29 T.C. 262">*262 OPINION.

Respondent determined deficiencies in petitioner's income tax for the years and in the amounts as follows:

The deficiencies are due primarily to the respondent's action in reducing the credit available for foreign taxes by disallowing substantial 1957 U.S. Tax Ct. LEXIS 42">*43 amounts in the income taxes accrued by petitioner to the Dominion of Canada during the years involved.

The issue presented for our decision concerns the proper composition of the ratio to be utilized by petitioner during 1948 through 29 T.C. 262">*263 1953, as the credit-limiting fraction provided in section 131 (b) (1) of the Internal Revenue Code of 1939.

The case was submitted upon a stipulation of facts which is hereby adopted as our findings of fact and which may be summarized as follows.

Petitioner is a corporation organized under the laws of the State of Minnesota and is authorized to transact business throughout the United States and in the Dominion of Canada. Petitioner's principal office is located at Owatonna, Minnesota. During the years 1948 through 1953, petitioner was a mutual fire and casualty insurance company subject to tax under section 207 of the 1939 Code; however, it was not an interinsurer or reciprocal underwriter within the meaning of subsection (a) (3) of that section.

Petitioner filed its Federal income tax returns for each of the years in issue with the director of internal revenue for the district of Minnesota at St. Paul, Minnesota. The returns for each year were filed on 1957 U.S. Tax Ct. LEXIS 42">*44 Treasury Department, Internal Revenue Service, Form 1120M. To each return was attached Treasury Department, Internal Revenue Service, Form 1118, entitled "Statement in Support of Credit Claimed by Domestic Corporation for Taxes Paid or Accrued to a Foreign Country or Possession of the United States." During each of the years here in question, petitioner kept its books and prepared its income tax returns on an accrual method of accounting. For the years 1948 and 1949, petitioner computed its income tax liability on the basis of its gross investment income and net premiums pursuant to section 207 (a) (2) of the 1939 Code. During each of the remaining years here involved, petitioner's income tax was computed on the basis of its net investment income as determined under subsections (a) (1) and (b) (4) of section 207 of the Code.

During the years in issue, the petitioner transacted business in the Dominion of Canada. However, it did not transact business in any possession of the United States or in any foreign country other than the Dominion of Canada, and it did not derive any income from such other sources.

During the years 1948 to 1953, inclusive, the petitioner accrued income taxes 1957 U.S. Tax Ct. LEXIS 42">*45 to the Dominion of Canada on the "underwriting profits" resulting from its Canadian business pursuant to the Income War Tax Act, the Income Tax Act, and the Old Age Security Act in effect in Canada during those years. The underwriting profits on which petitioner's Canadian income and old age security taxes were based consisted of the excess of the premiums earned in Canada, on the basis of full unearned premium reserve, over claims and expenses incurred in Canada and dividends paid to policyholders in Canada. Pursuant to the Canadian income tax regulations, no income from interest, dividends, rents, gains from the sale or exchange of capital 29 T.C. 262">*264 assets, or any other investment income was required to be included in its income tax base. No deduction for home office expenses attributable to petitioner's Canadian business was allowed. Petitioner's Canadian income and old age security taxes so accrued were for the years and in the amounts as follows:

The foregoing income and old age security taxes accrued to the Dominion of Canada constituted income taxes accrued to a foreign country within the meaning of sections 131 and 205 of the 1939 Code.

During the years 1948 to 1953, inclusive, the underwriting profits on which the petitioner's income and old age security taxes accrued to the Dominion of Canada were based were as follows:

During the years 1948 to 1953, inclusive, the petitioner's net income from all sources as determined under section 207 (a) (1) of the 1939 Code was as follows:

The combined corporation income tax and surtax rates applicable to mutual insurance companies taxable under section 207 of the 1939 Code were as follows for each of the years involved:

29 T.C. 262">*265 The corporation income tax rates in effect in the Dominion of Canada during the years in issue (except for lower 1957 U.S. Tax Ct. LEXIS 42">*47 rates on the first $ 10,000 of net income during the years 1949 to 1952, inclusive, and on the first $ 20,000 of net income in 1953) were as follows:

