Wells, Wells, Lipscomb Newman, of Jackson, and Clyde J. Cover, of Fort Wayne, Ind., for appellant.
The broad question, therefore, presented for consideration is whether the Lincoln National Life Insurance Company is required to return as a part of its gross income the amount of reinsurance premiums received by it on account of reinsurance relating to original insureds residing in the State of Mississippi. This question applies to two distinct situations, namely: (a) The situation wherein the insurer is domiciled in Mississippi; and (b) the situation wherein the insurer is foreign to Mississippi.
When an insurer takes on a risk in excess of an amount it can safely carry, it turns to another insurer for protection against the excess risk exposure. Of course the second insurer is not able to intrude itself into the original insurance contract, nor would it want to do so if it could, and so the end desired is attained through a separate contract by which the second insurer agrees to indemnify the first insurer against the unwanted portion of the risk assumed under the original insurance contract. Hence, the rule that a reinsurance contract is separate and distinct from the original insurance to which it relates.
Moseley v. Liverpool London Globe Ins. Co., 104 Miss. 326 , 61 So. 428; Allemannia Fire Ins. Co. v. Firemen's Ins. Co., 209 U.S. 326 , 28 S.Ct. 544, 52 L.Ed. 815; Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77 , 58 S.Ct. 436, 82 L.Ed. 673; Morris Co. v. Skandanavia Ins. Co., 279 U.S. 405 , 49 S.Ct. 360, 73 L.Ed. 762; Note, 103 A.L.R. 1487.
Insurance companies recognize the advantage of having an outlet for their excess risks and so it is customary for them to enter into agreements or treaties which set forth in detail the basis on which reinsurance may be procured.
Such agreements do not of themselves effect reinsurance, but instead they establish the conditions, terms and provisions on which reinsurance may be effected in the future. Such agreements once made may continue in force for years.
When a party to a reinsurance agreement desires re-insurance of a risk, it makes application to the other party by mail, and, in so doing, submits all necessary information concerning the risk in question. If the company to which the application is made decides to grant re-insurance, it accepts the application in much the same fashion as an original insurer accepts an application for insurance.
Reinsurance agreements or treaties may provide for automatic or for facultative reinsurance, or alternatively, for either, depending upon the circumstances of the particular case. Automatic reinsurance is so named because it binds the reinsurer without any act on its part so long as the original policy conforms to the requirements of the re-insurance agreement. Facultative reinsurance, in contrast with automatic reinsurance, must be applied for, and the company to whom application is made has the right to accept or reject the application. The reinsurance involved in the instant case was written under automatic and facultative agreements.
The statutory provision in issue is that part of Section 3, Chapter 120 of the Laws of 1934, which reads as follows: "A like tax is hereby imposed to be assessed, collected and paid annually at the rate specified in this section and as hereinafter provided upon and with respect to the entire net income, from all property owned and from every business, trade or occupation carried on in this state by individuals, corporations, partnerships, trusts or estates, not residents of the State of Mississippi." The significant part of the law is contained in the words "the entire net income from . . . every business, trade or occupation carried on in this state by . . . corporations." Unless the Lincoln National Life Insurance
Company in accepting reinsurance risks from Mississippi companies and from companies foreign to Mississippi was actually carrying on a trade or business within the State of Mississippi the law obviously has no application to it.
Subsection (a) of Section 11 of the Income Tax Act of 1934 (Chapter 120), wherein the net income of non-resident and foreign taxpayers is specifically defined, includes within the scope of gross income from sources within the state "insurance premiums" but this inclusion is necessarily limited to insurance premiums arising from business carried on in Mississippi by foreign corporations. If such a limitation were not applicable, a foreign corporation would be obliged under the strict letter of the law to return as gross income, premiums received from every jurisdiction.
It is fundamental that a state's jurisdiction to tax is limited to acts done or things located within the territorial limits of the state. This rule stems from the fact that tax legislation cannot have effect apart from the state's ability to control the act or the thing taxed.
Schwab v. Richardson, 263 U.S. 88 , 44 S.Ct. 60, 68 L.Ed. 183; Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203 , 45 S.Ct. 477, 69 L.Ed. 916; Rhode Island Hospital Trust Co. v. Doughton, 270 U.S. 69 , 46 S.Ct. 256, 70 L.Ed. 475; Wachovia Bank Trust Co. v. Doughton, 272 U.S. 567 , 47 S.Ct. 202, 71 L.Ed. 413; Southern Railway Co. v. Kentucky, 274 U.S. 76 , 47 S.Ct. 542, 71 L.Ed. 934; Safe Deposit Trust Co. v. Virginia, 280 U.S. 83 , 50 S.Ct. 59, 74 L.Ed. 180; Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77 , 58 S.Ct. 436, 82 L.Ed. 673.
