LIBERTY MUTUAL INSURANCE COMPANY vs. COMMISSIONER OF REVENUE. (and nine companion cases [Note 1]).

ABRAMS, J. Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company (companies) appeal from a decision of the Appellate Tax Board (board). The board upheld the decision of the Commissioner of Revenue (Commissioner), who denied the companies' applications for abatement on the excise tax imposed on domestic insurance companies by G. L. c. 63, Section 22A (1986 ed.). [Note 2] The companies argue that the excise tax imposed by G. L. c. 63, Section 22A, violates various provisions of the Federal and State Constitutions. We transferred the cases to this court on our own motion. We affirm the board's decision.

The companies are domestic insurance companies within the meaning of Section 22A. Both companies filed excise tax returns for the taxable years ending in 1975. [Note 3] As Section 22A requires, the companies included in their total gross investment incomes the interest from Federal bonds, treasury notes, and other Federal

Page 354

obligations, as well as interest on bonds exempt from taxation under Massachusetts law. The companies paid taxes which reflected the interest on the Federal and State obligations. The companies then applied to the Commissioner for abatement of the entire excise tax for the years 1971-1977. The Commissioner refused to abate the excise tax, and the board upheld the Commissioner's decision. [Note 4]

1. Supremacy clause. The companies argue that Section 22A violates the supremacy clause of the United States Constitution because it conflicts with a Federal statute, 31 U.S.C. Section 3124(a). [Note 5] This statute exempts all Federal bonds and other Federal obligations from all taxation except for a "nondiscriminatory franchise tax or other nonproperty taxes." Id. [Note 6] The companies argue that the State excise tax of G. L. c. 63, Section 22A, does not fall within the exception in the Federal statute and therefore Section 22A impermissibly conficts with the Federal exemption for Federal bonds and obligations. The Commissioner argues that the Massachusetts excise tax of Section 22A is a "nondiscriminatory franchise or other nonproperty tax" which is expressly permitted by the terms of the Federal statute. We agree with the Commissioner.

We have already considered this issue. The precedent set by Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., 384 Mass. 607, 608, 619 (1981), compels the conclusion that "[t]he tax imposed by Section 22A is a `nondiscriminatory franchise

Page 355

or other nonproperty tax' permitted by [Section 3124(a)] . . . and therefore, the Commissioner is correct in [his] assertion that the interest earned on Federal obligations may properly be included in an excise tax." Id. at 616-617. The companies urge us to abandon our holding in Massachusetts Mut. Life Ins. Co., supra. We decline to do so.

"The label by which a tax is known should not control the constitutional principles by which it is judged." Aronson v. Commonwealth, 401 Mass. 244, 248 (1987), quoting George S. Carrington Co. v. State Tax Comm'n, 375 Mass. 549, 552 n.3 (1978). See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 288 (1977). In Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., we carefully looked behind the labels of the State statute to determine whether the excise tax of Section 22A was a nondiscriminatory franchise or other nonproperty tax which is permitted under Federal law, or whether it was a property tax forbidden by Federal law. In our analysis, we noted that "[t]he tax measure [of Section 22A] includes items that are not `income' to the companies in the traditional sense, such as imputed home office rent, amortization of Federal investment tax credits, and earnings on assets held in connection with employee and agents' pension plans; and excludes items which are income in the traditional sense, such as capital gains. The fact that the measure of the tax mentions `gross investment income' as reported in the annual statement does not divest the tax of its excise character. . . . Section 22A does not impose a limited income tax. Rather, it sets out a workable measure, a yardstick to calculate the value of the privilege of doing business in Massachusetts." Id. at 612. The United States Supreme Court has recognized that in State tax situations " `rough approximation rather than precision' is sufficient." International Harvester Co. v. Evatt, 329 U.S. 416, 422 (1947), quoting Illinois Cent. Ry. v. Minnesota, 309 U.S. 157, 161 (1939). In enacting Section 22A, "the Legislature meant to use the figure of total gross investment income as reported in the annual statement for insurance regulatory purposes as a benchmark by which to calculate the amount of excise payable for the privilege of doing business in the Commonwealth."

Page 356

Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., supra at 613-614.

