United States v. Atlas Life Insurance Company
| Decision Date | 17 May 1965 |
| Docket Number | No. 489,489 |
| Citation | 85 S.Ct. 1379,381 U.S. 233,14 L.Ed.2d 358 |
| Parties | UNITED STATES, Petitioner, v. ATLAS LIFE INSURANCE COMPANY |
| Court | U.S. Supreme Court |
[Syllabus from pages 233-234 intentionally omitted] Archibald Cox, Sol. Gen., for petitioner.
Norris Darrell, New York City, for respondent.
Daniel B. Goldberg, New York City, for Attorney General of Louisiana and others, as amici curiae.
The Life Insurance Company Income Tax Act of 1959,1 which represents a comprehensive overhaul of the laws relating to the taxation of life insurance companies, places a tax upon taxable investment income and upon one-half the amount by which total gain from operations exceeds taxable investment income. 2 In arriving at taxable investment income and gain from operations, the 1959 Act, consistent with prior law in this regard, recognizes that life insurance companies are required by law to maintain policyholder reserves to meet future claims, that they normally add to these reserves a large portion of their investment income and that these annual reserve increments should not be subjected to tax. The question in this case is whether the method by which Congress chose to deal with these annual reserve increments and to arrive at taxable investment income places an impermissible tax on the interest earned by life insurance companies from municipal bonds, within the meaning of the Act itself and the relevant cases in this Court.
The 1959 Act defines life insurance company reserves,3 provides a rather intricate method for establishing the amount which for tax purposes is deemed to be added each year to these reserves4 and in § 804 prescribes a division of the investment income of an insurance company into two parts, the policyholders' share and the company's share.5 More specifically, the total amount to be added to the reserve—the policy and other contract liability requirements—is divided by the total investment yield6 and the resulting percentage is used to allocate each item of investment income, including tax-exempt interest, partly to the policyholders and partly to the company. In this case, approximately 85% of each item of income was assigned to the policyholders and was, as the Act provides, excluded from the company's taxable income. The remainder of each item is considered to be the company's share of investment income. From the total amount allocated to the company the Act allows a deduction of the company's share of tax-exempt interest (and of other nontaxed items) to arrive at taxable investment income. 7 The taxable investment income for the pur- poses of arriving at the portion of gain from operations which is to be subjected to tax is arrived at by much the same process as above described.
Section 804(a)(6), however, provides as follows:
'adjustment shall be made to the extent necessary to prevent such imposition.'
An identical exception is contained in § 809(b)(4) providing for the calculation of gain from operation. Section 103 of the Code provides for the exclusion from gross income of the interest earned on state and municipal bonds.
According to the Commissioner, the company's income from investments includes only its pro rata share of tax-exempt interest and since this share is fully deductible by the company, the law imposes no tax at all on exempt interest. Atlas, however, claims otherwise: The company is entitled to deduct from total investment income both the full amount of the annual addition to reserves and the full amount of exempt interest received; by assigning part of exempt interest to the reserve account rather than assigning only taxable income, the Act necessarily places more taxable income in the company's share of investment return; the company thus pays more tax because it has received tax-exempt interest of which a portion must be allocated to the reserve account.
Claiming that it was entitled to the adjustments provided for in §§ 804(a)(6) and 809(b)(4), the company sued for a refund in the District Court. The complaint also alleged the treatment accorded tax-exempt interest was contrary to the Constitution of the United States and to the principles set forth in National Life Ins. Co. v. United States, 277 U.S. 508, 48 S.Ct. 591, 72 L.Ed. 968, and State of Missouri ex rel. Missouri Ins. Co. v. Gehner, 281 U.S. 313, 50 S.Ct. 326, 74 L.Ed. 870. The District Court rejected these claims, 216 F.Supp. 457 (D.C.N.D.Okl.), but the Court of Appeals reversed, 333 F.2d 389 (C.A.10th Cir.). That court considered the 1959 formula to impose a tax on tax-exempt interest within the meaning of the National Life and Gehner cases and hence by the terms of §§ 804(a)(6) and 809(b)(4) an adjustment was required. We granted certiorari to consider this important question relating to the taxation of life insurance companies. 379 U.S. 927, 85 S.Ct. 326, 13 L.Ed.2d 340.
