Opinion — Helvering v. Ind Life Ins. Co.

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SUPREME COURT OF THE UNITED STATES.

No. 689.—OcToBER TERM, 1933. _

‘

Guy T. Helvering, Commissioner of

ai Ww ; f ks :

Internal Revenue, Petitioner, On Writ of Certiorari to

the United States Circuit

: stan Court of Appeals for the

The Independent Life Insurance Com-| ©... let ines

Sixth Cireuit.

pany. , J ‘

[May 21, 1934.] %

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Mr. Justice BuTLEeR delivered the opinion of the Court.

This case involves the yalidity of deficiency assessments of in-

come taxes made by the Commissioner against the life insurance

company for 1923 and 1924. The 1921 Revenue Act (42 Stat.

261), § 244 (a) defines gross income of such companies as that re-

ceived from interest, dividends and rents. Premiums and capital

gains are excluded. Section 245 (a) directs that net income be

ascertained by making specified deductions from gross income.

These include four per cent. of the company’s reserve, “‘ (6) Taxes

and: other expenses paid during the taxable year exclusively upon

or with respect to the real estate owned by the company . =

and ‘‘(7) A reasonable allowance for the exhaustion, wear and tear

of property, ineluding a reasonable allowance for obsolescence”’

But. it is provided, § 245 (b), that no deduction shall be made

under paragraphs (6) and (7) ‘‘on aecount of any real estate

owned and occupied in whole or in part by a life insurance com-

pany unless there is included in the return of gross income the

rental value of the space so occupied. Such rental value shall be

not less | than a sum which in addition to any rents received from

other tenants shall provide a net income (after deducting. taxes,

depreciation, and all other expenses) at the rate of 4 per centum .

per annum of the book value at the end of the taxable year of the

real estate-so owned or oceupied’’. " Provisions similarly worded

and having the same meaning are contained in the. Revenue Act

of 1924, §§ 244-245. 43 Stat. 289. '

During 1923 and 1924 respondent owned a building of whieh

it occupied part- and rented part. Its tax return for each year in-

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2 Helveritig vs.’ Independent Life Insurance Co.

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eluded in gitdss ‘income the rents received for the space let and de-

ducted the taxes, expenses and depreciation chargeable to the whole

building. . The result for 1923 was a net of $3,615.30 whereas four

° per cent: of: ‘book valué amounted to $18,400: The result for 1924

ewas minus $14,629.76, four per cent. of the then book value being

$19,770.32. The Commissioner, following § 245 (b) added to th:

rents received from lessees in each year a sum sufficient to make the

net equal to the required four per cent. On_that basis the amount

of the deficiency for 1923 was $298. 97 and for 1924 $1,115.65.":

The Board of Tax Appeals held them direct taxes and therefore

invalid. 17 B. T. A. 757. The Ciréuit Court of Appeals affirmed,

one of the judges dissenting. 67 F.. (2d) 470. Its decision con-

flicts with Commissioner v. Lafayette Life Ins. Co. (C. C. A.7),

67 F. (2d) 209, and Commissioner v. Rockford Life Ins. ae. aC. C.

A.-7) 67 F. (2d) 213.

relied ork violate the rule that no direct.tax shall be laid unless

in proportion to the census. Constitution, Art. I, §9, el. 4.

In support of .the decision below, respondent, maintains that the

‘‘rental value’’ of the space oceupied by it was included in net

income and taxed and that the exaction is“ direct tax on the land

itself and void for lack of apportionment.

If the statute lays taxes on the part’ of the building iil

by the owner or upon the rental. value of that space, it cannot be

sustained for that would be to lay a direct tax requiring appor-

tionment. Pollock v. Farmers’ Loan & Trust Co., 157 U.S: 429,

580, 581; 158 U. Pa 601, 635, €37, 659. Brushaber v. Union

Pac.. R. R,, 240 U. z. 16, 17. Eisner v. Macomber, 252 U. S. -

The Sci ‘for decision is whether the statutory provisions -

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i1In 1923, rents were $73, 620.48. Taxes, expenses and depreciation were

$70,005.18.. Book value was stipulated to be $460,000. The commissioner «

called the difference between $18,400. (4% of: $460,000) and $3,615.30 ($73,- .

620.48 — $70,005.18) or $14,784.70 the ‘‘value of space owned and occupied

_ by company’’. That, added to rents received, amounted, to, $88,405.18: He

then subtracted from gross income so increased” the sum of permissible de-

ductions, including the $70,005.18. el ae

In 1924, mane “ar $74,289.21. Taxes, expenses and depreciation were

" $85,918.97. Book value was $494,257.97. The commissioner added $19,770.32

(4% of $494,257.97) and $14,629.76 ($71,289.21 — $85,918.97) and called the

sum, $34,400.08, the ‘‘ value of space owned and occupied by company’’. That, -

added to rents received, amounted to $105,689.29; and from gross income 80 ©

increased were subtracted the deductions, including the $85,918.97.

4

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LEAT RES aoent

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“ H. elvering VS. Tadependent Infe Insur-nce Co. ae.

~ 189,205. Dawson. y. Kentucky Distilleries Co., 255 U. S. 288, 294.

Bromley V. McCaughn, 280 U. S. 124, 136. Willeuts v. ‘Bunn, 282.

