NATIONAL LIFE INSURANCE COMPANY v. UNITED STATES.
No. 228.
Supreme Court of the United States
June 4, 1928
277 U.S. 508
Argued April 12, 1928.
The evidence appears not to have been taken with a view to an ascertainment of the damages, but there is testimony tending to show that the owner of the surface is asserting a claim for damages done at the time the plaintiffs entered or soon thereafter. It of course is admissible to fix the damages by agreement. But if this be not done there will be need for a hearing on that question.
We conclude that the decree of the circuit court of appeals should be reversed and that the cause should be remanded to the district court with directions to modify its decree in accordance with what is said in this opinion.
Decree of circuit court of appeals reversed.
Decree of district court modified.
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 entire 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 facto 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
A chronological review of authorities condemns the plan embraced in
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 non-existent 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
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 can make that deduction equivalent to the man‘s debts, or 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
The State, in making any deduction or in granting any privilege, cannot make the ownership of tax-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. Terral 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 Life 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
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 Mitchell 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 a 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
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
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
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 legislation in question.
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 (
“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 taxation 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, 12½ 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
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.
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.
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 the 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.
“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.
MR. JUSTICE BRANDEIS, dissenting.
Ever since Corporation Tax Act, August 5, 1909, c. 6, § 38, 36 Stat. 11, 112, the United States has laid upon life insurance companies a special excise tax measured by net income. But the several revenue acts have varied as to the rate of the tax and also as to the method of computing the taxable income. That is, the items to be included in gross income and the items to be allowed as deductions have been changed from time to time. In the earliest act no deduction was made of interest on tax-exempt bonds. Until 1921, the gross income considered included premium
The gross income to be considered under the Act of 1921 is limited to that received “from interest, dividends, and rents.” In order to ascertain the taxable income, this gross investment income is to be reduced by nine classes of deductions, so far as severally applicable. Only two of these are material here—the provisions in paragraphs (1) and (2) of § 245. Taken together, they provide for the deduction from the gross investment income of the interest from tax-exempt bonds or of an amount equal to 4 per cent of the mean insurance reserve, whichever sum is the greater. That is, paragraph (1) provides for a deduction of interest received from tax-exempt bonds;3 The Revenue Bill of 1921, as introduced in the House, contained the plan of taxation which had been adopted by the Senate in 1918. House Report, 67th Cong., 1st Sess., No. 350, p. 14. It was stated to the Senate Finance Committee that “all the life insurance companies are behind that scheme and are satisfied with it.” Hearings before the Senate Committee on Finance, 67th Cong., 1st Sess., on H. R. 8245, September 1-October 1, 1921, p. 84. See also Senate Report, 67th Cong., 1st Sess., No. 275, p. 20; Brief of Amici Curiae, p. 1.
The National Life Insurance Company had, during the year 1921, gross investment income amounting to $3,824,592.78. Of this income, $1,125,788.26 was interest on tax-exempt bonds. Four per cent of the Company‘s insurance reserve amounted to $2,695,279.12. As the interest received from tax-exempt bonds was less than 4 per cent upon its reserve, the Company was allowed under paragraph (2) the additional deduction of a sum equal to the difference between these two, namely $1,569,490.86. The aggregate of the deductions allowed under paragraphs (1) and (2) was thus no greater than the deduction would have been if all the Company‘s income had been derived from taxable securities.
