Petition for a Writ of Certiorari — Franklin Life Insurance v. United States

CHARLES ELMORE CAOPLEY

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1940

S

No. 931

THE FRANKLIN LIFE INSURANCE COMPANY,

Petitioner,

vs.

THE UNITED STATES,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

COURT OF CLAIMS AND BRIEF IN SUPPORT

THEREOF.

Warren W. Grimes,

Counsel for Petitiones.

CONTENTS.

io: SEN OE I ay eS a 1

Bi: TUE SRR Pc Per Ck 2

ik, Bpeciiiention of ervete ... 2... os. 5

EY: OO TOE ON ne ae 6

Ve BURGE Pee WORE 8s ei ee a ae 7

Vi, Sere Se OE ee ae ee: 8

1. Error in holding exercise of State police

power does not include requiring se-

curity deposits with the State as a con-

dition to doing business in a certain

form within the State ................ 8

2. Error in finding a State governmental

function not involved because of ‘‘elec-

tion’’ of petitioner as to form of busi-

WE ne Wh NX Os ee 10

3. Error in finding that State statutes did

not require the deposits .............. 11

4. Error in finding that because tax not

passed on to State there was no direct

burden upon the State .... .......... 12

5. Error in failing to find the deposits were

the ‘‘means’’ or ‘‘instrumentality’’ of

tt TA ee ee eee. 13

6. Error in finding that because statute did

not specifically exempt these deposits,

they Sete CN ek 14

7. Erroneous approval of administrative

regulation patently broader than stat-

WO ae ore eis ek de 14

VII. Appendix:

1: ee MN os ie 17

2. Pederal VOMINUONE:. ek 19

3. SU SS er eS 20

BE I I bE ec tas Kia 20

June 29, 1937, Secs. 248, 250........ 23, 24

June 26, 1925, Secs. 2, 3,4.......... 24, 25

June 29, 1937, Sec. 191............. 25

—3697

ii INDEX

Tass or Cases Crrep.

Page

Ambrosini v. United States, 187 U. S. 1, 47 L. Ed.

OO i ee re ee ge Se 6, 10

Bowers v. Lawyers Mtg. Co., 285 U.S. 182.......... 15

Federal Land Bank v. Crosland, 261 U. 8S. 374, 67

Bi oe se ck Sate dads he oA eas 6, 10

German Alliance Ins. Co. v. Lewis, 233 U. S. 389, 58

ep NE ee ea ye ae ee ga ee 7,8

Helvering v. Gerhardt, 304 U. S. 405, 82 L. Ed.

ra a a ee ws kee 6,9

Helvering v. Tex-Penn Oil Co., 300 U.S. 481........ 15

Indian Motocycle Co. v. United States, 283 U. S.

te See Es oe ks use. 6, 10

Metcalf v. Mitchell, 269 U. S. 253, 70 L. Ed. 392... ... 6, 10

National Union Fire Ins. Co. v. Wanberg, 260 U. S.

iN 8 °o | ‘SER Rise eee 7,8

Pittman v. Home Owners Loan Corp., 308 U. S. 21,

ne ar ra bee os 6

Provost v. United States, 269 U.S. 448............. 15

Raybestos-Manhattan v. United States, 269 U. S.

i ee ei a ag a ct ey owe 15

Stirneman v. Smith, 100 Fed. 600.................. 12

Thomson v. Union Pac. R. R., 9 Wall. 579, 19 L. Ed.

i ea ee Bo aS Pes se 13

United States v. Merchants Nat. Trust & Savings

i es EE a oa cds eee cine ws ues 7,14

United States v. Owens, 100 Fed. 70 ............... 10

United States v. Phellis, 257 U.S. 156.............. 15

Ward v. Maryland, 12 Wall. 427................... 14

Warwick v. Bettman, 102 Fed. 127................. 11

Oruer AutHorities CrTep.

