Case: NATIONAL LIFE INSURANCE COMPANY v. UNITED STATES
Abbreviation: National Life Insurance v. United States
Decision Date: 1928-06-04
Docket Number: No. 228
Citation: 277 U.S. 508
Volume: 277
Reporter: United States Reports
Court: Supreme Court of the United States
Jurisdiction: United States
Parties: NATIONAL LIFE INSURANCE COMPANY v. UNITED STATES.
Judges: Mr. Justice Holmes and Mr. Justice Stone join in this dissent.
Pages: 508–537

Head Matter:
NATIONAL LIFE INSURANCE COMPANY v. UNITED STATES.
No. 228.
Argued April 12, 1928.
Decided June 4, 1928.
Messrs. Wm. Marshall Bullitt and J. Harry Covington, with whom Mr. George B. Young was on the brief, for petitioner.
The effect of the statute is to include all tax-exempt income in the “ net income ” on which the 10% tax is levied. [This was demonstrated by interesting algebraic methods.] Although the National Life derived nearly one-third of its entiré gross income from tax-exempt securities, yet it had to pay exactly the same tax as it would have paid if its whole income were from taxable securities. As aptly said by Justice McReynolds in Nichols v. Coolidge, 274 U. S. 531, 541, “ Taxes are very real things and statutes imposing them are estimated by practical results.”
The effect of the Act was to accomplish a purpose not to give the taxpayer any exemption on his tax-exempt bonds, by the simple expedient of first allowing the exemption, and then providing that any taxpayer, having such' exemption, should have his authorized deductions ipso jacto reduced’by the exact amount of his tax-exemptions.
Of two companies, identic in size of assets, income and business, A, with a million' dollars tax-exempt income, pays exactly the same tax as B, with no tax-exempt income;, and so the practical effect of the Act is to tax. A’s tax-exempt income. While, with the same income subject to taxation, A pays vastly more than B solely because A- has invested in U. S. bonds.
Or, stated from a slightly different angle, while B, having no tax-exempt securities, is allowed to deduct 4% of its reserve, A, solely because it owns tax-exempt securities, is allowed a deduction, diminished in the precise amount of its- tax-exempt income; so- that A, solely because it owns tax-exempt securities, is taxed upon its other taxable income a greater tax than B, who does not own any tax-free bonds. The sole basis of classification between A and B, is A’s ownership of tax-exempt securities; and that differentiation is made the basis of giving B a correspondingly greater reduction. .
Section 245 (a) (2) is unconstitutional in so far ,as it reduces the 4% of Reserves exemption by the exact amount of the National Life’s tax-exempt income; and this is so because its purpose and effect are to tax the income from tax-exempt bonds. Congress cannot tax (1). instrumentalities of the States, nor.(2) the income from U. S. bonds which it has expressly exempted from taxation. The effect of § 245 (a) (2) is to tax the income from tax-free securities. Northwestern Mutual Life Ins. Co. v. Wisconsin, 275 U. S. 136; Evans v. Gore, 253 U. S. 245; Farmers Bank v. Minnesota, 232 U. S. 516; Miller v. Milwaukee, 272 U. S. 713.
A chronological review of authorities condemns the plan embraced in § 245 (a) (2); United States v. Ritchie, Fed. Cas. 16,168; People v. Commissioners, 41 How. Pr. 459; People v. Weaver, 100 U. S. 539; Farmers Bank v. Minnesota, 232 U. S. 516; Evans v. Gore, 253 U. S. 245; Miles v. Graham, 268 U. S. 501.
Although Evans v. Gore ,and Miles v. Graham, supra, are not as directly in point as others of the cases reviewed, they are important as establishing' the doctrine that if income (whether judicial salary or.interest from.tax-free bonds) is exempt from diminution or seizure by governmental authority, it cannot be diminished or taken by the device of compelling -its inclusion in “ gross ” income as the basis from which “ net ” income is ascertained. The exempted income must be, for purposes of taxation, treated as non-existent.
