Petitioners Brief — Franklin Life Insurance v. United States

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BRIEF IN SUPPORT OF PETITION.

Opinion Below.

The opinion of the Court of Claims has not been officially

reported but may be found at page 8 of the Record.

Jurisdiction.

The judgment of the Court of Claims was entered on

March 3, 1941 (R. 14). The jurisdiction of this Court is in-

voked under Section 3, c. 229 of the Act of February 13,

1925; 43 Stat. 939 (U. S. Code, Title 28, Section 288).

Statement.

The facts are set forth in the petition.

Statutes and Regulations Involved.

The statutes and regulations involved are set forth in

full in the appendix, infra, page 17.

1. The Court of Claims erred in holding that the exercise

of State police power does not include requiring security

deposits with the State as a condition to doing business in

a certain form within the State.

The regulation of insurance companies is the exercise of

the State police power, also a State Governmental function

since the State is the creator of the corporation. German

Alliance Insurance Co. v. Lewis, 233 U. 8. 369, 59 L. Ed. 1011;

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

71, €7 L. Ed. 136. This Court will notice judicially the com-

mon practice among States in requiring State deposits by

insurance companies, but for lists see 32 Corpus Juris, Sec.

18, p. 988, footnotes.

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The Court of Claims opinion recognizes

‘‘There is no doubt that any state of the Union has

the right under its police powers to regulate and con-

trol the issuance of insurance policies in such manner

as to protect the interests of the policyholders”? (R.

12).

The Illinois statute immediately involved (Sec. 1, Act of

April 18, 1899) specifically States that the deposits involved

here are to be held by the State

<* * * for the common benefit of all the holders of

its registered policies and annuity bonds * * *”’

(Appen., p. 20).

Yet the court below holds the deposits outside its own

statement of the rule.

The State established a procedure under which it would

register policies provided always that as long as such

policies were in forcee—even after registration was discon-

tinued, the company would maintain deposits with the State.

If the company did not comply as to deposits, it could not

sell registered policies. Once it adopted that form of doing

business, the State statute shows that the deposits were

required. Sec. 3, Act of April 18, 1899; Secs. 247 and 250,

Act of June 29, 1937; Illinois Insurance Code, Art. XV. The

record below shows (R. 7, par. 10) that certain of the

deposits here were made after registration had been dis-

continued; therefore they clearly were compulsory under

Sec. 250 of the Act of June 29, 1937 (Appen., p. 24).

The court below states that the constitutional question

raised is ‘‘difficult and somewhat doubtful’’ (R. 11). The

determination affects all corporations and individuals whose

business is under State control, yet the Court of Claims dis-

misses the issue with a solitary citation—Helvering v.

Gerhardt, 304 U. S. 405, 82 L. Ed. 1427, an income rather

than excise tax case. The court below admits that Gerhardt

‘*does not directly decide the question now presented’’. It

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then states the two rules therein—the one excluding from

the immunity ‘‘activities thought not to be essential to the

preservation of state governments’’ which it summarily

dismisses without further comment, other than that the tax

was not paid from the State treasury. Thereupon, it admits

again that ‘‘none of the rules laid down”’ by Gerhardt ‘‘was

applied to a state of affairs exactly similar to that in the

case before us’’ (R. 11-12).

No other judicial basis whatever is given for the lower

court’s conclusion.

The first decision of this Court upon which petitioner

relied (Ambrosini v. U. S., 187 U. S. 1, 47 L. Ed. 49) is

passed over with the statement it has no application and that

the facts were quite different, but the court did not make

any distinction. In Ambrosini there was an ‘‘election’’ as

to doing business and no tax was passed on to the State—

yet the court below bases its decision on these two facts.

The court below also fails even to mention two decisions

of this Court relied upon by petitioner and directly con-

trolling, viz: Federal Land Bank v. Crosland, 261 U. S.

374, 67 L. Ed. 703; and Pittman v. Home Owners Loan Corp.,

269 U.S. 253, 70 L. Ed. 392—in both of which the same rea-

soning, relied upon by petitioner here, was relied upon

successfully by the Federal Government. Under the

doctrine of ‘‘equality’’ of immunity recognized by this

Court in Metcalf v. Mitchell, 269 U. 8. 253, 70 L. Ed. 392,

reiterated in Indian Motocycle Co. v. U. S., 283 U. 8. 570,

75 L. Ed. 1277, these two decisions are pointedly applicable.

See also U. S. v. Owens, 100 Fed. 70.

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.