Conference Report No. 1492, 72d Cong., 1st Sess., H.

i aa ek Oa Chir bss cone cee 15

Bewuletioss Ti, Bar. Tet. Ber... .. os. ee. 14

Cocpus curm, Vor. Ge, WON 36... 5... 8

Senate Finance Report No. 665, 72d Cong., 1st Sess.,

RU re a ih sk hw tious Soe ca 15

a)

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1940

No. 931

THE FRANKLIN LIFE INSURANCE COMPANY,

Petitioner,

vs.

THE UNITED STATES,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

COURT OF CLAIMS OF THE UNITED STATES AND

BRIEF IN SUPPORT THEREOF.

Petitioner, The Franklin Life Insurance Company, by its

undersigned attorney, respectfully prays for a writ of cer-

tiorari to the Court of Claims of the United States, to

review the judgment of that Court entered in the above

cause March 3, 1941 (R. 14).

Nature of Controversy.

The first case to test the validity of the Federal docu-

mentary transfer tax as applied to deposits of securities

with a State by an insurance company, under State stat-

«utes enacted for the regulation of such companies chartered

by the State.

1:

4J

2

Statutes and Regulations Involved.

The statutes and regulations involved appear in the

Appendix hereto, infra, page 20.

Statement of Facts.

Petitioner is an Illinois corporation engaged in the mak-

ing and selling of insurance, including life, accident, health

and endowment risks, in Illinois and other States (R. 4-5,

par. 1). Under Illinois statutes (Appendix., p. 23) and dur-

ing the period July 1, 1899, to June 30, 1937, when it was

discontinued (R. 5, par. 2) procedure was established for

the registration of life policies by the State Director of In-

surance. Any company issuing registered policies was re-

quired to deposit approved securities with the Director

‘for the common benefit of all the holders of its registered

policies and annuity bonds’’ (Append., p. 24) and to main-

tain its deposits in an amount equal to the reserve required

to cover such policies. After discontinuance of registration

on June 30, 1937, it was still required to maintain such de-

posits to cover registered policies remaining in force

(R. 5).

The registration was evidenced by the following required

certificate signed and sealed by the Director and on the fact

of the policy:

This policy is registered; and approved securities,

equal in value to the legal reserve thereon, are held in

trust by this department (R. 5).

On failure of a company to maintain the required de-

posits, after sixty days notice by the Director, the company

shall be deemed insolvent and proceeded against under

special statutes (R. 6).

During the period of deposit, all securities are and must

be included among the company assets on balance sheets

8

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, agree-

ment or otherwise, to dispose of such deposited securities

except back to the depositing company ; except upon insolv-

ency, procedure for which is provided by special statutes

on liquidation, dissolution or rehabilitation of insurance

companies (R. 6, par. 6).

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 as its own the interest, coupons, and other in-

come 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 about to mature (R. 6, par. 7).

Petitioner sold registered policies and from time to time

both deposited with and withdrew securities from the

Director of Insurance under the statutes referred to (R. 6,

par. 8).

As to unregistered bonds so deposited, the petitioner

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, policy holders, 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 with-

drawn from said trust, at which time it shall be endorsed

by the Director of Insurance.

4

The form or endorsement used by the Director of In-

surance 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 —— —, —— (R. 7),

Prior to October, 1939, neither the petitioner 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 (R. 7).

On October 2, 1939, the Collector of Internal Revenue at

Springfield, Illinois, required the petitioner to purchase,

and petitioner did purchase from him and cancelled, such

documentary stamps to cover such bond deposits and with-

drawals, 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 $2,742.00 (R. 7).

Under date of November 3, 1939, the petitioner filed with

said collector a claim for refund of the said amount $2,742.00.

The grounds relied upon in said 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 con-

templated 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

5

(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 (R.

7-8).

On November 20, 1939, the Commissioner of Internal

Revenue rejected the claim (R. 8). On January 8, 1940,

petitioner filed suit in the Court of Claims of the United

States, upon the grounds recited in the claim (R.1). That

court made special findings of facts upon stipulation of the

parties and, on March 3, 1941, dismissed the petition and

entered judgment for the United States (R. 14). The pres-

ent petition is directed toward review of that decision.

Specification of Errors.