In the case at' bar, the National Life insists that its interest from the state and federal bonds should be treated, for tax purposes, as.being as completely nonexistent as Evans v. Gore and Miles v. Graham held that a judicial salary should be treated as non-existent when it came to tax purposes.
. Three cases are directly in point, viz., City of Waco v. Amicable Life Ins. Co. (Tex.), 230 S. W. 698;. id., 248 S. W. 332; Motor Car Co. v. Detroit, 232 Mich. 245; and Miller v. Milwaukee, 272 U. S. 713.
If the device of § 245 (a) (2)' be sustained, then the door will be open'wide for the States, by simple statutory amendments, to nullify many of this Court’s most important rulings as to tax-exempt property, for example, Evans v. Gore, 253 U. S. 245; People v. Weaver, 100 U. S. 539; L. & J. Ferry Co. v. Kentucky, 188 U. S. 385; Bank of California v. Richardson, 248 U. S. 476; Frick v. Pennsylvania, 268 U. S. 473; Miller v. Milwaukee, 272 U. S. 713; Northwestern Mutual Life Ins. Co. v. Wisconsin, 275 U. S. 136.
The power of Congress to grant or refuse deductions does not authorize “ unconstitutional conditions ” of deduction. Federal Land Bank v. Crosland, 261 U. S. 374; Miller v. Milwaukee, 272 U. S. 713; Nichols v. Coolidge, 274 U. S. 531.
Congress had the absolute power to grant, or to refuse to grant, deductions in the shape of a percentage of the Reserves. It could have made such deduction, if allowed at all, 1%, 2%, 3%, or any other per cent that, in its discretion, the equitable and economic necessities of the case required. But, it could not lawfully authorize a conditional deduction (1) where the full deduction was allowed, if a company held no tax-free securities; whereas (2) if a company held tax-free securities, the deduction was made smaller, in the exact amount of such tax-free securities, — so that the effect was to impose a tax upon tax-free securities, in the precise amount that they would have been taxed if a tax had been levied upon them eo nomine.
The whole point is that the ownership of tax-exempt securities, cannot be made the basis of a classification, whose sole purpose is-to tax more heavily those who hold tax-exempt securities, than those who do not hold them.
The Government can tax anything it pleases, except tax-exempts; but it must deduct tax-exempts from anything on which it imposes taxes. It can give any further deductions that it pleases, and it can ascertain what that deduction shall be in almost any way it pleases.
It e^n- malee that deduction equivalent to the man’s debts, ¿r to his tangible property, or to his bank stocks, or to his agricultural products, or to any fraction of any of those, but the qualification is, that it cannot make the ownership of tax-exempts in any way a factor in determining the amount of the deduction. In. other words, it cannot use the ownership of tax-exempts in any way so that such ownership shall work out adversely to any citizen owning such tax-exempt securities. This is an implied and necessary limitation on the power to give a deduction that would otherwise' be wholly within, the discretion of the Legislature.
The State, in making any deduction or in granting any privilege, cannot make the ownership of tkx-exempt securities result in the taxpayer getting a less benefit or privilege than he would have had if he had not owned them, because the minute you do that, you are putting a burden on the ownership of the tax-exempt securities. It cannot annex to the privilege of a deduction the surrender or subtraction of the constitutional privilege of tax exemption. Terrall v. Burke, 257 U. S. 529.
The Act purports to be something that it is not. While it is true the Government could tax the gross income; minus the tax-exempt income, yet it cannot tax gross income, minus 4% of Reserves, without giving the benefit of tax-exempt income. It is absurd to subtract the tax-exempt income and then add it back on. Regard must be had to the substance of what is done and not merely to the form. Nichols v. Coolidge, 274 U. S. 531; Child Labor Tax Case, 259 U. S. 20; Hill v. Wallace, 259 U. S. 44.
The tax cannot be sustained upon the theory that it is: measured by income regardless of the tax-free character of such income. Frick v. Pennsylvania, 268 U. S. 473.