If it is a fact that the Lincoln National Life Insurance Company received the reinsurance premiums in question without an act on its part within the State of Mississippi, then it must necessarily follow that the State of Mississippi has no power to impose the tax asserted.
Considerably more than one-half of the reinsurance premiums involved in this controversy were paid to the Lincoln National Life by Mississippi companies. Admittedly the Mississippi companies had in the first instance collected an amount of premiums from the original insureds residing in Mississippi but that fact does not associate the Lincoln National Life with the original insurance transaction nor does it establish that the Lincoln National Life was transacting business within the State of Mississippi. The only connection that the Lincoln National Life Insurance Company had with Mississippi occurred when the reinsurance agreement or treaty was entered into, which as explained heretofore did not of itself constitute reinsurance but was rather a statement of conditions on which reinsurance might thereafter be granted. The terms of reinsurance having been agreed upon, reinsurance arose from time to time as the Mississippi companies applied to the Lincoln National Life for reinsurance or ceded reinsurance to the Lincoln National Life automatically. Whether the reinsurance was automatic or facultative, the Lincoln National Life did no acts within the state save only those incident to a transaction by mail, and was not doing business within the state.
Minnesota Commercial Men's Association v. Benn, 261 U.S. 140 , 43 S.Ct. 293, 67 L.Ed. 573; Baldwin v. Iowa State Traveling Men's Association, C.C.A. 8, 40 F.2d 357 ; Oliver v. Iowa State Traveling Men's Association, C.C.A. 8, 76 F.2d 963 ; Sasnett v. Iowa State Traveling Men's Association, C.C.A. 8, 90 F.2d 514 ; Pembleton v. Illinois Commercial Men's Association, 289 Ill. 99 , 124 N.E. 355; Saunders v. Iowa State Traveling Men's Association, 222 Iowa 969 , 270 N.W. 407 ; Allgeyer v. State of Louisiana, 165 U.S. 578 , 17 S.Ct. 427, 41 L.Ed. 832; Hammond v. International Railways Co., 116 N.Y.S. 854, 63 Misc. 437 ; Swing v. Taylor
Crate, 68 W. Va. 621 , 70 S.E. 373; Kasprzak v. Mutual Life Assur. Co. of Canada, 1 F. Supp. 915 ; Provident Savings Life Assur. Soc. v.
Kentucky, 239 U.S. 103 , 36 S.Ct. 34, 60 L.Ed. 167; Cronin v. Union Aid Life Ins. Co., 184 Ark. 493 , 42 S.W.2d 758 .
It is true that the Lincoln National Life Insurance Company during the years in question was licensed as a foreign life insurance company in the State of Mississippi, but it is also true that the Lincoln National Life during that entire period was not actively engaged in the life insurance business in this state. The Lincoln National Life procured a license so that its reinsurance clients within the State of Mississippi might be privileged under the law and the ruling of the Insurance Department to take a reserve deduction in preparing their annual reports. Mississippi and a few other states empower their Insurance Commissioner to disallow as assets the amount of reserves held by reinsuring companies unless the reinsuring company itself has qualified to do business within the state. The act of qualifying required for such purpose is merely a test of financial stability and strength and has nothing to do with the actual fact of doing business within the state.
Even though it were assumed that the Lincoln National Life had an active agency in the State of Mississippi throughout the years involved in this controversy, yet there would be no basis for imposing the tax unless it could be established that the acts of reinsurance, as distinguished from the other business activities, amounted to the condition of doing business. In other words, the business of a foreign company must be taken as it is presented. One segment of the business may fall definitely within the law as an act done within the state while another segment may as clearly fall outside the law in that it involved no act within the jurisdiction of the state.
Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77 , 58 S.Ct. 436, 82 L.Ed. 673.
