Court Opinion

ID: 9418657
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:34:35.889021+00
Date Added: 2024-06-11T17:22:07.377545
License: Public Domain

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 interests and dividends and rents received, less certain specified deductions — (1) interest derived from tax exempt securities, if any; (2) a sum equal to four 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.
The Revenue Act of 1921, approved November 23, 1921, Chap. 136, Title II, Income Tax (42 Stat, 227, 238, 252, 261) provides—
*517“ Sec. 213. That for the purposes of this title (except as otherwise provided in section 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 taxátion 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; . . .
“ 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, 12V^ per centum of such excess amount. ...
“ 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 [war 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. . . .
*518“ 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 ...
“ Sec. 245. (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] ...”
(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, $13,460.00. 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% of the reserve fund ($2,695,279.12) and ($1,125,788.26) interest received from exempt securities; miscellaneous items, not contested *519and negligible 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 ten 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% 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% 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% 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.
*520' 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 óf assessment, including, of course, deductions from gross values. What remains after subtracting all allowances is the thing really taxed.
United States v. Ritchie (1872) Fed. Cases 16,168.
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, one thousand dollars 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 (1870) 41 How. Prac. Reports, 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.
*521Held: — 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 ratio 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.) 230 S. W. 698; id., 248 S. W. 332.
Miller, et al., Executors v. Milwaukee, 272 U. S. 713.
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 the income therefrom in the hands of thex corporations, and taxing only so much of the stockholder’s dividends as corresponds to the corporate income not assessed, the tax is invalid.
It is settled doctrine that directly to tax the income from securities amounts to taxation of the securities themselves, Northwestern Mutual Life Ins. Co. v. Wisconsin, 275 U. S. 136. Also that the United States may not tax state or municipal obligations. Metcalf & Eddy v. Mitchell, 269 U. S. 514, 521.
How far the United States might repudiate their agreement not to tax we need not stop to consider. Counsel do not claim that here state obligations should have more favorable treatment than is accorded to’ those of the Federal Government. The Revenue Act of 1921 (Sec. 213) expressly disavows any purpose to tax interest upon the latter’s obligations.
*522Section 1403 provides—
“ That if any provision of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provision to other persons or circumstances, shall not be affected thereby.”
Congress had no power purposely and directly to tax state obligations by refusing to their owners deductions allowed- to others. It had no purpose to subject obligations of the United States to burdens which could not be imposed upon those of a State.
Considering what has- been said, together with the saving clause just quoted, and the manifest general purpose of the statute, we think that provision of the Act which undertook to abate the 4% deduction, by the amount ■ of interest- received from tax exempt securities cannot be given effect as against petitioner under the circumstances here disclosed. It was unlawfully required to pay $92,490.20 and is entitled to recover.
The judgment of the Court of Claims must be reversed. If within ten days counsel can agree upon a decree for entry here, it may be presented. Otherwise, the cause will be remanded to the Court of- Claims for further proceedings in conformity with this opinion.

Reversed.