1. COURTS 379-SUPREME COURT HAS NOT Bill by a citizen of New Jersey to restrain 303(1) SUIT BY CITIZEN AGAINST HIS STATE NOT WITHIN JUDICIAL POWER GRANTED BY CONSTITUTION TO UNITED STATES. The whole sum of the judicial power granted by the Constitution to the United States does not embrace authority to entertain a suit brought by a citizen against his own state, with out its consent. the state of New Jersey. The bill sought an injunction restraining the United States officials named and the state of New Jersey, its officers and agents, from in any manner directly or indirectly enforcing the Eighteenth Amendment to the Constitution of the United States, any law of Congress or statute of the state to the contrary, on the ground that that amendment was void from the beginning and formed no part of the Constitution. Answering a rule to show cause why leave to file the bill should not be granted, if any there was, the defendants, including the state of New Jersey, denied the existence of jurisdiction to entertain the cause and this is the first question for consideration. [1, 2] So far as the controversy concerns the officials of the United States, it is obvious that the bill presents no question within the original jurisdiction of this court, and in effect that is not disputed, since in substance it is conceded that the bill would not present a case within our original jurisdiction, if it were not for the presence of the state of New Jersey as a defendant. But it has been long since settled that the whole sum of the judicial power granted by the Constitution to the United States does not embrace the authority to entertain a suit brought by a citizen against his own state without its consent. Hans v. Louisiana, 134 U. S. 1, 10 Sup. Ct. 504, 33 L. Ed. 842; North Carolina v. Temple, 134 U. S. 22, 10 Sup. Ct. 509, 33 L. Ed. 849; California v. Southern Pacific Co., 157 U. S. 229, 15 Sup. Ct. 591, 39 L. Ed. 683; Fitts v. McGhee, 172 U. S. 516, 524, 19 Sup. Ct. 269, 43 L. Ed. 535. [3] It is urged, however, that although this may be the general rule, it is not true as to the original jurisdiction of this court, since the second clause of section 2, article 3, of the Constitution, confers original jurisdiction upon this court "in all cases affecting ambassadors, other public ministers and consuls, and those in which a state shall be party. " In other words, the argument is that the effect of the clause referred to is to divest every state of an essential attribute * *314 Mr. Everett V. Abbot, of New York City, of its sovereignty by subjecting it without its for complainant. consent to be sued in every case if only the Mr. Thomas F. McCran, of Paterson, N. J., suit is originally brought in this court. Here for defendant State of New Jersey. again the error arises from treating the lan Mr. Solicitor General Alexander C. King, of guage of the clause as creative of jurisdiction Atlanta, Ga., for other defendants. 312 *Memorandum opinion by Mr. Chief Justice WHITE, by direction of the Court. The complainant, a citizen of New Jersey, asked leave to file an original bill against the *313 Attorney General of the United States, the Commissioner of Internal Revenue thereof and the United States District Attorney for the District of New Jersey, as well as against instead of confining it to its merely distributive significance according to the rule long since announced as follows: "This second clause distributes the jurisdiction conferred in the previous one into original and appellate jurisdiction, but does not profess to confer any. The original jurisdiction depends solely on the character of the parties, and is confined to the cases in which are those enumerated parties and those only." Louisiana v. Texas, 176 U. S. 1, 16, 20 Sup. Ct. 251, 256 (44 L. Ed. 347). For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes (40 Sup.Ct.) 4. INTERNAL REVENUE On 7, 9 RESERVE That is to say, the fallacy of the conten- claimed by the government to be the proper tion consists in overlooking the fact that the basis, and on which tax was paid. distribution which the clause makes relates solely to the grounds of federal jurisdiction previously conferred and hence solely deals with cases in which the original jurisdiction of this court may be resorted to in the exerExcise and Income Tax Acts, providing cise of the judicial power as previously given. that, in determining net income of insurance In fact, in view of the rule now so well set- companies to be taxed, any addition "required tled as to be elementary, that the federal ju- by law" to be made within the year to reserve risdiction does not embrace the power to en- funds may be deducted from gross income, aptertain a suit brought against a state with-plies to reserves required by rules and regulaout its consent, the contention now insisted upon comes to the proposition that the clause relied upon provides for the exercise by this court of original jurisdiction in a case where no federal judicial power is conferred. As the want of jurisdiction to entertain the bill clearly results, it follows that the permission to file must be and it is denied, and our order is: Rule discharged. (251 U. S. 342) tions of state insurance departments, when promulgated in the exercise of an appropriate power conferred by statute. and Phrases, Second Series, Required by Law.] [Ed. Note.