
    METROPOLITAN LIFE INSURANCE CO. v. THE UNITED STATES
    [No. E-419.
    Decided April 2, 1928]
    
      On the Proofs
    
    
      Excise tax; carrying on or doing business; sec. 1000 (e), revenue act of 1918; mutual insurance companies; ascertainment of surplus and, reserves; finding by Commissioner of Internal Revenue. — -In ascertaining the sum of its surplus or contingent reserves and of certain other reserves, taxable under section 1000 (e) of the revenue act of 1918, the market value, as of the close of the period designated by statute, of securities held by a mutual insurance company, representing actual sales and bid and asked prices, reflects the value of said sum for tax purposes, and the Commissioner of Internal Revenue, who was under obligation to take into consideration every relevant fact, was not author.zed to make- his assessment on the basis of an average value over an arbitrary period of time.
    
      The Reporter's statement of the case:
    
      Mr. Leroy A. Lincoln for the plaintiff. Mr. Frederic G. Dunham, was on the briefs.
    
      Mr. Dwight E. Borer, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. The Metropolitan Life Insurance Company is and was in the years 1917, 1918, and 1920 a mutual life insurance corporation organized and existing under the laws of the State of New York and having its principal office and place of business at 1 Madison Avenue, Borough of Manhattan, city of New York.
    