Ambrosini (supra) ‘‘elected’’ to go into the liquor busi-

ness. He was not compelled to do so, but having so elected

i-

d

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he was subject to the requirements of the State law as to

bond. The individuals involved in Federal Land Bank and

Pittman v. Home Owners Loan Corp. (supra), ‘‘elected’’

to borrow through Federal agencies.

Insurance companies are not under compulsion to write

certain forms or to do business in Illinois, but once the elec-

tion is made the law imposes certain conditions—as when

one elects to marry, to own a dog or become a banker. The

conditions imposed by the State here were that these de-

posits be made. It is the satisfaction of these conditions

rather than the ‘‘election’’ which the court below over-

looks. The ‘‘election’’ amounts to nothing if the conditions

are not satisfied. This is the unmistakable reasoning of this

Court in Ambrosini, Federal Land Bank and Pittman,

supra. There was no compulsion to become a notary public

in Warwick v. Bettman, 102 Fed. 127, but this documentary

tax (1898) was held illegal as to a bond to qualify a notary.

An Illinois life insurance company ‘‘elects’’ to write

health and accident risks. There is no compulsion. But to

do so it must make special deposits independent of those

involved here. Sec. 4, Act of June 21, 1919.

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

statutes did not require the deposits.

The Illinois insurance statutes, read together, show that

special deposits were required as conditions for issuing

various forms of policies and that ‘‘registered’’ policies

were but one of these forms. Accident and health, Sec. 4,

Act of June 21, 1919; Assessment Life Companies, Sec. 15,

Act of July 14, 1927; all Foreign Insurance Companies, Sec.

1 of Act of June 18, 1883, as amended June 30, 1925; all

insurance companies of other States, Sec. 16, Act of March

26, 1869; Burial Insurance Companies, Sec. 3b, Act of June

10, 1911; Casualty Companies, Sec. 3, Act of April 21, 1899,

as amended June 30, 1919; Fidelity and Surety, Sec. 4, Act

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of June 29, 1915. If the deposits were not made, the forms

could not legally be used.

The court below erroneously concluded the deposits here

involved were required only of Illinois companies, and to

give them some advantage over companies of other states.

There was nothing whatever in the record to support that

finding. Even if true, this would not determine the ques-

tion, and the court states it would not be controlling (R.

11).

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.

The State bore no burden of the tax paid by Ambrosini

(supra) to his bonding company. In the Pittman case,

supra, this Court reiterated that it was immaterial who

paid the tax. The State bore none of the tax on notarial

certificates in Stirneman v. Smith, et al., (CCA-8) 100 Fed.

600, where this same documentary tax under its 1898 enact-

ment was held illegal. The State bore no burden of the

tax on the qualifying bond for a notary in Warwick v. Bett-

man, supra,

The Court below fails to see that when this Court, in

Helvering v. Gerhardt, supra, and other cases refused to

extend the immunity doctrine to give ‘‘ private persons’’ an

advantage in ordinary or ‘‘commercial’’ transactions, it

did not mean that the rules in Gerhardt control, where, as

here, no advantage exists or is claimed.

This Court specifically stated in the Gerhardt case that

its decision rested upon a reason different from that in

Indian Motocycle Co. v. U. S., supra. The effort of sal-

aried officers to avoid their share of a tax imposed on per-

sons generally has no similarity to an enforced transaction

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with a State engaged in the regulation of its corporations.

When the petitioner transfers its securities on sale or re-

demption, it pays its full share of tax. Under the decision

below its transfer tax is multiplied several times although

there has been no transfer.

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

deposit of securities was the ‘‘Means’’ or ‘‘Instrumen-

tality’’ employed by Illinois in the exercise of a Govern-

mental function, and therefore exempt.

In the Federal Land Bank case, supra, this Court held

that the mortgage deed itself, rather than the bank, was the

‘‘instrumentality’’ and prohibited the tax on the mortgage

orits use. The same in the Pittman case, supra. They fol-

low the reasoning in Ambrosini, supra, that the document

must be considered together with its use. The recording

of the mortgages was an act or use for official purposes,

distinct from the execution of the deed. In all three of

them the ‘‘election’’ of the individual put the machinery in

motion, but this Court disregards that fact.

Similarly, the deposit of securities in the present case

was a purely official use, at least equally a ‘‘means’’ em-

ployed by Illinois as the recording was a ‘‘means’’ em-

ployed by the Federal Government. Thomson v. Union

Pacific R. R., 9 Wall. 579; 19 L. Ed. 792. This ‘‘use’’ which

transforms an otherwise common transaction into an of-

ficial and immune one is well shown in the Stirneman case,

supra. In the present case, the State of Illinois must al-

ways be one of the parties. Indian Motocycle, supra.