-For other definitions, see Words 5. INTERNAL REVENUE 7, 9-NATURE OF "RESERVE" OF INSURANCE COMPANIES WITHIN TAX ACTS STATED. The term "reserve" or "reserves" in insurance law, relative to provisions of Excise and Income Tax Acts, allowing additions to “reserve funds," required by law, of insurance companies, to be deducted from income to be taxed, is technical, and in general means money which with accretions from interest, is set aside with which to mature or liquidate future unaccrued MARYLAND CASUALTY CO. v. UNITED and contingent claims, and claims accrued, but STATES. indefinite as to amount or time of payment, and includes "unearned premium reserve" to meet (Argued Nov. 13, 1919. Decided Jan. 12, 1920.) future liabilities on policies, "liability reserve" No. 73. 1. INTERNAL REVENUE 7, 9-EXCISE AND INCOME TAX PROPER ON INCOME RECEIVED BY DOMESTIC CORPORATIONS. Under Income Tax Act 1913, § 2, par. G, subd. (a), in view of subdivision (b), as well as under Excise Tax Act 1909, § 38, tax is on income received during the year, as regards domestic corporations. 2. INTERNAL REVENUE 7, 9-PREMIUMS RECEIVED BY INSURER'S AGENTS "RECEIVED" BY IT WITHIN TAX LAWS. Where insurer allows its agents to give 30 days for payment of premiums, and requires them on the 5th of each month to remit balance due it as shown by last preceding monthly statement rendered to it, premiums received by them, but not yet remitted to it, are "received" by it within Excise and Income Tax Acts, but not so as to premiums not yet paid to agents. [Ed. Note. For other definitions, see Words and Phrases, Received.] to satisfy claims indefinite in amount and as to time of payment, but accrued on liability and workmen's compensation policies, and "reserve for loss claims" accrued on policies other than those provided for in the liability reserve, but does not apply to funds to meet ordinary running expenses of the business, definite in amount and which must be currently paid by every company from its income, if its business is to continue, such as taxes, salaries, reinsurance, and unpaid brokerage. [Ed. Note. For other definitions, see Words and Phrases, First and Second Series, Reserve.] 6. INTERNAL REVENUE 7, 9-"RESERVE" IN ments of various states to be maintained by in- 3. INTERNAL REVENUE 38-PETITION FOR paid within the year. REFUND PROPERLY DISMISSED THE AMOUNT Petition of insurance company for refund of excise and income tax is properly dismissed, the amount of premiums received by it or its agents, the proper basis for the tax, not being shown, though the company is allowed time therefor, but only the amount remitted to it by agents, claimed by it to be the proper basis, and the amount of premiums written by it, 7. INTERNAL REVENUE 7, 9-DIMINUTION Diminution in reserves of insurance company over that of preceding year is not taxable as income, in the absence of findings that it is thereby restored to the free beneficial use of the company in a real, rather than a mere bookkeeping, sense. For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes 8. INTERNAL REVENUE 38-CLAIMS AGAINST UNITED STATES FOR REFUND OF TAXES BARRED BY FAILURE TO APPEAL TO COMMISSION ER OR TO SEASONABLY SUE. Claims against the government for refund of parts of excise and income taxes paid held barred, under Rev. St. § 3226 (Comp. St., § 5949), by failure to appeal to the Commissioner of Internal Revenue, and, under section 3227 (Comp. St. 5950), by failure to sue in two years after accrual of cause of action, and not extended by amended returns filed by Commissioner of Internal Revenue to increase the payment. Appeal from the Court of Claims. Suit by the Maryland Casualty Company against the United States. From an adverse judgment (52 Ct. Cl. 201), claimant appeals. Modified and affirmed, and remanded. See, also, 52 Ct. Cl. 288; 53 Ct. Cl. 81. (3) Should the decrease in the amount of reserve funds required by law for the year 1913 from the amount required for 1912 be treated as "released reserve" and charged to the company as income for 1913? Of these in the order stated. [1, 2] Section 38 of the Excise Tax Act (36 Stat. 112) provides that every corporation, organized under the laws of any state as an insurance company "shall be subject to pay annually a special excise tax with respect to the carrying on or doing business equivalent to one per centum upon the entire net income * received by it from