      
      Gapital-Stoch Tax, Period, Ending Jwne 30, 1919
    
    II. The Metropolitan Life Insurance Company on or about September 26th, 1918, duly filed its capital-stock tax return for the year ending June 80th, 1919, based on the surplus of the company as of December 31st, 1917.
    III. The plaintiff on or about December 24th, 1919, duly filed an amended capital-stock tax return for the year ending June 30th, 1919, based on the surplus of the company as of December 31st, 1917.
    IY. The Commissioner of Internal Revenue by his deputy, James Hageman, jr., on or about January 24th, 1920, made an assessment of the capital-stock tax of the said company on the basis of said original and amended returns.
    V. The plaintiff on or about February 24th, 1920, duly made claim for abatement of said tax in a letter.
    YI. The Commissioner of Internal Revenue adjusted such claim for abatement and made final assessment of said capital-stock tax in the sum of $21,888.45.
    VII.'Notice and demand for said tax signed by William H. Edwards, collector of internal revenue, under date of February 16th, 1920, was given to said company under which tax in the sum of $21,888.45 was claimed.
    VIII. The plaintiff duly paid said tax in the sum of $21,888.45, by its check dated February 24th, 1920, to the order of the collector of internal revenue.
    IX. The plaintiff duly filed its claim for refund on Treasury Department Form 843, verified January 11, 1923, claiming refund of the said sum of $21,888.45.
    X. The claim for refund in the sum of $21,888.45 was rejected by the Commissioner of Internal Revenue.
    XI. The final assessment of the capital-stock tax of said company for the taxable period ending June 30th, 1919, was made by the Commissioner of Internal Revenue in a statement accompanying a letter signed R. M. Estes, Deputy Commissioner, with which said claim for refund in the sum of $21,888.45 was disallowed.
    XII. In making such finding the Commissioner of Internal Revenue asserted that the values of the securities, stocks, and bonds, owned by the plaintiff and set forth in Schedule D of its annual statement for December 31st, 1917, were obtained by reference to a book published by the National Convention of Insurance Commissioners and entitled, “ List of Securities held by Insurance Companies with Valuations to be used in the Companies’ Annual Statements as of December 31, 1917.”
    XIII. The said “List of Securities Held by Insurance Companies,” etc:, recited in the introduction thereto that the values to be published in the said book were to be prepared by adding together the market values as of November 1, 1916, February 1, May 1, August 1, and November 1, 1917, dividing them by five.
    XIV. The introduction to the book entitled “List of Securities Held by Insurance Companies,” etc., begins as follows:
    “The National Convention of Insurance Commissioners at its annual meeting in St. Paul, Minnesota, on August 30, 1917, recognized the probability that the participation of the United States in the World War would affect the bond and stock markets to such- an extent that market quotations on any fixed date would not represent the real values on standard securities, and adopted the following resolution:
    “ ‘ Resolved, That the Committee on Valuations be authorized to make a contract for the publication of the book on valuations, and that it also be authorized to arrive at the valuations by such method as within the opinion of the committee is proper.’ ”
    The last paragraph of the said introduction is as follows:
    “ The committee wishes to caution the general public against the use of this book as a guide for investors, or for the purpose of assisting in the sale or disposal of any securities. Its use by any brokerage firm or security salesman in a prospectus or otherwise, to assist in the sale of any security, will be unauthorized and improper. Its sole purpose is to facilitate the valuation of the stocks and bonds held by insurance companies on a fair and uniform basis, and for that purpose it is believed by the committee to be well adapted.”
    XV. The statement accompanying the findings of the Commissioner of Internal Kevenue showed, among other deductions from the assets of the company for the purpose of determining the amount subject to tax, a deduction of $15,264,492.51 as being “ difference between book and market values of stocks and bonds shown under Schedule D.’ ”
    XYI. The difference between the book and market values of stocks and bonds shown under said Schedule D, according to reference to the Commercial and Financial Chronicle, which is an accepted market report of sales and of bid and asked prices on stocks and bonds dealt in on the New York and other stock exchanges and dealt in “ over the counter,” was $30,017,528.26.
    XVII. The total deduction from the company’s assets in order to find the amount subject to tax for said taxable year ending June 30, 1919, was, according to the Commissioner of Internal Eevenue, $676,311,836.33, leaving a taxable value of $27,713,678.98, while the total deduction according to the contention of the company, by using the difference between book and market value of stocks and bonds shown under said Schedule D, according to quotations stated in the said Commercial and Financial Chronicle, was $691,064,872.08, leaving an amount subject to taxation, according to the same formula, of $12,960,643.23. The tax at $1.00 for each full $1,000, according to the method used by the Commissioner of Internal Eevenue, was $27,708, whereas the tax arrived at, by using the market quotations from the Commercial and Financial Chronicle, according to the contention of. the plaintiff and upon the same formula, was $12,956. The plaintiff had previously paid $21,888.45 and, according to its contention, has overpaid such tax in the sum of $8,932.
    XVIII. The valuations of the plaintiff’s securities arrived at by reference to plaintiff’s exhibit, known as the List of Securities Held by Insurance Companies, were required to be included in the annual report of the company by reason of the laws of the State of New York and the rulings and requirements of the superintendent of insurance of the State of New York thereunder. The said values were not used by the plaintiff for any purpose except as herein stated, either with respect to any form of State or Federal taxation or with respect to establishing the solvency of the plaintiff company.
    XIX. The National Convention of Insurance Commissioners, the organization under whose direction said exhibit was prepared, is an association of the insurance supervising officials of the different States of the United States, which association has, among other committees, a committee on blanks, which prepares the blank form of report for use by insurance companies in all States, and a committee on valuations of securities, under whose direction the list of securities held by insurance companies are prepared.
    XX. There is attached to these findings and made a part of such findings a comparative schedule entitled “ Schedule 1,” in which there are set forth in one column the computation of the said capital-stock tax for the period ending June 30, 1919, according to the commissioner’s determination, upon his formula as set forth in plaintiff’s exhibit, and in the parallel column the computation of the capital-stock tax of the plaintiff for the same year, upon the same formula as used by the commissioner, but with a change in the item of “ difference between book and market values of stocks and bonds shown under Schedule D ” and with the corresponding change in the resultant figures.
    
