Opinion
No. 45045.
March 3, 1941. Writ of Certiorari Denied May 26, 1941. See 61 S.Ct. 1096, 85 L.Ed. ___.
Warren W. Grimes, of Washington, D.C., for plaintiff.
H.L. Will, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and WHITAKER, LITTLETON, and GREEN, Judges.
Action by the Franklin Life Insurance Company against the United States to recover stamp taxes paid.
Petition ordered dismissed.
This case having been heard by the Court of Claims, the court, upon the stipulation of the parties, makes the following special findings of fact:
1. Plaintiff is a corporation organized and existing under the laws of the State of Illinois, with its principal place of business in the City of Springfield in that State, and is engaged in the business of making and selling life insurance, including accident, health, and endowment risks in Illinois and other States of the United States.
2. Under the laws of the State of Illinois in force since March 26, 1869 (Smith-Hurd, Illinois Revised Statutes, Chapter 73, § 205 et seq.), every life insurance company doing business in that State is required to file with the Insurance Superintendent an annual statement of its business standing and affairs showing, among other things, the amount and character of its assets and investments, the amount and kind of each outstanding policy of insurance, and other information necessary to the determination of the financial condition of the company. The Superintendent of Insurance is authorized to make annual net valuations of all outstanding policies computed by the standard of valuation established by said laws, and all other obligations of every life insurance corporation doing business in the State, and the Company is required to maintain assets (reserves) in approved securities and investments equal to all its liabilities, including the net value of its policies computed upon the net premium basis; the standard for valuation of policies issued before January 1, 1908, being the actuaries or combined experience table of mortality with interest at 4 per centum per annum, and for policies issued on or after said date, the American experience table of mortality with interest at 3½ per centum per annum.
3. Under the laws of the State of Illinois (Smith-Hurd, Illinois Revised Statutes, Chapter 73, § 240 et seq.) in force from July 1, 1899, the effective date of the Act, approved April 18, 1899, to June 30, 1937, when registration was discontinued by law, any life insurance company incorporated under the laws of that State might elect to deposit securities with the Director of Trade and Commerce (Director of Insurance) equal to the reserve on a certain group of policies to be designated as registered policies. Such policies were thereupon registered by the Director of Insurance, and each such policy had a certificate on its face signed by the superintendent and sealed with the seal of his office, in the following words: "This policy is registered; and approved securities, equal in value to the legal reserve hereon, are held in trust by this department."
Such policies and bonds were known as registered policies and annuity bonds.
4. At all times, before and after the discontinuance of registration, such companies have been required to maintain their security deposits with the Director of Insurance in an amount at least equal to the reserves required to cover such policies or bonds as had been registered and still remained in force; periodic revaluations being provided for, not only of the increased or decreased value of such policies or bonds, but also of the securities on deposit.
5. Upon the failure of any company to maintain its deposits as required, the state statutes provide that after sixty days' notice by the Director of Insurance such company shall be deemed insolvent and shall be proceeded against as such.
6. During the period of deposit, all securities are and must be included among the company assets on balance sheets and Annual Statements required to be filed with the state. No authority exists in the Director of Insurance or any other department or agency of the State, by statute, agreement or otherwise, to dispose of such deposited securities except back to the depositing company or at the direction of the depositing company; except upon insolvency, procedure for which is provided by special statutes on liquidation, dissolution, or rehabilitation of insurance companies.
7. During the period of deposit, depositing companies have the right to withdraw any security or to substitute others of equal value and character in their stead, subject only to the maintenance of the required balance; and so long as the depositing company is solvent and keeps up its deposits, it may collect the interest, coupons, and other income on the securities deposited as the same accrues. In practice, the Company calls for and receives from the Director of Insurance, in advance of maturity dates, any interest-bearing coupons upon which it makes its own collections.
8. The plaintiff elected to take advantage of the foregoing provisions of the laws of the State of Illinois in respect to the deposit of reserves and the registration of policies and annuity bonds, and from time to time has both deposited with and withdrawn securities from the Director of Insurance under these statutes.