all sources during such year." The Income Tax Act (38 Stat. 172) provides section G, paragraph (a) that the tax shall be levied upon the entire, "net income arising or accruing from all sources during the preceding calendar year." But in paragraph (b), providing for deductions, gross income is described as that "received within the year from all sources." So that, with respect to domestic corporations, it is clear enough that no change was intended by the use of the expression "arising or accruing" Mr. Justice CLARKE delivered the opinion in the Income Tax Act, and that the tax of the Court. Under warrant of the Act of Congress approved August 5, 1909 (36 Stat. c. 6, pp. 11, 113), the government collected from the claimant, a corporation organized as an insurance company under the laws of Maryland, an excise tax for the years 1909, 1910, 1911, and 1912, and, under warrant of the Act of Congress of October 3, 1913 (38 Stat. c. 16, pp. 114, 166), it likewise collected an excise tax for the first two months of 1913, and an income tax for the remaining months of that year. This suit, instituted in the Court of Claims, to recover portions of such payments claimed to have been unlawfully collected, is here for review upon appeal from the judgment of that court. The claimant was engaged in casualty, liability, fidelity, guaranty and surety insurance, but the larger part of its business was employers' liability, accident, and, in the later of the years under consideration in this case, workmen's compensation insurance. By process of elimination the essential questions of difference between the parties ultimately became three, viz.: (1) Should claimant be charged, as a part of its gross income each year, with premiums collected by agents, but not transmitted by them to its treasurer within the year? (2) May the amount of gross income of the claimant be reduced by the aggregate amount of the taxes, salaries, brokerage and reinsurance unpaid at the end of each year, under the provisions in both the excise and income *345 *tax laws allowing deductions of "net addition, if any, required by law to be made within the year to reserve funds"? should be levied under both acts upon the income "received" during the year. Southern Pacific Co. v. Lowe, 247 U. S. 330, 335, 38 Sup. Ct. 540, 62 L. Ed. 1142. The claimant did business in many states, through many agents, with whom it had uniform written contracts which allowed them to extend the time for payment of the premiums on policies, not to exceed thirty days from the date of policy, and required that on the 5th day of each calendar month they should pay or remit, in cash or its equivalent, the balance due claimant as shown by the last preceding monthly statement rendered to it. ⚫346 *Under the provisions of such contracts obviously the agents were not required to remit premiums on policies written in November until the 5th of January of the next year and on policies written in December not until the following February. Much the largest item of the gross income of the company was premiums collected on policies of various kinds. Omitting reference to earlier and tenative returns by the claimant and amendments by the government, it came about that claimant took the final position that the only premiums with which it could properly be charged as net income "reduring each year" ceived by it * * were such as were collected and actually paid to its treasurer within the year. This involved omitting from gross income each year “premiums in course of collection by agents, not reported on December 31st," which varied in amount from $584,000 in one year to $1,020,000 in another. The amount, if deducted one year, might appear in the return of the For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes (40 Sup.Ct.) claimant for the next year, but the rate such a showing, and thereupon the court might be different. The government, on the other hand, contended that the claimant should return the full amount of premiums on policies written in each year, whether actually collected or not. The Court of Claims refused to accept the construction of either of the parties and held that the claimant should have returned, not all premiums written by it, but all which were actually received by it during the year and that receipt by its agents was receipt by the company, within the meaning of the act of Congress. The claimant contends that premiums paid to its agents but not remitted to its treasurer were not "received by it during the year," chiefly for the reason that while in the possession of the agents the money could not be attached as the company's property (Maxwell v. McGee, 66 Mass. [12 Cush.] 137), and be 347 cause money, while thus in *the possession of agents was not subject to beneficial use by the claimant and therefore cannot, with propriety, be said to have been received by it, within