      Gwpitdl-Stock Tam, Period, Ending Jwae SO, 19%0
    
    
      ' XXI. The Metropolitan Life Insurance Company on or about July 18,1919, duly filed its capital-stock tax return for the year ending June 30, 1920, based on the surplus of the company as of December 31st, 1918.
    . XXII. The plaintiff duly paid the tax assessed for the period ending June 30, 1920, by its check dated December 2, 1919, to the order of the collector of internal revenue.
    XXIII. The plaintiff duly filed its claim for refund on Treasury Department Form 843, verified January 11, 1923, claiming refund of the said sum of $27,043.
    XXIV. The said claim for refund in the sum of $27,043 was granted by the Commissioner of Internal Eevenue to the extent of $16,452 and was rejected to the extent of $10,591.
    XXV. The final assessment of the capital-stock tax of said company for the taxable period ending June 30, 1920, was made by the Commissioner of Internal Eevenue in a statement accompanying a letter signed E. M. Estes, deputy commissioner, with which said claim for refund in the sum of $27,043 was allowed in the sum of $16,452 and was rejected in the sum of $10,591.
    XXYI. In making such finding the Commissioner of Internal Revenue asserted that the values of the securities, stocks, and bonds owned by the plaintiff and set forth in Schedule D of its annual statement for December 31, 1918, were obtained by reference to a book published by the National Convention of Insurance Commissioners and entitled “List of Securities Held by Insurance Companies with Valuations to be used in the Companies’ Annual Statements as of December 31, 1918,” which book is in evidence.
    XXVII. The said “List of Securities Held by Insurance Companies,” etc., recited in the introduction thereto that the values to be published in the said book were to be prepared by adding to the values set forth in the last publication of the National Convention of Insurance Commissioners the actual market values as of November 30, 1918, and dividing the sum so obtained by two.
    XXVIII. The final paragraph to the introduction of the plaintiff’s Exhibit No. 17 is identical to the one which has been set out in Finding XIV hereof.
    XXIX. The statement accompanying the findings of the Commissioner of Internal Revenue showed, among other deductions from the assets of the company for the purpose of determining the amount subject to tax, a deduction of $20,-631,602.40 as being “ difference between book' and market values of stocks and bonds shown under Schedule D.”
    XXX. The difference between the book and market values of stocks and bonds shown under said Schedule D, according to reference to the said Commercial and Financial Chronicle, which is an accepted market report of sales and of bid and asked prices on stocks and bonds dealt in on the New York and other stock exchanges and which were dealt in “over the counter,” is $30,265,531.15.
    XXXI. The total deduction from the company’s assets in order to find the amount subject to tax for said taxable year ending June 30, 1920, was, according to the Commissioner of Internal Revenue, $764,858,144.73, leaving a taxable value of $10,596,553.55, while the total deduction according to the convention of the> company, by using the difference between book and market value of stocks and bonds shown under said Schedule D, according to quotations stated in the said Commercial and Financial Chronicle, was $774,492,073.48, leaving an amount subject to tax, according to the same formula, of $962,624.80. The tax at $1.00 for each full $1,000, according to the method used by the Commissioner of Internal Revenue, was $10,591, whereas the tax arrived at, by using the market quotations- from the Commercial and Financial Chronicle, according to the contention of the plaintiff and upon the same formula, was $958. The plaintiff had previously paid $27,043 and had been allowed under the assessment contained in plaintiff’s Exhibit No. 5 a refund in the sum of $16,452, and therefore, according to its contention, has overpaid such tax in the sum of $9,753.
    XXXII. The valuations of the plaintiff’s securities arrived at by reference to the List of Securities Held by Insurance Companies were required to be included in the annual report of the company by reason of the laws of the State of New York and the rulings'and requirements of the superintendent of insurance of the State of New York thereunder. The said values were not used by the plaintiff for any purpose except as herein stated either with respect to any form of State or Federal taxation or with respect to establishing the solvency of the plaintiff company.
    XXXIII. The National Convention of Insurance Commissioners, the organization under whose direction said exhibit was prepared, is an association of the insurance supervising officials of the different States of the United States, which association has, among other committees, a Committee' on Blanks, which prepares the blank form of report for use by insurance companies in all States, and a Committee on Yaluations of Securities, under whose direction the list of securities held by insurance companies is prepared.
    XXXIY. There is attached to these findings, and made a part of such findings, a comparative schedule, entitled “ Schedule 2,” in which there are set forth in one column the computation of the said .capital-stock tax for the period ending June 30, 1920, according to the commissioner’s determination, upon his formula, and in the parallel column the computation of the capital-stock tax of the plaintiff for the same year, upon the same formula as used by the commissioner, but with a change in the item of “ difference between book and market values of stocks and bonds shown under Schedule D ” and with the corresponding change in the resultant figures.
    
