National Life Ins Co v. United States, 228

• Decision Date: 04 June 1928
• Docket Number: No. 228,228
• Citation: 48 S.Ct. 591,72 L.Ed. 968,277 U.S. 508
• Parties: NATIONAL LIFE INS. CO. v. UNITED STATES
• Court: U.S. Supreme Court

277 U.S. 508

48 S.Ct. 591

72 L.Ed. 968

NATIONAL LIFE INS. CO.

v UNITED STATES.

No. 228.

Argued April 12, 1928.

Decided June 4, 1928.

Messrs. William Marshall Bullitt, of Louisville, Ky., J.

Harry Covington, of Washington, D. C., Moorfield Storey, of Boston, Mass., and George B. Young, of Montpelier, Vt., for petitioner.

[Argument of Counsel from pages 509-513 intentionally omitted] The Attorney General and Mr. Alfred A. Wheat, of Washington, D. C., for respondent.

[Argument of Counsel from pages 514-516 intentionally omitted] Mr. Justice McREYNOLDS delivered the opinion of the Court.

In 1921, departing from previous plans Congress laid a tax on life insurance companies based upon the sum of all interest and dividends and rents received, less certain specified deductions: (1) Interest derived from tax-exempt securities, if any; (2) a sum equal to 4 per centum of the company's legal reserve diminished by the amount of the interest described in paragraph (1); (3) other miscellaneous items-seven-not presently important.

Petitioner maintains that, acting under this plan, the collector illegally required it to pay taxes, for the year 1921, on federal, state, and municipal bonds; and it seeks to recover the amount so exacted. The Court of Claims gave judgment for the United States (63 Ct. Cl. 256).

The Revenue Act of 1921, approved November 23, 1921, chapter 136, tit. 2, Income Tax (42 Stat. 237, 238, 252, 261) provides:

'Sec. 213. That for the purposes of this title (except as otherwise provided in sec. 233) (the exceptions not here important) the term 'gross income'—

'(a) Includes gains, profits, and income * * *

'(b) Does not include the following items, which shall be exempt from taxation under this title:

(1), (2), and (3) (not here important).

'(4) Interest upon (a) the obligations of a state, territory, or any political subdivision thereof, or the District of Columbia; or (b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or (c) the obligations of the United States or its possessions. * * *' Comp. St. § 6336 1/8 ff.

'Sec. 230. That, in lieu of the tax imposed by section 230 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax at the following rates:

'(a) For the calendar year 1921, 10 per centum of the amount of the net income in excess of the credits provided in section 236; and

'(b) For each calendar year thereafter, 12 1/2 per centum of such excess amount.' Comp. St. § 6336 1/8 nn.

'Sec. 243. That in lieu of the taxes imposed by sections 230 (general corporation tax) and 1,000 (special taxes on capital stock) and by title III (was profits and excess profits taxes) there shall be levied, collected, and paid for the calendar year 1921 and for each taxable year thereafter upon the net income of every life insurance company a tax as follows:

'(1) In the case of a domestic life insurance company, the same percentage of its net income as is imposed upon other corporations by section 230 (ten per cent. for 1921, twelve and one-half thereafter);

'(2) In the case of a foreign life insurance company, the same percentage of its net income from sources within the United States as is imposed upon the net income of other corporations by section 230.' Comp. St. § 6336 1/8 t(2).

'Sec. 244. (a) That in the case of a life insurance company the term 'gross income' means the gross amount of income received during the taxable year from interest, dividends, and rents.

'(b) The term 'reserve funds required by law' includes * * *' Comp. St. § 6336 1/8 t(3).

'Sec. 244. (a) That in the case of a life insurance company the term 'net income' means the gross income less—

'(1) The amount of interest received during the taxable year which under paragraph (4) of subdivision (b) of section 213 is exempt from taxation under this title (interest on tax-exempt securities);

'(2) An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subdivision, of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, plus (certain other sums not here important). * * *' Comp. St. § 6336 1/8 t(4).

(3)(4)(5)(6)(7)(8) and (9) grant other exemptions not now important.

The mean of petitioner's reserve funds for 1921 was $67,381,877.92. Four per centum of this is $2,695,279.12.

During 1921 interest derived from all sources amounted to $3,811,132.78; from dividends, nothing; from rents, $13,460-total, $3,824,592.78. $1,125,788.26 of this interest came from tax-exempt securities-$873,075.66 from state and municipal obligations, and $252,712.60 from those of the United States.