the meaning of the act. On the other hand it is conclusively argued: That payment of the premium to the agent discharged the obligation of the insured and called into effect the obligation of the insurer as fully as payment to the treasurer of the claimant could have done; that in the popular or generally accepted meaning of the words "received by it" (which must be given to them, Maillard v. Lawrence, 16 How. 251, 14 L. Ed. 925), receipt by an agent is regarded as receipt by his principal; that under their contract collected premiums in possession of the agents of the claimant were subject to use by it in an important respect before they were transmitted to the treasurer of the company, for the agency contract provided that "the agent will pay on demand, out of any funds collected by him for account of premium and not remitted to the company, such drafts as may be drawn on him by the company for the purpose of settling claims, deducting the amount from the next succeeding monthly remittance"; and that only imperative language in the statute would justify a construction which would place it in the power of the claimant, by private contract with its agents, to shift payment of taxes from one taxing year into another. *348 treated the return of premiums *written as the correct one and very properly, so far as this item is concerned, dismissed claimant's petition. [4, 5] Second. In the same words the Ex cise and Income Tax Acts provide that "the net addition, if any, required by law to be made within the year to reserve funds" may be deducted from gross, in determining the amount of net, income to be taxed. Finding its authority in this provision of the law the claimant in all of its returns treated as "reserves," for the purpose of determining whether the aggregate amount of them each year was greater or less than in the preceding year, and of thereby arriving at the "net addition to reserve funds" which it was authorized to deduct from gross income, the following, among others, viz.: "Reserve for unearned premiums," "special reserve for unpaid liability losses," and "loss claims reserve." Unearned premium reserve and special reserve for unpaid liability losses are familiar types of insurance reserves, and the government, in its amended returns, allowed these two items, but rejected the third, "loss claim's reserve." The Court of Claims, somewhat obscurely, held that the third item should also be allowed. This "loss claims reserve" was intended to provide for the liquidation of claims for unsettled losses (other than those provided for by the reserve for liability losses) which had accrued at the end of the tax year for which the return was made and the reserve computed. The finding that the insurance department of Pennsylvania, pursuant to statute, has at all times since and including 1909 required claimant to keep on hand, as a condition of doing business in that state, "assets as reserves sufficient to cover outstanding losses," justifies the deduction of this reserve as one required by law to be maintained, and the holding that it should have been allowed for all of the years involved is approved. *349 *But the Court of Claims. approved the action of the government in rejecting other claimed deductions of reserves for "unpaid taxes, salaries, brokerage and reinsurance due other companies." The court gave as its reason for this conclusion that the "net addition, if any, required by law to be made within the year to reserve funds," which the act of Congress permitted to be deducted from gross income, was limited to reserves required by express statutory provision, and did not apply to reserves required by the rules and regulations of state insurance departments, when promulgated in the exercise of an appropriate power conferred by statute. [3] The claimant withheld from its returns collections in the custody of its agents at the end of each year, and because in its amendments the government had included all premiums written in each year whether or not collected, the Court of Claims, having reached the conclusion thus approved by us, allowed the claimant ninety days in which to show In this the Court of Claims fell into error. the amount of premiums received by it and It is settled by many recent decisions of this its agents within each of the years in con- court that a regulation by a department troversy, but the claimant failed to make of government, addressed to and reasonably insurance departments of New York, Pennsylvania and Wisconsin that "assets as reserves" must be maintained to cover "all claims," "all indebtedness," "all outstanding liabilities," in terms might include the rejected items we are considering; but plainly the departments, in these expressions used the word "reserves" in a nontechnical sense as equivalent to "assets," as is illustrated by the Massachusetts requirement that each company