1. The Court of Claims erred in holding that the exer-

cise of State police powers does not include requiring

security deposits with the State as a condition to doing

business in a certain form within the State.

2. The Court of Claims erred in finding that a State

governmental function was not involved because of the

‘‘election’’ of petitioner to engage in a certain form of

business.

3. The Court of Claims erred in finding that the State

statutes did not require the deposits covered by this case.

4, The Court of Claims erred in holding that, because the

tax was not passed on to the State, there was no direct

burden upon the State.

5. The Court of Claims erred in failing to find that the

deposit of securities was the ‘‘means”’ or ‘‘instrumental-

ity’’ employed by Illinois in the exercise of a governmental

function, and therefore exempt.

2)

6

6. The Court of Claims erred in considering that because

these deposits are not within the statutory exemptions,

they were subject to Federal taxation.

7. The Court of Claims erred in approving an adminis-

trative regulation which on its face extends the statute by

punctuation and in violation of the expressed legislative

intent.

Reasons Relied Upon.

1. The Court of Claims has decided an important ques-

tion of Federal law which has not been, but should be,

settled by this Court; in that the decision is the first to

deal with Federal documentary transfer taxes applying to

security deposits with States, required by State laws regu-

lating insurance companies. It affects every insurance

company doing business. The decision itself states that

(as to constitutionality) ‘‘a difficult and somewhat doubt-

ful question is thus raised”’.

2. The Court of Claims has decided a Federal question

in a way probably in conflict with applicable decisions of

this Court, in particular Ambrosini v. U. S., 187 U. S. i,

47 L. Ed. 49; Federal Land Bank v. Crosland, 261 U. 8. 374,

67 L. Ed. 703; Metcalf v. Mitchell, 269 U. S. 253, 70 L. Ed.

392; Indian Motorcycle Co. v. U. S., 283 U.S. 570, 75 L. Ed.

1277; and Pittman v. Home Owners Loan Corp., 308 U. 8S.

21, 84 L. Ed. 11; in that it holds the Federal tax may con-

stitutionally be applied to transactions exclusively with a

State exercising a strictly governmental function under its

police powers. It attempts to decide only under H elvering

v. Gerhardt, 304 U. S. 405, 82 L. Ed. 1427, which it spe-

cifically states ‘‘does not directly decide the question’’, and

spells certain rules from that case none of which it admits

was applied to the present state of affairs.

3. The Court of Claims has decided an important ques-

tion of General Law in a way probably untenable or in

7

conflict with the weight of authority, in that its decision

discards a fundamental principle of Corporation Law that in

purely regulatory matters invol.ing qualification the cre-

ating State has exclusive jurisdiction. As applied to in-

surance companies the decision is in conflict with German

Alliance Insurance Co. v. Lewis, 233 U. S. 389, 58 L. Ed.

1011; and National Union Fire Insurance Co. v. Wanberg,

260 U.S. 71, 67 L. Ed. 136.

4, The Court of Claims decision has so far departed from

the accepted and usual course of judicial proceedings as

to call for an exercise of this Court’s power of supervision,

in that it has approved the practice of administrative reg-

ulations altering by punctuation a statute in order to extend

the scope beyond the legislative intent.

5. The decision of the Court of Claims is in conflict with

that of the Circuit Court of Appeals for the Ninth Circuit

in U. S. v. Merchants National Trust & Savings Bank, 101

F. (2d) 399, in disregarding the transactions as ‘‘transfers

by operation of law’’ and therefore specifically excepted

from the tax by the Regulations.

WHEREFORE, your petitioner prays that a writ of cer-

tiorari issue to the Court of Claims of the United States,

commanding said court to certify and send to this Court on

a day to be determined a full and complete transcript of the

record of all the proceedings of the Court of Claims in this

cause, to the end that this cause may be reviewed and de-

termined by this Court; that the judgment of the Court of

Claims be reversed; and that the petitioner be granted such

other and further relief as may seem proper.

Warren W. Grimes,

Shoreham Building,

Washington, D. C.,

Counsel for Petitioner.