Court Opinion

ID: 9444492
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:02:27.484778+00
Date Added: 2024-06-11T17:29:53.426102
License: Public Domain

RIVES, Circuit Judge
(dissenting).
With much deference to the clear, concise, and forceful opinion of the majority, and to the able opinion of the district court reported in 119 F.Supp. 57, et seq., I am constrained to dissent.
As an academic exercise in semantics, it seems to me that either the affirmative or the negative can be proved that is, that the word “rents” includes royalties, or that it does not include royalties. It has often been used in both senses as is demonstrated by a reference to the many cases collected under the subheading “royalty” to the word “rent” in 36 Words and Phrases, pp. 912-914, and the pocket supplement thereto. See also Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25, 29, 66 S.Ct. 861, 90 L.Ed. 1062; Kirby Petroleum Company v. Commissioner, 326 U.S. 599, 607, 66 S.Ct. 409, 90 L.Ed. 343; Burnet v. Harmel, 287 U.S. 103, 106, 53 S.Ct. 74, 77 L.Ed. 199; Von Baumbach v. Sargent Land Co., 242 U.S. 503, 521-522, 37 S.Ct. 201, 61 L.Ed. 460. Which is the more common and usual meaning of the word is probably a debatable question.
To arrive at any conclusion, we must get down to cases. The question is whether the word “rents” as used in defining the gross income of life insurance companies for purposes of taxation1 includes royalties. To my mind, that question leads immediately to the purpose of the Congress in singling out life insurance companies for special and preferred tax treatment and confining the tax on such companies to income received or accrued from “interest, dividends and rents”. The Supreme Court has said that, “The new plan, as it related to life insurance companies, had as a major objective the elimination of premium receipts from the field of taxable income.” Helvering v. Oregon Mutual Life Insurance Co., 311 U.S. 267, 269, 61 S.Ct. 207, 208, 85 L.Ed. 180. Underlying the special systems applicable to insurance companies alone was the dual nature of the business of insurance.
“ * * * Every insurance business consists of two major activities : underwriting and investments. Speaking of the ‘investment business’ of a life insurance company, the Supreme Court has said:28
“ ‘That phrase may be taken to include activities relating to interest, dividends, and rents constituting the income taxed as distinguished from its “underwriting business” which embraces its other activities.’
“As a general rule no one would buy insurance from a company that does not have a substantial net worth in assets over and above its current premium income. Obviously these assets must be invested and must produce an investment income. Except for small mutual associations on a co-operative assessment basis, the business of insurance is therefore necessarily a combination of the business of underwriting and the business of investment. * * *
“28 Rockford Life Insurance Co. v. Commissioner, 1934, 292 U.S. 382, 54 S.Ct. 761, 78 L.Ed. 1315.”
Mertens Law of Federal Income Taxation, Vol. 8, Sec. 44.04, pp. 10 and 11.
The legislative history cited in the briefs of counsel indicates to me that the plan was to tax life insurance companies on the basis of investment income as distinguished from underwriting income.2 *698To carry out that purpose, no narrow or limited meaning can be given to the words “interest, dividends and rents”. In speaking of those words as applicable to a different set of facts, the Supreme Court has said:
“The terms ‘interest,’ ‘dividends,’ and ‘rents,’ employed in the statute simply and without qualification or elaboration, were plainly used by Congress in their generic meanings, as broadly descriptive of certain kinds of ‘income.’ ” Helvering v. Midland Ins. Co., 300 U.S. 216, 223, 57 S.Ct. 423, 425, 81 L.Ed. 612.
It is true that some kinds of investment income of life insurance companies, such as capital gains and income from the sales of property, are not taxed. The occasional receipt of income of that character by companies which undertake to confine their investment income to “interest, dividends and rents” would usually be closely related to the business of underwriting. See 8 Mertens Law of Federal Income Taxation, Sec. 44.04. The separate schemes of taxation for insurance companies were adopted in the light of the fact that investments of such companies were governed and limited by state laws. Congress evidently anticipated that life insurance companies, as so regulated, would derive most of their investment income from “interest, dividends and rents”. How nearly that anticipation has proved true in experience may be roughly gleaned from the facts as stated in the 1954 Brittanica Book of the Year, pages 361, 362: “As of July 31, 1953, assets of United States and Canadian legal reserve life insurance companies reached $81,000,000,000 made up of 44% corporate securities, 29% mortgages, 17% government bonds and 10% other assets.” 3
If the self-restraint of the life insurance companies and the state regulatory laws should be so far relaxed that such companies engage directly in distinct businesses, then, of course, much of the income from such businesses would not come within the terms, “interest, dividends and rents”. Serious problems would then arise as to the taxation of such companies on their income from the separate businesses. So far such problems have been faced by the courts in only a few cases, and in those the decisions have not been entirely harmonious.4 If the courts find that they cannot solve such problems so as to carry out the Congressional purpose of taxing life insurance companies on their investment income, Congressional action may be indicated to enlarge the sources of taxable income of such companies beyond “interest, dividends and rents”. A problem of that kind would have arisen in the case of the present taxpayer, if, instead of leasing its oil lands, it had gone one step further toward engaging directly in a separate business by itself mining and producing the oil. It is questionable whether the courts could then solve the problem under the present statute with equitable results to the Government, the taxpayer, and to its competitors in the life insurance business and in the oil producing business.
The present case is not so extreme. Here, the life insurance company leased its oil lands to others and received in*699come therefrom in the form of royalties. The courts, I think, can and should carry out the Congressional purpose by holding that the royalties are included within the term “rents”.
True,5 Congress had made no provision for depletion allowances which would apply to oil royalties received by life insurance companies. It seems to me that such failure works a lesser degree of discrimination than is worked by upholding the taxpayer’s insistence that it is exempt entirely from the tax which ordinary business corporations have to pay on the receipt or accrual of income from oil royalties. Obviously, the separate scheme of income taxation provides many advantages for life insurance companies by confining their taxable income to interest, dividends and rents, and those advantages would far outweigh the disadvantage arising from the failure to provide for any depletion allowance on oil royalties.
It may be that Congress did not anticipate that life insurance companies would go even that far toward engaging in a separate business, for it appears that only one prior decided case has arisen involving the taxability of oil royalties as income of a life insurance company. Farmers Life Insurance Co. v. Commissioner, 27 B.T.A. 423. Indeed, if appellee were willing to forego its claim of complete tax exemption as to the oil royalties, it lies within its power to prevent any discrimination on any side by adopting the simple device of conveying its oil lands to a separate business corporation in exchange for that corporation’s capital stock. If a life insurance company electing to lease its oil lands directly is entitled to any relief in the matter of depletion allowance, it seems to me that the remedy should be sought in Congress.
I respectfully dissent.