Evans v. Gore, 253 U. S. 245; Gillespie v. Oklahoma, 257 U. S. 501; Miller v. Milwaukee, 272 U. S. 713; Nichols v. Coolidge, 274 U. S. 531; Northwestern Mutual Ins. Co. v. Wisconsin, 275 U. S. 136, established the doctrine that where the principal, as here, is absolutely immune from taxation, even net income partially derived ' therefrom cannot be taxed; and that inquiry will be permitted into the income taxed, for the purpose of ascertaining whether it comes from a. source which is itself untaxable.
The tax is an income tax and not an excise tax. Distinguishing Flint v. Stone Tracy Co., 220 U. S. 107; Stanton v. Baltic Mining Co., 240 U. S. 103; Stratton’s Independence v. Howbert, 231 U. S. 399; and Brushaber v. Union Pacific, 240 U. S. 1.
Mr. Alfred A. Wheat, Special Assistant to the Attorney General, with whom. Solicitor General Mitdiell was on the brief, for the United States.
Petitioner has not been taxed upon any part of its income from tax-exempt securities, and the law does not impose any tax thereon. If the gross income of a life insurance company consisted wholly of interest from such securities, it would all be deducted, no matter how much it. might be. ' The exemption is absolute and unqualified. The misconception underlying the petitioner’s argument is that for some unexplained reason a life insurance company is entitled as of" right to & further deduction of 4% of its legal reserve without reference to the amount of that reserve or of the securities in which it is invested.
Conceding that Congress has no power to tax income from state and municipal bonds, and has power to tax income from rents, stock dividends, railroad bonds, and mortgages, it is obvious that it could exempt income from any one or all of these forms of investment without thereby infringing upon the immunity of the state and municipal bonds from taxation. The .immunity of one class of security from taxation does not impose upon Congress an obligation to tax all other forms of investment.
Neither the Bill upon its face nor what was said of it by the committees having it in charge justifies the accusation that Congress was ^attempting by subterfuge tO' override its constitutional limitations or to impose an unrighteous system of taxation upon these companies.
No complaint may fairly be made because the statute does not permit petitioner to deduct the same income twice. The single fact of importance is that the tax-exempt income of the companies is given complete exemption from taxation under any and all circumstances.
Petitioner had no inherent right to the deduction of any amount based upon its reserves. Deductions are a matter of legislative discretion and authority for all deductions must be found in the statute. New Creek Co. v. Lederer, 295 Fed. 433; People ex rel. Bijur v. Barker, 155 N. Y. 330; Smalley v. Burlington, 63 Vt. 443.
Upon constitutional grounds no complaint could have been made by any company had Congress omitted entirely the deductions specified in § 245 (a) (2). The fact that an insurance company holding no tax-exempt securities will under certain circumstances pay no greater tax than will another company having tax-exempt securities, is not discriminatory in a legal sense. Cf. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1. It is not discrimination against tax-exempt securities to give exemption to other securities which could lawfully be taxed, and no corporation holding securities which may not constitutionally be taxed has a right to insist that its neighbor, owning securities which are within the taxing power, shall, be taxed. The uniformity required by Art. I, § 8, cl. 1 of the Constitution, means geographical uniformity. Knowlton v. Moore, 178 U. S. 41; Patton v. Brady, 184 U. S. 608; Barclay & Co. v. Edwards, 267 U. S. 442.
Congress has authority to adjust its income taxes according to its discretion within the bounds of geographical uniformity. The Revenue Act of 1921 treats all insurance corporations alike, and if in its application a tax in particular instances may seem to bear upon one corporation more than another, this is due to differences in their circumstances, not to lack of uniformity in the. tax imposed. LaBelle Iron Works v. United States, 256 U. S. 377.
No company under this statute can possibly be taxed by reason of its ownership of tax-exempt securities more heavily than those which do not hold them, other things being equal, and “ tax-exempt securities ” are under all conditions deducted from that upon which the taxes are imposed.-
Mr. Charles Evans Hughes on behalf of The Metropolitan Life Insurance Company, The Mutual Benefit Life Insurance Company, ,and The Prudential Insurance Company, as amici curiae, filed a brief by special leave of court, sustaining the législation in question.

Opinion:
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—
" 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. . . .
" 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 and 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.
' 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.
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 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.
Section 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.