We reverse, holding that in the circumstances of this case there is no statutory or constitutional barrier to the application of the formula provided in § 804 to arrive at the taxable investment income of Atlas and hence the exceptions provided in §§ 804(a)(6) and 809(b)(4) are not applicable.
Under the 1959 Act the undivided part of a life insurance company's assets represented by its reserves is considered as a fund held for the benefit of the policyholders. The required annual addition to reserve is drawn from the income earned from investments of the commingled assets. Each item of investment income, including tax-exempt interest, is divided into a policyholders' share and a company's share. The policyholders' share is added to the reserve, is excluded for tax purposes from the gross income of the company and is not taxed to either company's share of investment income company's share jof investment income is then reduced by its share of tax-exempt interest to arrive at taxable investment income. It is apparent from the face of the Act that this is the formula which Congress intended to be of general appli- cation and that Congress did not consider the application of the formula in the usual case to lay a tax on exempt interest, or to have any such effect, so as to bring the exception clauses into operation. Otherwise the exception would become the rule and the general formula of little, if any, utility.
This view of the section is fully supported by its legislative history. As H.R. 4245 came to the Senate after passage by the House, it provided for deducting the annual addition to reserves, but to prevent a 'double deduction' reduced the deduction by a portion of tax-exempt interest.8 This treatment of tax-exempt interest was one of many subjects of comment in the extensive hearings which followed before the Senate Committee on Finance. It was repeatedly and strongly argued by many that life insurance companies were entitled to deduct in full both the annual addition to reserves and the entire amount of tax-exempt interest, that the provisions of H.R. 4245 with regard to tax-exempt interest discriminated against the insurance companies, that the section was constitutionally invalid under the National Life and Gehner cases and that the formula would have adverse consequences on the municipal bond market.9 Other witnesses, however, including those representing the Treasury Department, supported the bill and considered it to accord proper and constitutionally permissible treatment to municipal bond interest.10 It is very doubtful that there remained at the conclusion of the hearings any unexplored facts or legal arguments concerning this aspect of the bill.
The Senate Committee, with the hearings behind it, reported out a bill with amendments which, among other things, took a decidedly different approach to the ascertainment of the annual addition to reserves and to the handling of tax-exempt interest. This approach was essentially that which is contained in the statute as described above.11
As time and again stated in the Committee Report and by those who presented the bill on the floor of the Senate, the purpose of the formula provided by the Senate was to avoid taxing exempt interest.12 Senator Byrd, the Committee chairman, stated that '(i)n providing the formula I have described to the Senate it was the intention of the committee not to impose any tax or tax-exempt interest.' 105 Cong.Rec. 8401. It is extremely difficult to read the hearings, the reports, and the debates without concluding that in the opinion of Congress the formula it provided, without adjustment under § 804(a)(6) or § 809(b)(4), did not impose a tax on exempt interest in either the statutory or constitutional sense.
None of the materials called to our attention, however, explain why or for what purpose §§ 804(a)(6) and 809(b)(4) were added to the Act, save for mere recitations in the reports and the debates that an adjustment would be required in any case where tax-exempt interest was shown to be subjected to tax.13 It may be that Congress thought that peculiar facts and circumstances in particular cases would require different treatment than the general formula would provide. If this was the case, no examples or illustrations of these aberrational situations were referred to or explained. And if this was to be the sole function of §§ 804(a)(6) and 809(b)(4) the Commissioner is surely entitled to a judgment, for there is nothing in this record indicating that this case is anything but the typical one to which Congress intended to apply the general formula.
Atlas, however, in effect views §§ 804(a)(6) and 809(b)(4) as built-in safety valves to be triggered and become fully operational by a final determination in a lawsuit, such as this...
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