As to unregistered bonds so deposited, the plaintiff used a legend stamped across the face of the bond as follows: "This (bond) is the property of and deposited by the The Franklin Life Insurance Company, of Springfield, Illinois, with the Director of Insurance of the State of Illinois, and held by him in trust for the benefit and security of the members, policyholders, or creditors of the said The Franklin Life Insurance Company, as required by and pursuant to the laws of the State of Illinois. It is not negotiable or transferable until withdrawn from said trust, at which time it shall be endorsed by the Director of Insurance."
The form of endorsement used by the Director of Insurance is by rubber stamp and as follows:
"Withdrawn from above trust this ____ day of ____, A.D. 19__. Without recourse on me.
"________ as Director of Insurance of the State of Illinois.
"Acknowledged before me this ____ day of ____, 19__.
"________ Notary Public. My commission expires ______".
9. Prior to October 1939, neither the plaintiff nor the State purchased or used Federal documentary transfer stamps under Schedule A(9) of Title VIII of the revenue act of 1926 as added by section 724(a) of the revenue act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 634.
10. On October 2, 1939, the Collector of Internal Revenue at Springfield, Illinois, required the plaintiff to purchase, and plaintiff did purchase from him and cancelled, such documentary stamps to cover such bond deposits and withdrawals beginning January 14, 1936, and ending August 8, 1939; the deposits amounting to a total of $5,443,000, and the withdrawals amounting to $1,162,000; the said stamps amounting to $2,177.20 and $564.80 on the respective sums, or a total in stamps of $2,742.
11. Under date of November 3, 1939, the plaintiff filed with the Collector on the prescribed form No. 843 a claim for refund of the amount of $2,742. The grounds relied upon in the claim were:
"(a) Neither the deposits of the securities with the State Insurance Department nor their return to the taxpayer constituted a transfer or delivery as contemplated by Schedule A(9) of Title VIII of the revenue act of 1926 as added by section 724(a) of the revenue act of 1932; and
"(b) Congress has no power to impose such a tax on transactions in which a State must always be one of the parties under the circumstances in this case."
On November 20, 1939, the Commissioner of Internal Revenue rejected the claim.
The plaintiff was required by the Commissioner of Internal Revenue to pay stamp taxes on securities deposited by it with the Director of Insurance for the State of Illinois. It claims the taxes were unlawfully exacted and seeks to have them refunded.
The plaintiff is an insurance corporation organized under the laws of the State of Illinois with its principal place of business in the City of Springfield. Under the laws of that state during the period involved in this case any life-insurance company incorporated in Illinois might elect to deposit securities with the Director of Trade and Commerce (Director of Insurance) equal to the statutory reserve on a certain group of policies to be designated as registered policies. Such policies were then stamped by the Director of Insurance and the following legend placed thereon: "This policy is registered; and approved securities, equal in value to the legal reserve hereon, are held in trust by this department."
While the securities were legally transferred to him, the Director of Insurance was not authorized to dispose of the deposited securities except to exchange them with the depositing company for others of equal or greater value. Upon insolvency of the insurance company, however, or failure to maintain its deposits as required, the insurance act provides a special procedure under which, after appropriate court order, the Director of Insurance appoints a receiver who operates the company for the benefit of the policyholders. The depositing insurance company, on the other hand, could not withdraw the bonds without substituting ones of equal value and quality.
The plaintiff elected to issue registered policies and from time to time has both deposited with and withdrawn securities from the Director of Insurance under the Illinois statute. Unregistered bonds were merely deposited in trust with the Director and the following legend was stamped across the face of each: "This (bond) is the property of and deposited by The Franklin Life Insurance Company, of Springfield, Illinois, with the Director of Insurance of the State of Illinois, and held by him in trust for the benefit and security of the members, policyholders, or creditors of the said The Franklin Life Insurance Company, as required by and pursuant to the laws of the State of Illinois. It is not negotiable or transferable until withdrawn from said trust, at which time it shall be endorsed by the Director of Insurance."