The companies rely on Northwestern Mut. Life Ins. Co. v. Wisconsin, 275 U.S. 136 (1927), for the proposition that corporate excise taxes which include interest earned on Federal obligations necessarily must be struck down. The United States Supreme Court "has consistently upheld franchise taxes measured by a yardstick which includes tax-exempt income or property, even though a part of the economic impact of the tax may be said to bear indirectly upon such income or property." Werner Mach. Co. v. Director of Div. of Taxation, 350 U.S. 492, 535 (1956). In 1981, we also noted that, "[s]ince the 1930's . . . the Supreme Court has upheld corporate excise taxes which include income immune from direct taxation. In a series of cases, the Supreme Court ruled: `[T]he corporate excises may be measured by income immune from a direct tax thereon.'" Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., supra at 615, quoting Powell, The Waning of Intergovernmental Tax Immunities, 58 Harv. L. Rev. 633, 633 (1945). We therefore continue to adhere to our conclusion that Section 22A is a franchise or other nonproperty tax. [Note 7]

Page 357

The companies argue, however, that, even if Section 22A is a franchise tax, it is a discriminatory franchise tax and thus not permitted by the Federal statute. The companies assert that Section 22A discriminates between Federal and State obligations because Massachusetts law forbids any tax on the interest of State obligations, and thus only Federal obligations are taxed pursuant to Section 22A. The short answer to this peculiar argument is that, contrary to the companies' assertion, Section 22A requires taxpayers to include in their excise tax base the interest on State obligations as well. Concededly, the enabling acts of certain State authorities exempt State bonds issued by those authorities from taxation on income or property. [Note 8] However, these State obligations are not exempt from forming part of the base on which an excise tax is levied on the privilege of doing business in Massachusetts. See, e.g., Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., supra at 617-618 (tax exempt status of income derived from projects pursuant to c. 121A, did not prevent inclusion in the tax base for excise tax purposes).

This conclusion disposes of the companies' argument that the Commissioner's attempt to tax Massachusetts authority bonds impairs a "covenant" made by the Legislature that the bonds remain free from taxation. According to the companies, this impairment violates the contracts clause of the United States Constitution. Art. 1, Section 10, of the Constitution of the United States. However, we have concluded above that the fact that the tax base for the excise of Section 22A includes the interest earned on State bonds does not mean that the Legislature has imposed a property tax on these bonds. Therefore, no covenant has been broken.

Because Section 22A constitutes a "nondiscriminatory franchise tax or another nonproperty tax" within the meaning of 31 U.S.C.

Page 358

Section 3124(a), the imposition of this excise tax does not conflict with Federal law.

2. Delegation of taxing power. The companies argue that Section 22A grants the Commissioner "the absolute power to determine the excise tax unchecked by any clear statement of policy, and without any judicial or administrative supervision whatsoever." The companies therefore assert that Section 22A embodies a delegation by the Legislature of its taxing power in violation of the Massachusetts Constitution. We do not agree. This argument also is precluded by Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., supra. There we held that under Section 22A, "[t]he Commissioner of Insurance does not include or exclude items in the annual statement for the purpose of affecting the amount of the excise tax, but rather for the purpose of regulating the companies. His power to affect the amount of tax payable under the formula established by the Legislature is purely incidental to those regulatory powers. The taxing power remains with the Legislature as provided in the State Constitution. Part II, c. 1, Section 1, art. 4, of the Masschusetts Constitution." Id. at 610.

3. Equal protection and reasonableness. The companies assert that Section 22A discriminates against domestic insurance companies by taxing them more heavily than foreign companies and other types of domestic businesses. The companies argue that Section 22A, therefore, violates their rights to equal protection of the laws under the Fourteenth Amendment to the United States Constitution and their right to be free from unreasonable taxation under Part II, c. 1, Section 1, art. 4, of the Massachusetts Constitution. We do not agree.

"Any distinction in a tax statute that has a rational basis will survive a challenge under the equal protection clause." Smith v. Commissioner of Revenue, 383 Mass. 139, 141 (1981). See Seiler Corp. v. Commissioner of Revenue, 384 Mass. 635, 639 (1981). Assuming without deciding that the taxpayers bear a heavier burden than foreign insurance companies doing business in Massachusetts, it is not unreasonable to tax domestic insurance companies differently. The Legislature could rationally decide that the benefits the State accords to domestic insurance

Page 359

companies justify treating them differently from foreign insurance companies. See Mary C. Wheeler School, Inc. v. Assessors of Seekonk, 368 Mass. 344, 346-350 (1975). The Legislature could also rationally conclude that the nature of the insurance business warrants treating insurance companies differently from other types of companies. See Massachusetts Auto. Rating & Accident Prevention Bureau v. Commissioner of Ins., 381 Mass. 592, 604-605 (1980).

Similarly, the companies' argument that Section 22A is an unreasonable tax in violation of Part II, c. 1, Section 1, art. 4, of the Massachusetts Constitution is without merit. "[T]he Legislature's choice of gross investment income as reported for regulatory purposes as a rough approximation of the value of the privilege of doing business in the Commonwealth is reasonable." Commissioner of Revenue v. Massachusetts Mut. Life Ins. Co., supra at 613.

The decision of the board is affirmed.

So ordered.