A substantial portion of the tax in question has relation to reinsurance premiums paid to the Lincoln National Life by companies foreign to the State of Mississippi
which had placed the original insurance upon the lives of Mississippi residents. It is contended that with respect to these premiums the Lincoln National Life is subject to the Mississippi income tax. It is not clear on what theory the Commissioner proceeded in asserting a tax liability against the Lincoln National Life on account of reinsurance premiums received by it from companies foreign to the State of Mississippi. As to such premiums, no act whatsoever took place within the State of Mississippi insofar as the Lincoln National Life was concerned. It is true that the foreign companies reinsuring the risk with the Lincoln National Life received premiums from residents of the state, but the Lincoln National Life had nothing to do with that act of premium payment or premium receipt.
The case of Connecticut General Life Insurance Co. v. Johnson, supra, would seem to be decisive of this. It seems perfectly apparent to us that if this court should construe the Income Tax Act of 1934 to require the Lincoln National Life Insurance Company to report these reinsurance premiums and pay the additional taxes demanded by the Commissioner, that Act as thus construed will run afoul of the Fourteenth Amendment to the Constitution of the United States. If the case of Connecticut General Life Insurance Co. v. Johnson, supra, does not render that certain, then the Johnson case has no meaning.
In an effort to escape the effect of the Johnson case, appellee cites and quotes extensively from State of Wisconsin v. J.C. Penney Co., 311 U.S. 435 , 61 S.Ct. 246, 85 L.Ed. 271, 150 A.L.R. 1229. It should be evident to the court that this case adds no support to appellee's contention, as the first requisite of a valid tax, namely, the jurisdiction over the act or thing to which the tax applies, was found to exist in the act of the Penney Company in carrying on business within the state. In the instant case the question presented is whether the act of appellant in receiving reinsurance premiums having their indirect
origin in Mississippi constitutes an act of doing business within the state. Quite obviously there is no similarity between the facts of this case and those of the Penney case justifying its use as a precedent.
Appellee in his brief attempts to avoid the effect of the Johnson case by alluding to its treatment in the Penney case and in other later Supreme Court cases. In the Penney case the Johnson case was asserted by the foreign corporation but it was held not to have application for the reason that its facts failed to establish an act within the jurisdiction of the state upon which the tax could be predicated, this being in contrast with the situation involved in the Penney case.
Appellee's reference to and quotation from the case of State Tax Commission v. Aldrich, 316 U.S. 174 , adds nothing to this discussion, as it merely indicates that the Supreme Court of the United States had not, within the period elapsing after January 13, 1941, and prior to April 27, 1942, changed its mind relative to its decision in the Penney case.
Appellee refers to and quotes from numerous cases, which, as he asserts, indicate the "trend" of court decisions involving tax questions. It is assumed that the "trend" which appellee hopes to develop is in the direction of liberality on the part of appellate courts in passing upon tax statutes. Conceding for the purpose of the case that such a "trend" prevails, it would be of little weight in discrediting the Johnson case, which itself is of recent vintage. It would hardly be flattering to appellee's case to admit the necessity of relying upon "trends" to dispose of a positive court decision with only six years of age to its credit.
See Stone v. General Electric Contracts Corporation, 193 Miss. 317 , 7 So.2d 811 ; Stone v. General Contract Purchase Corporation, 193 Miss. 301 , 7 So.2d 806 ; Stone v. York Ice Machinery Corporation, 193 Miss. 638 , 10 So.2d 380 ; A.H. Stone, Commissioner, v. Interstate Natural Gas Co., 103 F.2d 544 ; McGoldrick v. Berwind-White
Coal Mining Co., 309 U.S. 33 , 60 S.Ct. 388, 84 L.Ed. 565, 128 A.L.R. 876; Nelson v. Sears, Roebuck Co., 312 U.S. 359 , 61 S.Ct. 586, 85 L.Ed. 888, 132 A.L.R. 475.
J.H. Sumrall, of Jackson, for appellee.
The statute under which the tax demanded of the appellant is made is Section 11, Chapter 120, Laws of 1934, which reads as follows: "Net income of non-resident and foreign taxpayers. Sec. 11. (1) In the case of foreign corporations or of a non-resident or citizen of a foreign country the following items of gross income shall be treated as income from sources within the state. (a) Insurance premiums, interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise . . ." It will be noted that the provision of the statute uses the broad term "insurance premiums." There is no qualifying or limiting language used in connection with such term, thereby indicating that the term is used in its broadest sense. And according to the rule laid down in Section 1394 of the Mississippi Code of 1930 such terms should be given their common and ordinary meaning.