. Section 201(c) (1) of the former Internal Revenue Code, footnote 1 to the majority opinion, now Section 803(a) of the 1954 Internal Revenue Code, 26 U.S.C.

. The Senate Report on the Revenue Bill of 1918 [S.Rep. No. 617, 65th Cong. 3d Sess., p. 9; 1939-1 Cum.Bull. (Part 2) 117, 123]; the House Conference Re*698port [H.Conferenee Rep. No. 1037, 65th Cong., 3d Sess., p. 55; 1939-1 Cum.BulI. (Part 2) 130, 140]; House Report on the Revenue Bill of 1921 [H.Rep. No. 350, 67th Cong., 1st Sess., p. 14; 1939-1 Cum.BulI. (Part 2) 168, 178]; Senate Report [S.Rep. No. 275, 67th Cong., 1st. Sess., p. 20; 1939-1 Cum.BulI. (Part 2) 181, 195]. The distinction between the two is expressed in Sec. 204(b) (3) and (4) of the 1939 Internal Revenue Code, 26 U.S.C. § 204(b) (3, 4), relating to “insurance companies (other than a life or mutual)”.

. The $81 billion assets were divided $76 billion among approximately 800 United States life insurance companies and over $5 billion among about 30 Canadian companies. The Americana Annual 1954, p. 413. The “10% other assets” included, of course, the insurance companies’ home buildings and their rental properties.

. See the authorities cited in footnotes 44 and 48, pages 16 and 17, of 8 Mertens Law of Federal Income Taxation.

. Certainly prior to the 1954 Internal Revenue Code. See Section 611 of that Code, 26 U.S.C.