On October 2, 1939, the collector of internal revenue at Springfield, Illinois, required the plaintiff to purchase documentary stamps to cover bond deposits and withdrawals from January 14, 1936, through August 8, 1939. These deposits totalled $5,443,000 and the withdrawals $1,162,000, the stamps thereon amounting to $2,177.20 and $564.80, respectively, or a total of $2,742. Plaintiff filed a claim for refund of the $2,742 on November 3, 1939, which was rejected by a letter of the Commissioner of Internal Revenue dated November 20, 1939.
The first question to be determined is whether the transactions involved are subject to the Federal stamp tax.
The statute provides, Schedule A(9) of Title VIII of the Revenue Act of 1926, as added by Section 724(a) of the Revenue Act of 1932, that the tax shall be imposed upon "all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to any of the instruments mentioned or described in subdivision 1 and of a kind the issue of which is taxable thereunder, whether made by any assignment in blank or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale (whether entitling the holder in any manner to the benefit of such instrument or not), * * *."
This statute has been uniformly construed by the Bureau of Internal Revenue to impose a tax on the mere physical delivery of a described security unless such delivery is expressly exempted from the tax, for example, delivery to or by a broker in the course of a sale.
The contention of the plaintiff that the statute does not apply to transfers of bonds under section 241 of the Insurance Laws of the State of Illinois is largely based on the fact that no beneficial interest was acquired in the transaction by the Director of Insurance. Plaintiff concedes that the legal title to the bonds was by the transfer conveyed to the Director. Indeed, the Illinois statute provides (1899 act, section 240) that the securities "shall be legally transferred * * * to him" and "shall be held by him in trust." It is true that the transaction did not involve the transfer of a beneficial interest but in the case of Founders General Corp. v. Hoey, 300 U.S. 268, 274, 57 S.Ct. 457, 460, 81 L. Ed. 639, it was said "that fact is, in view of the language of the act, without legal significance." In the case before us the taxpayer transferred the legal title to the security and thereby gave the Director of Insurance the right to hold it under certain conditions. The transfer of the legal title was expressly made subject to the tax by the revenue act and we think the case cited above is decisive against plaintiff's contention that the statute does not cover the transaction in question.
Plaintiff also urges that if the transfers in question are included in the provisions of the Federal stamp tax statute the tax is unconstitutional as imposing a direct burden upon the exercise by a state of its governmental functions.
In order to sustain this contention two matters must be established. The first is that it must appear that the permissive registration of insurance policies is an essential governmental function exercised pursuant to the police power of the state. The second is that the tax imposes a direct burden on the exercise of that function. A difficult and somewhat doubtful question is thus raised, but on the whole we think the statute is constitutional.
Upon examination of the registration provisions we find that they relate only to companies incorporated in Illinois, although foreign companies are authorized to do business in the state and actually do issue a very large proportion of the life insurance policies sold there. The registration provisions apply to all policies issued by Illinois companies whether to citizens within or outside the state. Much less than half of the insurance in force by Illinois companies has been issued to residents of that state. Plaintiff argues that the registration provisions of the Illinois statute were enacted to protect the residents of the state. It would seem rather that the purpose was to give Illinois insurance companies an opportunity to hold out some special advantage to those who were considering taking out the life insurance policies. But we think these facts are not controlling in the case.
A special feature of the registry act was that it was optional with the insurance companies whether or not they so registered policies. It was the insurance company and not the state that decided what should be done. Section 240 provides that a domestic corporation "may deposit" securities with the insurance superintendent for the purpose of issuing registered policies. The only mandatory provision of the act is that after electing to issue registered policies the company must continue to issue only such policies until the insurance in force exceeds $20,000,000, after which it may discontinue registration. It should also be observed that the registration statute did not increase the amount of legal reserves required but merely provided that a special method might be used in taking charge of such reserves.