The word "premium" with reference to insurance contracts usually refers to the amount in cash which the insured pays to the insurer for keeping the policy in force during a stated period.
Wade v. National Bank of Commerce, 144 Minn. 187 , 174 N.W. 889.
Reinsurance is insurance by the first insurer of the whole or some part of his interest in the risk created by his contract of insurance: or, as it is otherwise defined, it is the contract that one insurer makes with another to protect the first from a risk he has already assumed.
The question involved in this case is whether or not the premiums received by the Lincoln National Life Insurance Company for reinsuring those companies that
have issued policies to residents of Mississippi, and received such part of such premiums as are paid by residents of Mississippi for such insurance, in that proportion which the amount of reinsurance assumed by said company bears to the whole amount of premiums paid by the insured located in Mississippi, are such premiums as are contemplated by the provisions of the Income Tax Law. The company claims that, since the premiums paid to it are not paid by the original insured, the amount of money received by it covering the risk which it has assumed is through the medium of reinsurance to other companies by which the policies of insurance were originally issued, does not constitute premiums received from the State of Mississippi as contemplated by Section 11 of the Income Tax Law.
The statute, however, provides broadly that "insurance premiums shall be treated as income from sources within the state." And the broad definition of insurance premium is the amount paid to another for assuming an obligation to protect the insured from such a risk. And the amounts paid to the appellant by companies issuing the policies to residents of Mississippi, and insuring themselves against loss to the amount of the ceded portion of the policies, by paying to the appellant a corresponding amount of the premiums received from the first insured, could in reality be properly classed as such insurance premiums as are contemplated by the statute in question.
The appellant is qualified to do business in Mississippi. It qualified to do business in this state because, under the provisions of Section 5158 of the Code of 1930, the Insurance Commissioner would not approve it as qualified to do the business of reinsuring otherwise. The purpose of qualifying as a reinsuring company was to be able to receive ceded business from other life insurance companies writing insurance upon the lives of residents of Mississippi, and to receive a part of the premiums paid by residents of Mississippi upon whose lives policies had been issued by the original insurers. What benefit did
appellant receive as a result of qualifying to have ceded to it insurance written upon the lives of residents of Mississippi? It received a part of the original premiums paid by residents of Mississippi, at least indirectly from the original insurers writing the original insurance upon residents of Mississippi, if not directly through the original insurer who, under the treaty authorizing the arbitrary ceding of standard policies, was in effect the agent of the appellant in writing the original policies.
It is, therefore, manifest that said company could not have received the business from those companies writing insurance in Mississippi and such reinsurance contracts as it may have entered into with companies writing insurance in Mississippi would not have been valid and lawful under the laws of Mississippi, unless it had complied with the statute and qualified to do business in Mississippi.
The policy of the state is indicated by the provisions of Section 108, Chapter 20, Laws of the Extraordinary Session of 1935, which was the privilege tax in force during the years involved in which the tax accrued, the language of said statute imposing a premium tax being as follows: "All life insurance companies or associations shall pay annually a tax of 2 1/4 per centum on the gross amount of premiums in this state, less premiums paid to reinsurance companies authorized to do business in this state, and where such reinsuring company pays the tax on such premiums."
While the Income Tax Law contains no similar provision with reference to domestic companies and other companies writing insurance within the state which permits them to omit from their income tax returns the amount of premiums received which have been paid by the original insurer to the reinsurance company to which had been ceded a part of the insurance written, in actual practice all domestic companies and other companies writing policies upon, and insuring the life of, residents of Mississippi are permitted to deduct from their gross
income the amount of premiums received by them, which are in turn paid to reinsuring companies who have assumed a part of the risk ceded to them under reinsurance treaties.
There can be no doubt as to the reason for this practice of allowing companies writing insurance upon the lives of residents of Mississippi to deduct from their income the amounts received as premiums paid by holders of such policies, which in turn has been paid to companies to which a part of such insurance has been ceded, since both the premium tax law and the law requiring companies assuming risks upon the lives of residents of Mississippi to maintain reserves within the state provide that the companies issuing the policies shall receive credit for the amount of premium tax paid by such reinsuring companies, and the reserves maintained by such reinsuring companies. And it amounts only to an adherence to the policy of the state, to impose the tax and other conditions only upon the companies receiving the benefit of the premiums received.
