Rev. Rul. 56-259

Advice has been requested relative to the applicability of the documentary stamp tax to insurance policies purchased from foreign insurers by instrumentalities of a State.

For example, insurance policies were purchased from foreign insurance companies for and on behalf of a State by (1) an unincorporated State toll bridge authority insuring bridge property against loss or damage and (2) a school district insuring its schools against vandalism. Since the policies were issued on behalf of the State, the question arises as to whether a State is a `domestic corporation' within the meaning of section 4372(d)(1) of the Internal Revenue Code of 1954. If the transactions are subject to tax, there is the further question of whether the State is immune from the tax.

Section 4371(1) of the Code imposes a tax on each policy of insurance issued by any foreign insurer to or for, or in the name of, an insured as defined in section 4372(d) of the Code. Section 4372(d) provides that, for the purpose of section 4371(1), the term `insured' means `(1) a domestic corporation or partnership, or an individual resident of the United States, against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States, * * *.'

Section 4383 of the Code provides that the documentary stamp tax shall be paid by any of the parties to a taxable transaction, or by any person for whose use or benefit the transaction is made. The United States or any agency or instrumentality thereof shall not be liable for the tax with respect to an instrument to which it is a party, and affixing of stamps thereby shal not be deemed payment for the tax, which may be collected by assessment from any other party liable therefor.

In United States v. Cooper Corporation , 312 U.S. 600, it is stated that the purpose, the subject matter, the context, the legislative history, and the executive interpretation of a statute are aids to construction which may indicate an intent to bring state or nation within the scope of the law. In Cotton v. United States , 11 How. 229, the Supreme Court of the United States stated that `Every sovereign State is of necessity a body politic, or artificial person, and as such capable of making contracts and holding property * * *.' In Helvering v. Stockholms Enskilda Bank , 293 U.S. 84, Ct. D. 887, C.B. XIII-2, 299 (1934), after having cited Blackstone to the effect that a sovereign is a corporation, the Court said: `This may be in the nature of a legal fiction; but legal fictions have an appropriate place in the administration of the law when they are required by the demands of convenience and justice.' In view of the foregoing, a State is considered to be a `domestic corporation' for purposes of section 4372(d) of the Code.

The principle relating to the liability for documentary stamp tax on conveyances of realty sold to or by a State, or a political subdivision or corporate instrumentality thereof, set forth in M.T. 39, C.B. 1950-1, 141, is also applicable to the documentary stamp tax on foreign insurance policies. M.T. 39 holds that conveyance of real property to or by a State, or a political subdivision or corporate instrumentality thereof, are not exempt from the documentary stamp tax merely by reason of the governmental character of one of the parties to the transaction. Likewise, foreign insurance policies are not exempt from the documentary stamp tax merely by reason of the governmental character of one of the parties to the transaction.

It is considered, however, that a State, a political subdivision or an instrumentality thereof, is immune from liability under section 4383 of the Code for the documentary stamp tax imposed by section 4371(1) where, in its truly governmental capacity, it acquires insurance policies from foreign insurers with respect to hazards, risks, losses or liabilities wholy or partly within the United States. When a State, a political subdivision or instrumentality thereof enters into such a transaction, it is presumed that it does so in the course of performing an essential governmental function. In the examples given above, relating to policies insuring state properties against loss or damage, there are no facts which would overcome this presumption.

Accordingly, it is held that the documentary stamp tax imposed by section 4371(1) of the Code applies to each policy of insurance issued by any foreign insurer to to or for, or in the name of, a State, including its political subdivisions and instrumentalities. It is held further that, if such policies are purchased in the exercise of an essential governmental function, the State is not liable for the tax, but the nonexempt party, the insurer or its agent, as one of the other parties to the transaction, is liable for the tax under the dual liability provisions of section 4383 of the Code.