The case of Helvering v. Gerhardt, 304 U.S. 405, 419, 420, 58 S.Ct. 969, 974, 82 L.Ed. 1427, contains an elaborate discussion of the constitutional question of state immunity to taxation, and while it does not directly decide the question now presented we think a logical conclusion from the rules laid down in the opinion will not sustain the plaintiff's position. It is quite evident from what is said therein that the mere fact that the tax affects some form of state activity "or [is one] whose economic burden reaches in some measure the state or those who serve it" will not cause the tax "to be set aside as an infringement of state sovereignty" (304 U.S. at page 417, 58 S.Ct. at page 974, 82 L. Ed. 1427), and it is shown that the immunity of the state is more narrowly restricted in those cases where the tax is not collected from a state treasury but from individual taxpayers (304 U.S. at page 418, 58 S.Ct. 969, 82 L.Ed. 1427) even though the state itself might be held immune. It is further said (304 U.S. at page 419, 58 S.Ct. at page 975, 82 L.Ed. 1427) that there are "two guiding principles of limitation for holding the tax immunity of state instrumentalities to its proper function." One excludes from the immunity "activities thought not to be essential to the preservation of state governments even though the tax be collected from the state treasury," as it was not in the case before us. The other principle is "exemplified by those cases where the tax laid upon individuals affects the state only as the burden is passed on to it by the taxpayer" and forbids the immunity when the burden on the state is speculative and uncertain. In the instant case the tax was not passed on to the state. Still further it is said (304 U.S. at page 421, 58 S.Ct. at page 976, 82 L.Ed. 1427): "When immunity is claimed from a tax laid on private persons, it must clearly appear that the burden upon the state function is actual and substantial, not conjectural." In the instant case the tax is levied upon private persons, and it is difficult to see how any state function is burdened.
While none of the rules laid down above was applied to a state of affairs exactly similar to that in the case before us, we think a logical conclusion from the principles laid down by the Supreme Court would exclude plaintiff from the immunity that it seeks to have established.
We need not discuss whether the action of the state involved in the instant case was beneficial to its citizens as we think it is well settled that the mere fact that some benefit is conferred by the state law does not make acts done by another party in connection therewith immune from taxation, or even the acts of the state itself. The argument of plaintiff assumes that the taxation on the transfer of securities by insurance companies in some way burdened or hindered the state in the exercise of its police powers. We do not think this appears from the facts in the case.
There is no doubt that any state of the Union has the right under its police powers to regulate and control the issuance of insurance policies in such a manner as to protect the interests of the policyholders. But in this case, we do not think the statute exercised either regulation or control. It was the insurance company which under the statute determined whether it would or would not register its policies and comply with the provisions of the law. The state exercised no control whatever over the securities deposited until after the insurance company had elected to accept the provisions of the law and proceed under it.
What the state did, as it seems to us, was to grant to the insurance company the privilege of using the state as a depository for its securities for the payment of the policies issued. If the insurance company exercised this privilege it could be used as an inducement to take out policies in the company making the deposit by reason of the greater security provided. Altogether it seems that the plan was devised rather in the interest of home insurance companies than of the public. But be this as it may, we think the statutory provisions should be taken as a whole and that when so regarded it is clear that they had no force unless put in motion by an insurance company. The tax may be said to have burdened in some slight degree the insurance companies which made use of the state as a depository for securities, but this was not a burden upon the right of the state to control the insurance companies or regulate them, for the statute did not require the insurance companies to make such a deposit. If this was the extent of the burden cast, the statute would not be unconstitutional.
The case of Ambrosini v. United States, 187 U.S. 1, 23 S.Ct. 1, 47 L.Ed. 49, which plaintiff contends is controlling in its favor, in our opinion has no application. In that case the State of Illinois was exercising its undoubted right under its police powers to regulate the sale of intoxicating liquors and in so doing required a bond to be filed by the applicant for a license to sell such liquors. The Government required a stamp to be placed upon the bond when filed. Unquestionably this placed a burden upon the lawful exercise of the police power of the state. The facts are quite different from those which appear in the instant case.
The rule is familiar that the courts should not declare a statute unconstitutional unless its unconstitutionality is free from doubt. This we cannot say, and therefore hold to the contrary of plaintiff's contention.
The plaintiff's petition must be dismissed, and it is so ordered.