If the function is governmental, as must be recognized

in this case, the extent of the interference is immaterial

and the prohibition is absolute. Metcalf v. Mitchell, supra;

Indian Motocycle, supra; Gerhardt, supra.

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6. The Court of Claims erred in considering that because

these deposits are not within the statutory exemptions,

they are subject to Federal taxation.

One of the bases for the decision below is the alleged

uniformity of administrative construction of the taxing

act and the fact the transactions here involved are not

within any of the exceptions in the statute (R. 10).

There is no public record of any prior attempt to apply

the statute to transactions such as those involved here.

The decision below shows that fact, the law reports and

services fail to disclose an instance of it, and the court be-

low was given to understand this was the first case. Since

no prior case existed, the doctrine of past construction

falls.

As to the statutory exceptions, the exemption here in-

volved existed before there was a Congress. Ward v.

Maryland, 12 Wall. 427. <A statutory exemption is futile,

for without it the same result would doubtless be reached

by judicial construction. Stirneman v. Smith, supra.

Regulations 71, Art. 35 (r) provide that the tax shall not

apply to transfers which result wholly by operation of law.

It would appear that under the decision of the Circuit

Court of Appeals for the Ninth Circuit in U. S. v. Mer-

chants Nat. Trust & Savings Bank, 101 Fed. (2d) 399, the

deposits and withdrawals here involved would come within

this category.

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

tive regulation which on its face extends the statute by

punctuation and in violation of the legislative intent.

The Bureay construes these deposits and withdrawals as

‘‘deliveries’? under par. (a) (9) of Schedule A sec. 800,

Title VIII of the revenue act of 1926, as set up in Article

120 of Bureau Regulations 71. That article, however, in-

1

‘

(

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serts in the statutory phrase ‘‘memoranda of sales or de-

liveries’? a comma which does not appear in the statute,

thus changing it to ‘‘memoranda of sales, or deliveries’’.

(Appen., p. 18).

The statutory section as a whole, caittiatacis the pro-

visos ; the legislative history and the Regulations otherwise

all show the statute intended only to cover transfers. Sen-

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

#705, pp. 12, 47; Conference Report, No. 1492, 72d Cong.,

1st Sess., H. R. 10236, pp. 25-26 and headings for amend-

ments 226-230.

The 5th proviso of the Federal Statute (Appen., pp. 18-19)

specifically provides that:

‘‘Where the transfer is_ by delivery of the instru-

ment assigned in blank there shall be made and de-

livered by the seller to the buyer a bill or memorandum

of such sale, to which the stamp shall be affixed; and

every bill or memorandum of sale or agreement to sell

before mentioned shall show the date thereof, the name

of the seller, the amount of the sale, and the matter

or thing to which it refers.”’

It is clear from this that the form of memorandum pre-

scribed relates only to sales. No other form ever has been

prescribed by either the statutes or the regulations which

could apply to the deposits involved here. This particular

proviso confirms the petitioner’s claim that wherever the

statute refers to ‘‘deliveries’’, it means transfers perfected

by mere delivery.

The ‘‘underlying essence’’ which determines taxability

under this statute (Helvering v. Tex-Penn Oil, 300 U. S.

481, 493; Bowers v. Lawyers Mtg. Co., 285 U. S. 182, 188;

U. S. v. Phellia, 257 U. S. 156, 168) is that the ‘‘power to

command the disposition’’ of the deposited bonds (Ray-

bestos-Manhattan, Inc. v. U. S., 296 U. 8. 60, citing Provost

v. U. S., 269 U. S. 448, 458-9) never left the petitioner here.

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The lower court finds (R. 6, par. 6) that no authority ex-

ists in Illinois to dispose of the depocited bonds except

back to the petitioner, unless the latter becomes insolvent.

Even in that event, and under secs. 188 and 191, Art. XIII

of the Illinois Insurance Code adopted June 29, 1937; and

secs. 2-4 of Act of June 26, 1925, as amended May 20, 1929,

the State through its attorney general must institute spe-

cial court proceedings before it gets full title, and that title

is not perfected until the order of court (Appen., p. 24).

Conclusion.

It is submitted, therefore, that this case is one calling for

the exercise of this Court’s powers, that the errors recited

may be corrected, the law properly and authoritatively

defined, and the judgment of the Court of Claims reversed.

To such an end petitioner prays a writ of certiorari be

granted.

Warren W. Grimes,

Counsel for Petitioner.