      Capital-Stocle Tax, Period, Ending June 30, 19M
    
    XXXV. The Metropolitan Life Insurance Company, on or about July 27th, 1921, duly filed its capital-stock tax return for the year ending June 30th, 1922, based on the surplus of the company as of December 31st, 1920.
    XXXVI. The collector of internal revenue, on or about September 2, 1921, gave notice and made demand for the capital-stock tax for the period ending June 30, 1922, calling for a payment of tax in the sum of $5,191, which demand was dated September 2, 1921.
    XXXVII. The company duly paid said tax in the sum of $5,191 by its check dated September 7, 1921, payable to the order of the collector of internal revenue.
    XXXVIII. The company duly filed its claim for refund on Treasury Department Form 843, verified January 11, 1923, claiming refund of the said sum of $5,191.
    XXXIX. The claim for refund in the ,sum of $5,191 was allowed by the Commissioner of Internal Eevenue to extent of $2,245, and was rejected by the Commissioner of Internal Eevenue in the sum of $2,946.
    XL. The final assessment of the capital-stock tax of said company for the taxable.period ending June 30th, 1922, was made by the Commissioner of Internal Eevenue in a statement accompanying a letter signed E. M. Estes, Deputy Commissioner, with which said claim for refund in the sum of $5,191 was allowed in the sum of $2,245, and was rejected in the sum of $2,946.
    XLI. In making such finding the Commissioner of Internal Eevenue asserted that the values of the securities, stocks, and bonds owned by the plaintiff and set forth in Schedule D of its annual statement for December 31, 1920, were obtained by reference to a book published by the National Convention of Insurance Commissioners and entitled “List of Securities Held'by Insurance Companies with Valuations to be used in the Companies’ Annual Statements as of December 31st, 1920,” which book is in evidence.
    XLII. The “ List of Securities Held by Insurance Companies,” etc., recited in the introduction thereto that the values to be published in the said book were to be prepared by adding to the values set forth in the last publication of the National Convention of Insurance Commissioners the market values as of November 1, 1920, and dividing the sum so obtained by two.
    XLIII. The introduction to the plaintiff’s exhibit again, closed with the paragraph which has been fully set out in Finding XIV hereof.
    XLIV. The statement accompanying the findings of the Commissioner of Internal Eevenue showed, among other deductions from the assets of the company for the purpose of determining the amount subject to tax, a deduction of $42,986,312.60 as being “ difference between book and market values of stocks and bonds shown under Schedule D.”
    XLV. The difference between the book and market values of stocks and bonds shown under said Schedule D, according to reference to the Commercial and Financial Chronicle, which is found to be an accepted market report of sales and of bid and asked prices on stocks and bonds dealt in on the New York and other stock exchanges and which were dealt in “over the counter,” was $17,213,741.19.
    XLVI. The total deduction from the company’s assets, in order to find the amount subject to tax for said taxable year ending June 30,1922, was, according to the Commissioner of Internal Eevenue, $977,961,281.46, leaving a taxable value of $2,951,805.71; while the total deduction according to the contention of the company, by using the difference between book and market value of stocks and bonds shown under said Schedule D, according to quotations stated in the Commercial and Financial Chronicle, was $1,012,248,716.35, leaving an amount subject to taxation, according to the same formula, of nothing. The tax at $1.00 for each full $1,000, according to the method used by the Commissioner of Internal Eevenue, was $2,946, whereas the tax arrived at, by using the market quotations from' the Commercial and Financial Chronicle, according to the contention of the company and upon the same formula, was nothing. The company had previously paid $5,191, and the company’s claim for refund thereof had been previously allowed to the extent of $2,245, and therefore, according to its contention, it has overpaid such tax in the sum of $2,946.
    XLVII. The valuations of the plaintiff’s securities arrived at by reference to plaintiff’s exhibit known as the List of Securities Held by Insurance Companies, were required to be included in the annual report of the company by reason of the laws of the State of New York and the rulings and requirements of the superintendent of insurance of the State of New York thereunder, and said values are not used by said company for any purpose whatsoever, either with respect to any form of State or Federal taxation or with respect to establishing the solvency of the said company.
    XLVIII. The National Convention of Insurance Commissioners, the organization under whose direction said exhibit was prepared, is an association of the insurance supervising officials of the different States of the United States, which association has, among other committees, a Committee on Blanks, which prepares the blank form of report for use by insurance companies in all States, and a Committee on Valuation of Securities, under whose direction the list of securities held by insurance companies is prepared.
    XLIX. There is attached to these findings and made a part of such findings a comparative schedule, entitled “Schedule 8,” in which there are set forth in one column the computation of the said capital-stock tax for the period ending June 80, 1922, according to the commissioner’s determination, upon his formula as set forth in plaintiff’s Exhibit No. 5, and in the parallel column the computation of the capital-stock tax of the plaintiff for the same year, upon the same formula as used by the commissioner, but with a change in the item of “ difference between book and market values of stocks and bonds shown under Schedule D ” and with the corresponding change in the resultant figures.
    