Wherever specific provision appears in any of the statutes giving relief to the original insurer for the burden assumed by the reinsuring companies, it is upon the condition that the reinsuring company pays the tax or assumes the obligation of which the original insurer is relieved. It is manifest, therefore, that in allowing the original insurer to deduct from its income the premiums received by it and paid to a reinsuring company, it is on the theory that the reinsuring company owes and will pay the taxes, both premium and income, on such part of such premiums.
I do not take issue with the authorities cited in the brief of the attorney for the appellant as to the lack of privity of contract between the original insured and the reinsurer, and I concede that all the courts, including the courts of this state, uniformly hold that the insured has no cause of action against other than the company writing the policy which the insured holds. But this principle has
no bearing whatever upon the question involved in this case, and which this court is called upon to decide.
Counsel for the appellant cites a number of cases dealing with the jurisdiction of states to tax or regulate the activity of nonresidents. He relies, however, implicitly on the case of Connecticut General Life Insurance Company v. Johnson, 303 U.S. 77 , 58 S.Ct. 436, 82 L.Ed. 673. And I respectfully call the court's attention to the fact that none of said cases have any bearing on the immediate question presented here, because none of said cases deal with the exact question presented by the facts in this case. The Connecticut General Life Insurance Company case, supra, was decided by the Supreme Court of the United States on January 31, 1938. And on January 13, 1941, three years after the decision in said case, the Supreme Court of the United States denied a rehearing in the case of State of Wisconsin v. J.C. Penney Co., 311 U.S. 435 , 61 S.Ct. 246, 85 L.Ed. 267, 130 A.L.R. 1229. In this case, there was involved not only a question arising under the Income Tax Law of the state, as is the case in the present matter, but there was decided, for all intents and purposes, the exact question presented to this court by this petitioner, to-wit, whether or not taxes could be imposed upon a foreign corporation, when it claims that the activity for which the tax was sought to be imposed was not carried on within the taxing state.
I desire to call the court's attention to the modern trend of decisions, brought about by the increased burdens assumed by the Federal and state governments, which have necessitated the tapping of new sources of revenue and have brought about the corresponding change in the interpretation of the existing laws, and reexamination of the basis for such immunities as have heretofore existed in favor of persons proclaiming to be engaged only in interstate commerce.
The simple but controlling question is whether the state has given anything for which it can ask return. The substantial privilege of carrying on business in Mississippi,
which has here been given, clearly supports the tax, and the state has not given less merely because it has conditioned the demand of the exaction upon happenings outside its own borders. The fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus between such a tax and transactions within a state for which the tax is an exaction.
State of Wisconsin v. J.C. Penney Co., supra.
A state is free to pursue its own fiscal policies, unembarrassed by the Constitution, if by the practical operation of a tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.
State Tax Commission of Utah v. Aldrich, 316 U.S. 174 ; Wisconsin v. J.C. Penney Co., supra; Hoopeston Canning Co. v. Cullen, 87 L.Ed. 568; A.H. Stone, Commissioner, v. Interstate Natural Gas Co., 103 F.2d 544 ; McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 , 60 S.Ct. 388, 84 L.Ed. 565, 128 A.L.R. 876; Nelson v. Sears, Roebuck Co., 312 U.S. 359 , 61 S.Ct. 586, 85 L.Ed. 888, 132 A.L.R. 475; Curry v. McCanless, 307 U.S. 357 ; Stone v. General Contract Purchase Corporation, 193 Miss. 301 , 7 So.2d 806 ; Stone v. General Electric Contracts Corporation, 193 Miss. 317 , 7 So.2d 811 ; Stone v. York Ice Machinery Corporation, 193 Miss. 638 , 10 So.2d 380 .
I respectfully submit that under all the facts and circumstances, and under all the recent decisions of all the courts bearing on the question, the mere fact that the petitioner elected to have the premiums paid to it covering insurance on Mississippi risks, by transmission to its home office outside of the state, through the United States mail, did not serve to relieve the petitioner of its liability for taxes computed solely on amounts received by it covering insurance risks which existed in Mississippi, and where such funds were derived from the premiums paid by policy holders in Mississippi. If petitioner is
correct in its construction of the law, then by the simple subterfuge of ceding to a nonresident company all of the business written on resident persons, the state would be deprived of its revenue which accrued on account of such premiums paid; whereas, if the insurer retained all of such insurance, the state would receive revenue from all business written within the state.
Argued orally by Hubert Lipscomb, for appellant, and by J.H. Sumrall, for appellee.