The collector treated interest plus dividends plus rents, $3,824,592.78, as gross income, and allowed deductions amounting to $2,899,690.79, made up of the following items: $1,125,788.26, interest from tax-exempt securities; $1,569,490.86, the difference between 4 per cent. of the reserve fund ($2,695,279.12) and ($1,125,788.26) interest received from exempt securities; miscellaneous items, not contested and neglible here, $204,411.67. After deducting these from total receipts ($3,824,592.78-$2,899,690.79), there remained a balance of $924,901.99. This he regarded as net income, and upon it exacted 10 per centum, $92,490.20.

If all interest received by the company had come from taxable securities, then, following the statute, there would have been deducted from the gross of $3,824,592.78-4 per cent. of the reserve, $2,695,279.12, plus the miscellaneous items $204,411.67-$2,899,690.79, and upon the balance of $924,901.99 the tax would have been $92,490.20. Thus it becomes apparent that petitioner was accorded no advantage by reason of ownership of tax-exempt securities.

Petitioner maintains that the result of the collector's action was unlawfully to discriminate against it and really to exact payment on account of its exempt securities, contrary to the Constitution and laws of the United States. Also that diminution of the ordinary deduction of 4 per cent. of the reserves because of interest received from tax-exempt securities, in effect, defeated the exemption guaranteed to their owners.

The portion of petitioner's income from the three specified sources which Congress had power to tax-its taxable income-was the sum of these items less the interest derived from tax-exempt securities. Because of the receipt of interest from such securities, and to its full extent, pursuing the plan of the statute the collector diminished the 4 per cent. deduction allowable to those holding no such securities. Thus, he required petitioner to pay more upon its taxable income than could have been demanded had this been derived solely from taxable securities. If permitted, this would destroy the guaranteed exemption. One may not be subjected to greater burdens upon his taxable property solely because he owns some that is free. No device or form of words can deprive him of the exemption for which he has lawfully contracted.

The suggestion that, as Congress may or may not grant deductions from gross income at pleasure, it can deny to one and give to another, is specious, but unsound. The burden from which federal and state obligations are free is the one laid upon other property. To determine what this burden is requires consideration of the mode of assessment, including, of course, deductions from gross values. What remains after subtracting all allowances is the thing really taxed.

U. S. v. Ritchie (1872) Fed. Cas. No. 16168-Ritchie was the state's attorney for Frederick county, Md. The federal statute allowed an exemption of $1,000. The collector claimed that, if Ritchie's salary was held free from taxation, $1,000 of it should be applied to the exemption clause. Giles, J., held:

'The United States could not apply the compensation of a state officer to the satisfaction of the exemption alone, because that would, indirectly, make his income from such source liable to the taxation from which it is exempt; that to exhaust the exemption clause by taking the amount out of his official income, would be to make it, in effect, subject to the revenue law, and to deny to a state's officer the advantage of the state's exemption, and that therefore the official income of defendant was not to be taken into consideration in the assessment of the tax.'

People, etc., v. Commissioners, etc. (1870) 41 How. Prac. (N. Y.) 459, held: That, in determining the amount of personal property of an individual, by assessors or commissioners of taxes, for the purpose of taxation, stocks and bonds of the United States are to form no part of the estimate. They cannot be excluded or deducted from the amount of his assets, liable to taxation, for it is error to include them in such assets.

Packard Motor Car Co. v. City of Detroit (1925) 232 Mich. 245, 205 N. W. 106

held: That tax-exempt credits may not be taxed, directly or indirectly, and in levying a tax on property they must be treated as nonexistent. The provision of Act No. 297, Pub. Acts 1921, providing that, if the person to be taxed 'shall be the owner of credits that are exempt from taxation such proportion only of his indebtedness shall be deducted from debts due or to become due as is represented by the radio between taxable credits and total credits owned, whether taxable or not,' is void as an interference with the power of the United States government to raise money by issuance of tax-exempt obligations, and is in conflict with the Constitution of the United States.

See, also, City of Waco v. Amicable Life Ins. Co. (Tex. Com. App. 1923) 248 S. W. 332.

Miller et al., Executors, v. Milwaukee, 272 U. S. 713, 47 S. Ct. 280, 71 L. Ed. 487, held: That, where income from bonds of the United States which by act of Congress is exempt from state taxation is reached purposely, in the case of corporation owned bonds, by exempting...