Helvering v. Independent Life Insurance

delivered the opinion of the Court.

This case involves the validity of deficiency assessments of income 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 in

During 1923 and 1924 respondent owned a building of which it occupied part and rented part. Its tax return for each year included in gross income the rents received for the space let and deducted 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 value amounted to $18,400. The result for 1924 was minus $14,629.76, four per cent, of the then book value being $19,770.32. The Commissioner, following § 245 (b) added to the rents received from lessees in each year a sum sufficient to malee the net equal to the required four per cent. On that basis the amount of the deficiency for

The question for decision is whether the statutory provisions relied on violate the rule that no direct tax shall be laid unless in proportion to the census. Constitution, Art. I, § 9, cl. 4. In support of the decision below, respondent maintains that the “rental value” of the space occupied by it was included in net income and taxed and that the exaction is a direct tax on the land itself and void for lack of apportionment.

If the statute lays taxes on the part of the building occupied 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 apportionment. Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 , 580, 581; 158 U.S. 601 , 635, 637, 659. Brushaber v. Union Pac. R. Co., 240 U.S. 1 , 16, 17. Eisner v. Macomber, 252 U.S. 189 , 205. Daw

Earlier Acts taxed life insurance companies’ incomes substantially 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 consideration were enacted upon the recommendation of representatives of the latter. As rents received for buildings were required to be included in gross and expenses chargeable to them were allowed to be deducted, it is to be inferred that' Congress found — as concededly the fact was — that the annual net yields from investments in such buildings ordinarily amounted to at least four per cent, of book value. Where an insurance company owns and occupies the whole of a building, it receives no rents therefor and is not allowed to deduct the expenses chargeable to the building. Where part is used by the company and part let, the rents are required to be included in the gross, but expenses may not be deducted unless, if it be necessary, there is added to the rents received an amount to make the total sufficient, after deduction of expenses, to leave four per cent, of book value. All calculations contemplated by § 245 (b) are made subject to that limitation. Congress intended that the rule should apply only where rents exceed such four per cent. Where they are less than that, addition of the

Respondent cites National Life Ins. Co. v. United States, 277 U.S. 508 , but the distinction between that case and this one is fundamental and obvious. There the effect of the statutory deduction was to impose a direct tax on the income of exempt securities, amounting to taxation of the securities themselves. We held that the tax imposed, so far as it affected state and municipal bonds, was unconstitutional and that, in so far as it affected United States bonds, it was contrary to the statute. In Denman v. Slayton, 282 U.S. 514 , we held the taxpayer not entitled to deduct the interest on debts incurred to purchase securities the interest on which was exempt. The opinion points out the distinction between that exclusion from deductions and the taxation of exempt securities condemned in National Life Ins. Co. v. United States. As shown above, 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 .

Unquestionably Congress has power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses to tax. Burnet v. Thompson Oil & Gas Co., 283 U.S. 301 , 304. Stanton v. Baltic Mining Co., 240 U.S. 103 . Brushaber v. Union Pac. R. Co., supra, 23-24. It is clear that the provisions under consideration do not lay a tax upon respondent’s building or the rental value of the space occupied by it or upon any part of either.

Reversed.

Me. Justice McReynolds is of opinion the judgment should be affirmed.