Petitioner's gross income realized during the years in issue from dividends, rents, and gains from the sale or exchange of capital assets to the extent provided under section 117 of the 1939 Code, together with its investment expenses, real estate expenses exclusive of taxes, depreciation, taxes, interest paid or accrued, and capital losses, was as follows:

29 T.C. 262">*266 Petitioner's gross interest as determined by respondent within the meaning of section 207 (b) (1) of the Code, the amount of interest excluded from gross income under section 22 (b) (4) of the Code, and its credits as provided in section 26 of the Code for each of the years in issue are as follows:

Petitioner claimed foreign tax credits on its income tax returns for each of the years in question as follows:

Petitioner 1957 U.S. Tax Ct. LEXIS 42">*50 now claims overpayments of income tax for the years 1948 through 1953, in unspecified amounts. The petitioner now asserts that 29 T.C. 262">*267 its allowable foreign tax credits for the years in issue should be as follows:

The respondent has determined that petitioner is entitled to foreign tax credits for Canadian taxes for the years and in the amounts as follows:

On stipulation the respondent has conceded that petitioner is entitled to credits for foreign taxes for the years and in the amounts as follows:

Section 205^{11957 U.S. Tax Ct. LEXIS 42">*51} of the 1939 Code provides that the income taxes imposed by foreign countries shall be allowed as a credit against the income tax of a domestic insurance company taxable under section 201, 204, or 207, to the extent provided in section 131.

Section 131 (b)^{21957 U.S. Tax Ct. LEXIS 42">*52 1957 U.S. Tax Ct. LEXIS 42">*53} of the 1939 Code prescribes two limitations on the amount of foreign taxes allowable as a credit against the United States29 T.C. 262">*268 tax, a per-country limitation and an over-all limitation. Only the per-country limitation contained in subsection (b) (1) is in issue here. Section 131 (b) (1) limits the credit for foreign taxes to an amount not in excess of the proportion of the United States tax which the taxpayer's normal tax net income from sources within a foreign country bears to his entire normal tax net income. Thus, the petitioner's normal tax net income from sources outside the United States becomes the numerator of the credit-limiting fraction and its entire normal tax net income becomes the denominator.

The issue presented for our decision relates solely to the proper amounts to be utilized in the numerator of the limitation fraction.

The petitioner has taken the position that the term "normal-tax net income" as used in section 131 (b) (1) includes its underwriting profits and all other income subject to Canadian tax during the years in issue. Consequently, petitioner maintains that the numerator of the credit-limiting ratio prescribed in section 131 (b) (1) must include all of its net income (as that term is defined by Canadian law) realized from Canadian sources which were subjected to tax by the Dominion of Canada.

The respondent calls to our attention the definition of "net income" contained in section 207 (b) (4) of the Code, and contends that the term "normal-tax net income" in section 131 (b) (1), when applied to mutual insurance companies taxable under section 207, must be restricted to the concept of net income described in section 207 (b) (4).

Under section 207 of the Code, ^{31957 U.S. Tax Ct. LEXIS 42">*55 1957 U.S. Tax Ct. LEXIS 42">*56 1957 U.S. Tax Ct. LEXIS 42">*57} mutual insurance companies are taxable on whichever of the following two bases produces the greater tax: (1) The net income taxable at regular corporate normal and surtax rates, or (2) the sum of the 1957 U.S. Tax Ct. LEXIS 42">*54 gross income from investments and net premiums, less dividends to policyholders and exempt interest, taxable at 1 per cent.

29 T.C. 262">*269 During 4 of the 6 years here in issue, petitioner's United States income tax was paid on the basis of its net income under section 207 (a) (1). For purposes of determining the net income under that section, a definition of the net income of mutual insurance companies, describing it strictly in terms of net investment income, is found in section 207 (b) (4):

29 T.C. 262">*270 SEC. 207. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE OR MARINE.

(b) Definition of Income, Etc. -- In the case of an insurance company subject to the tax imposed by this section --

* * * *

(4) Net Income. -- The term "net income" means the gross investment income less --