      
      
    
    
      
      
    
    The court decided that plaintiff was entitled to recover $21,631.00, with interest at 6 per cent per annum on a part thereof, $8,932.00, from February 24, 1920, to April 2, 1928; on $9,753.00, another part thereof, from December 2, 1919, to April 2,1928; and on $2,946.00, another part thereof, from September 8, 1921, to April 2,1928, the date of judgment.
   Campbell, Chief Justice,

delivered the opinion of the court:

The Metropolitan Life Insurance Company, a mutual life insurance company, sues to recover taxes it was required to pay and which the Commissioner of Internal Kevenue refused to refund for the taxable years 1919, 1920, and 1922.

By section 1000 of the revenue act of 1918, 40. Stat. 1126, there was imposed on every domestic corporation annually,

“ a special excise tax with respect to carrying on or doing business, equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. In estimating the value of capital stock, the surplus and undivided profits shall be included.”
“(C) * * * The taxes imposed by this section shall apply to mutual insurance companies, and in the case of every such domestic company the tax shall be equivalent to $1 for each $1,000 of the excess over $5,000 of the sum of its surplus or contingent reserves maintained for the general use. of the business and any reserves the .net additions to which are included in net income under the provisions of Title II as of the close of the preceding accounting period used by such company for purposes of making its income-tax return.”

The issue involved is thus stated in behalf of the insurance company:

The method of determining the market value of these securities, which must be ascertained for the purpose of determining the amount of the company’s surplus and reserve subject to this tax, is the only question .at issue in this case.

For the defendant the issue is stated to be whether the ■company’s stocks and bonds for capital-stock tax purposes under the act “ shall be valued at the actual market values or at fair market values.” Another feature is presented by the Government to be adverted to later.