shall "hold or reserve assets" for adapted to the enforcement of an act of [6] The requirements relied upon, of the Congress, the administration of which is confided to such department, has the force and effect of law if it be not in conflict with express statutory provision. United States v. Grimaud, 220 U. S. 506, 31 Sup. Ct. 480, 55 L. Ed. 563; United States v. Birdsall, 233 U. S. 223, 231, 34 Sup. Ct. 512, 58 L. Ed. 930; United States v. Smull, 236 U. S. 405, 409, 411, 35 Sup. Ct. 349, 59 L. Ed. 641; United States v. Morehead, 243 U. S. 607, 37 Sup. Ct. 458, 61 L. Ed. 926. The law is not different with respect to the rules and regulations of a department of a state government. But it is contended by the claimant that it was required to provide "reserves" for the payment of the rejected items of liability: Be cause the Court of Claims found that pursuant to statutes the insurance department of Pennsylvania required the company, as a condition of doing business in that state, to keep on hand "assets as reserves" sufficient to cover all claims against the company "whether due or accrued"; because the de partment of New York required it to main tain "reserves sufficient to meet all of its accrued but unpaid indebtedness in each year"; and because the department of Wisconsin required it to carry "sufficient reserves to cover all of its outstanding liabil ities." *350 *Whether this contention of the claimant can be justified or not depends upon the meaning which is to be given to the words "reserve funds" in the two acts of Congress we are considering. The term "reserve" or "reserves" has a special meaning in the law of insurance. While its scope varies under different laws, in general it means a sum of money, variously computed or estimated, which, with accretions from interest, is set aside "reserved"-as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims, and claims accrued, but contingent and indefinite as to amount or time of payment. In this case, as we have seen, the term includes "unearned premium reserve" to meet future liabilities on policies, "liability reserve" to satisfy claims, indefinite in amount and as to time of payment, but accrued on liability and workmen's compensation policies, and "reserve for loss claims" accrued on policies other than those provided for in the "liability reserve," but it has nowhere been held that "reserve," in this technical sense, must be maintained to provide for the ordinary running expenses of a business, definite in amount and which must be currently paid by every company from its income if its business is to continue, such as taxes, salaries, reinsurance, and unpaid brokerage. *351 the payment of all claims and obligations. The distinction between the "reserves" and general assets of a company is obvious and familiar and runs through the statements of claimant and every other insurance comordinary expenses such as we are considerpany. That provision for the payment of ing was not intended to be provided for and included in "reserve funds" as the term is used in the acts of Congress is plain from for such charges from income if paid within the fact that the acts permit deductions in this case to deduct large sums for such the year, and the claimant was permitted ly, large sums for taxes. The claimant did ordinary expenses of the business-specificalnot regard any such charges as properly covered by "reserves" and did not so include them in its statement for 1909. In its 1910 return "unpaid taxes" and "salaries" first appear as "reserves," and in 1911 "brokerage" and "reinsurance" are added. This earlier, though it is now claimed to have tation of the language of the acts, was been an uninstructed or inexpert, interprenevertheless the candid and correct interCourt of Claims in this respect is approved. pretation of it, and the judgment of the [7] Third. The year 1913 was the only one of those under consideration in which the aggregate amount of reserves which the below the amount so required for the preclaimant was required by law to keep fell ceding year. The government allowed only loss" reserves to be considered in determin"unearned premium" and "unpaid liability ing deductions. In 1913 the "unpaid liability loss reserve" decrease exceeded the "unearned premium reserve" increase by over ment added to the gross income of the this amount the govern$270,000, and claimant for the year, calling it "releas ference in the amount of the reserves for ed reserve," on the theory that the difthe two years released the decrease to the claimant so that it could use it for its general purposes, and therefore constituted free income for the year 1913, in which the decrease occurred. *352 *This theory of the government was ac cepted by the Court of Claims and the addition to the gross income was approved. The statute does not in terms dispose of the question thus presented. |