U. S. 216, 227. The rental value of the building used by the owner

does not constitute income within the meaning of the Sixteenth’

. Amendment. Eisner ‘v. Macomber, supra, 207. ‘Stratfen’ s Inde-

‘pendence v. Howbert, 231 U. S. 399, 415, 417. Doyle v. Mitchell

Brothers Co., 247 UES. 179, 185. Bowers v. Kerbaugh-Empire Co.,\

271 U. S. 170, 174. : Taft v..Bowers, 278 U. 8. 470, 481, 482. Mac-

Laughlin v. Alliance Ins. Co., 286 U. S. 244, 249, 250. Cf. Bug

.Waggoner Assn. Vv. Hopkins, 269 U. S. 110; 114.

Earlier ‘Acts taxed life insurance companies’ incomes substan-

tially the same as those of other corporations. Because of the ‘

character of the business, that method proved unsatisfactory to

the, Government and to the companies. The provisions under con-

_- sideration weré enacted upon the recommendation of. representa-

tives of the latter. As rents received for buildings were required »

to be included in gross and expenses chargeable to them were al-

lowed to be, deducted, it is to be‘inferred that Congress found—as -

eoncededly the fact was—that the annual net yields from .inv§st-

ments in such buildings ordinarily amounted to at least four per

cent, of book value. Where. an insurance company owns and oc-

‘eupies the whole of a building, it receives no rents therefor and is

not allowed to deduct the expenses chargeable to the building. -

Where ‘part ismsed by the company and part let, the rents are re-

quired to be included in the gross; but expenses may not be de-

ducted unless, if it be necessary, there is addéd to the rents re-

-. e@eived an amount to make the total sufficient; after deduction

of expense§, ‘to leave four per cent.: of book value. All ealcu-

lations contemplated by § 245 (b) are made subject to that limita-

rents exceed such four per cent. Where they are less than that,

addition of the prescribed rental value and deduttion of expenses”

operate to increase taxable i income. * The classification i is not with-

out. fourtdation.

: 2Take for example: book value of building, $1,000,000 ; 4% of book value,

$40,000; rents received, $30,000; expenses, $60, 000. If the calculation pre-

_-seribed wy § 945 (b) is not made, ¢ taxable income is $30,000..

“The ealeulation prescribed by -§ 245 (b) follows: — rents, $30,000, plus

‘“rental value’’, $70,000 i $60,000,: minus rents, $30,000, plus the

4%—$40,000) amounts to $100,000, less expenses, $60, ,000, leaves taxable

come, $40,000. Cf..Art. 686,” lsiasitl Regulations, 62 and 65.

tion. Congress intended that the rule should apply only where

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a Helvering vs. Independent Life Insurance Co.

The company is not rquited to include in gross any aniount

‘to’ coyer rental value of space used by it, but in order that, sub-

‘ject to the specified limitation, it may have the advantage of de-

ducting a part of the expenses chargeable to the building, it is

permitted to make calculations by means of such an addition. The

statute does not prescribe* amy basis for the apportionment of ex-

Renses between space used by the company and that for whieh it

receives rents. The ‘calculation indicated operates as such an ap-

portionment where the Tents received are more than four per cent. -

of book value, but less ‘than’ that amount plus expenses. 3 In such

cases the addition, called: rental value of space occupied by the

company, is employed to permit a deduction on account of ex-

penses. That, as is clearly shown in the dissenting opinion, supra,

p. 4%3, is the arithmetical equivalent of lessening the deduction by

the amgunt of the so-called. rental value.

Respondent. cites Nat’l Tife Ins. “Co. v. United States, 277 U. S.

508, but the distinction between that case and this one is funda-

mental and obvious. There the effect of the statutory. dedue-

—_tion—was-to impose ‘a direct tax on the incomé of exempt securi-

ties, amounting. to taxation of the securities themselves. We held

that the ‘fax imposed, so far as it “affected state and munieipal

States bonds, it was contrary to the statute. In Denman v. Slayton,

282 U.S. 514, we held the taxpayér not entitled to deduct the inter-

est on debts incyrred to purchase securities the interest on which

was exempt. The opinion;points out,the distinction between that

exclusion from asdactions and the taxation of exempt securities

condemned in Nat’l Life Ins. Co. v. United States. As shown above,

bonds, was unconstitutional an¢@ that, in 8o-far as it affected United

the prescribed calculation, § 245 (b), is in substance: a diminution _

or apportionment of expenses to be deducted from gross income

under the circumstances specified. . See Anderson v. Forty-Two

Broadway Co., 239 U.S. 69.

sTake for.example: book value of building, $1,000,000; 4% of book value,

$40 ,000 ; rents received, $50,000; expenses, $60,000.

On that basis the calculation is: rents, $50,000 plus ‘trental value’’, $50,000 °

. (expenses, $60,000 minus rents $50,000 plus 4%, $40 000), amounts to $100,000

less expenses $60, 000 leaves taxable income $40,000. Deduction of expenses

' operates to reduce taxable income by $10,000. aa

Assume rents received were $100,000. No rental value need be added. De-

ducting expenses, $60,000, leaves taxable income $40,000. :

_ Helvering vs. Independent life Insurance Co. .-° 5

Unquestionably Congress has power to condition, limit ‘o or deny.

deductions from gross income in order to arrive at the net that

it, ehooses to tax. “Burnet v. Thompson Oil & Gas Co., 283 U. S.

301, 304. Stanton v. Baltic: Mining Co., 240 U.S. 103. ' Bradabér

v. Union Pac. R: R., supra, 23-24. It is clear that the provisions

under consideration do not lay a®tax upon respondent’s. building

or the rental va]ue of the space occupied by it or upon any part

of a

pm ' Reversed.

Mr. J ustice McRevwotps is of —- ‘the judgment should -

affirmed.

A true copy. - : a rae

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° Clerk, Supreme Court, U. 8.