The law as it was prior to this revenue act of 1918 had not provided a measure for the tax if applied to mutual insurance companies, but this act remedies the situation by section 1000, declaring in terms that the taxes imposed shall apply "to mutual insurance companies, but it was necessary not •only to declare the measure of the tax, but also to define, in •case of these mutual companies, the character of property upon which the tax was imposed. In the case of a capital-stock company the tax was imposed “ on the fair average value of its capital stock for the preceding year ending June .30.” This would be .inapplicable to a mutual company having no capital stock, and therefore the tax is imposed on designated surplus and reserves “ as of the close of the preceding accounting period.” In the one case the fair “ average ” value of the stock is to be ascertained and in the other ■case the value of its surplus and certain reserves as stated in the act is to be found. Another difference is noted in that the fa.ir average value of the stock is to be ascertained for the preceding year ending June 30, while in the case of a mutual company the value shall be ascertained “ as of the close ” of a stated period, in this case December 31. These distinctions must be observed because the law-making power has made them in a new statute “ supplanting and changing the former statutes in many respects,” and in which there is a significant change of phraseology. Hecht v. Malley, 265 U. S. 144, 156; Ray Copper Co. case, 268 U. S. 373, 376. In the latter case the commissioner was called upon to find the fair average value of the capital stock, and the court said (p. 377) : “As the method to be pursued in ascertaining the value is not prescribed, we think that it was left to the sound judgment and discretion of the commissioner, subject only to the obligation to take ,into consideration every relevant fact.” In the instant case the tax is upon “ the sum ” of the company’s surplus or contingent reserves maintained for the general use of the business and certain, other- reserves, as of December 31 of a given year. In arriving at his values the commissioner adopted as a basis what is known as convention values. These were obtained from publications by the National Convention of Insurance Commissioners entitled “ List of securities held by insurance companies,” with valuations to be used in the companies’ annual statements as of December 31. The findings show that the values as recited in the publication were to be prepared for 1917 by adding together the market values as of November 1, 1916, and February 1, May 1, August 1, and November 1, 1917, and dividing them by five. The convention values for 1918, it was stated, were to be prepared by adding to the values ascertained for 1917, the actual market values as of November 30, 1918, and dividing this sum by two. And the convention values for 1920 were determined by taking the values set forth in its last publication, adding thereto the market values as of November 1, 1920, and dividing this sum by two. This method, it is conceivable, could ascertain the average value of the securities over a definite period, and if the duty be confined to “ the fair average value ” relating to companies haying capital stock, and the commissioner in his discretion used that method, a different question would be presented from that here involved. For some reason satisfactory to them, the Congress made a distinction between the two and required an ascertainment, in a class of cases, of the sum of a surplus and certain reserves “ as of the close ” of a definite period.

To adopt a means that will not reflect this sum is to ignore the statute itself. In the publication used by the commissioner its authors expressly warned the general public against its use as a guide for investors, and manifestly the action of this National Convention of Insurance Commissioners, composed of insurance supervising officials of the several States, should not be of controlling effect. On the other hand, the insurance company complaining of the valuations adopted as stated has had recourse to prices reported and carried in a publication known as the Commercial and Financial Chronicle, current on or about December 31. According to the findings this publication is an accepted market report of sales and of bid and asked prices on stocks and bonds dealt in on the New York and other stock exchanges and dealt in “ over the counter.” It may be conceded that the commissioner in the exercise of “ sound judgment and discretion ” may have resorted to some other proof of value than this publication, but in the absence of some other applicable proof he may not disregard the only proof offered that was adapted to an ascertainment of the necessary, facts. There was an obligation on him to take into consideration every relevant fact. Ray Copper Co. case, supra.

We are not impressed with the attempted distinction between “ actual ” market values and “ fair ” market values. We think that when the market value of the securities at the stated time is found, that amount reflects value for tax purposes. It has been said that as a rule the fair cash value of shares having a market is best ascertained by finding the price at which they sell in the market. See National Bank of Commerce v. City of New Bedford, 155 Mass. 313, 315; S. C. 175 Mass. 257; Mayor, etc., Newark v. Tunis, 81 N. J. Law 45. “ This is the case, for, eliminating exceptional and extraordinary conditions, giving an abnormal value for the moment to stock, it is apparent that the general market value of stock is its true cash and selling value.” San Francisco National Bank v. Dodge, 197 U. S. 70, 79. We are not dealing with the case of a “ fair average value of its capital stock ” because the plaintiff has no capital stock. Its potentiality to profit by the exercise of its corporate franchise (Ray Copper Co., supra) does not affect the value of the securities held by it in other concerns, however much it would affect its own capital stock, if it had any. Under the evidence adduced the insurance company was entitled to a refund. This conclusion is not affected by the Government’s contention that the commissioner’s values must be “ accepted in their entirety or rejected in their entirety.” To the extent they are not shown to be erroneous they should stand, but to the extent they are shown to be incorrect and erroneous they should'not stand. The failure of the taxpayer to attack some items will not defeat his right to recover for taxes erroneously or illegally assessed and collected.

The plaintiff should have judgment. And it is so ordered.

Moss, Judge; Gkaham, Judge; and Booth, Judge, concur.  