+
Section 205
+--------------------+ ¦Year ¦Net income ¦ +------+-------------¦ ¦1948 ¦$251,125.27 ¦ +------+-------------¦ ¦1949 ¦274,519.85 ¦ +------+-------------¦ ¦1950 ¦304,042.62 ¦ +------+-------------¦ ¦1951 ¦327,212.47 ¦ +------+-------------¦ ¦1952 ¦387,363.73 ¦ +------+-------------¦ ¦1953 ¦460,769.92 ¦ +--------------------+
The combined corporation income tax and surtax rates applicable to mutual insurance companies taxable under section 207 of the 1939 Code were as follows for each of the years involved:
+---------------------------+ ¦ ¦Combined tax rate ¦ +------+--------------------¦ ¦Year ¦(per cent) ¦ +------+--------------------¦ ¦1948 ¦38 ¦ +------+--------------------¦ ¦1949 ¦38 ¦ +------+--------------------¦ ¦1950 ¦42 ¦ +------+--------------------¦ ¦1951 ¦50 3/4 ¦ +------+--------------------¦ ¦1952 ¦52 ¦ +------+--------------------¦ ¦1953 ¦52 ¦ +---------------------------+
The corporation income tax rates in effect in the Dominion of Canada during the years in issue (except for lower rates on the first $10,000 of net income during the years 1949 to 1952, inclusive, and on the first $20,000 of the net income in 1953) were as follows:
+--------------------+ ¦ ¦Tax rate ¦ +------+-------------¦ ¦Year ¦(per cent) ¦ +------+-------------¦ ¦1948 ¦30 ¦ +------+-------------¦ ¦1949 ¦33 ¦ +------+-------------¦ ¦1950 ¦1 33 ¦ +------+-------------¦ ¦1950 ¦2 38 ¦ +------+-------------¦ ¦1951 ¦45.6 ¦ +------+-------------¦ ¦1952 ¦3 50 ¦ +------+-------------¦ ¦1953 ¦3 47 ¦ +--------------------+ 1To September 1.2After September 1.
3Plus 2 per cent old age security tax.