That the return and the payment required of the Company was in exact accord with the Act is conceded. The contention is that the Act is unconstitutional, because as applied it renders the tax-exempt privilege of no value to the Company. The argument is that the tax burden from which such federal and state obligations are free is
Some of the tax-exempt bonds held by the Company were state (including county, district and municipal) bonds. Some were United States bonds which in terms provide for exemptions from federal taxes. With the holders of state bonds the United States has entered into no contract. Whatever rights the Company may have as to them must flow either directly from the terms of the federal act which provides for the deductions to be made in computing the net income, or must arise indirectly out of the Constitution. The objection made, and sustained by the Court, is that the Act is void because thereby Congress taxes the bonds, an instrumentality of the States, or that it discriminates against the holder. Compare Collector v. Day, 11 Wall. 113, 124; Metcalf & Eddy v. Mitchell, 269 U. S. 514, 521-524. As to the United States bonds, the claim is that the due process clause of the
As the tax imposed by the Act of 1921 is on net income, I should have supposed that it was settled by Flint v. Stone-Tracy Co., 220 U. S. 107, 147, 162, that the inclusion in the computation of the interest on tax-exempt bonds, like the inclusion of the receipts from exports, Peck v. Lowe, 247 U. S. 165; Barclay & Co. v. Edwards, 267 U. S. 442, 447, or the inclusion in a state tax of receipts from interstate commerce, United States Glue Co. v. Oak Creek, 247 U. S. 321, 326; Shaffer v. Carter, 252 U. S. 37, 57; Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 120, would not have rendered the tax objectionable. Compare Interboro Rapid Transit Co. v. Sohmer, 237 U. S. 276, 284. But here it is indisputable that no part of the income derived from tax-exempt bonds is taxed. For the statute requires that in computing the taxable income the full amount of the interest on tax-exempt securities should be deducted. The only question that can arise in any case is how much additional shall be allowed as a deduction under paragraph (2).
The only factual basis for complaint by the Company is that, although a holder of tax-exempt bonds, it is,
or local taxing authority.” In the Second and later loans the bonds are subject to “graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States,” except that the interest on an amount not in excess of a certain figure is free from tax. All the bonds held by the petitioner were, by the statutes under which they were issued, exempt from the normal tax.
It is true that the tax-exempt privilege is a feature always reflected in the market price of bonds. The investor pays for it. But the value of the tax-exempt feature, like the value of the bond itself, may fluctuate for many reasons. Its value may be lessened by changing, through legislation, the supply or the demand. It may be lessened by laws which have no relation to taxation, as was done when the Federal Reserve legislation changed the basis for securing notes of issue.5 The recent successive reductions in federal surtaxes6 lessened for many holders the relative value of tax-exempt bonds. The narrowing thereby of an existing use for the tax-exempt bonds was important enough to affect the market value. Some of the States lessened the value of United States bonds to many a holder, when they substituted a small tax
The holder of tax-exempt bonds often finds himself with respect to taxes imposed under legislation other than the Act of 1921, no better off than if he had owned only taxable bonds. But this Court has never held a statute invalid on that ground. A state inheritance or legacy tax is valid although the tax is as high when the estate transmitted consists in part of bonds of the United States as when none are held. Plummer v. Coler, 178 U. S. 115; Orr v. Gilman, 183 U. S. 278. Compare Greiner v. Lewellyn, 258 U. S. 384. This is true also of the tax upon Connecticut savings banks upheld in Society for Savings v. Coite, 6 Wall. 594; of that upon Massachusetts savings banks upheld in Provident Institution v. Massachusetts, 6 Wall. 611; of that upon Massachusetts manufacturing corporations, upheld in Hamilton Co. v. Massachusetts, 6 Wall. 632; of that upon insurance corporations, upheld in Home Insurance Co. v. New York, 134 U. S. 594. Under all of these statutes a corporation holding bonds of the United States was obliged to pay the same amount in taxes that it would have been required to pay if it had
The mere fact that the National Life Insurance Company was not allowed a larger deduction than would have been available if it had held only taxable bonds, cannot, therefore, render the taxing provision void. Whether there is in the provision for deductions some element of discrimination which renders it unconstitutional, remains for consideration. It may be assumed—if the term is used with legal accuracy—that the United States may not discriminate against state bonds or against its own outstanding bonds. Discrimination is the act of treating differently two persons or things, under like circumstances. Compare Merchants Bank v. Pennsylvania, 167 U. S. 461, 463. Here the sole complaint is that the two, although the circumstances are unlike, are treated equally. The claim is not that the holder of tax-exempt bonds is denied a privilege enjoyed by others. It is that the holder of tax-exempt bonds should be given in respect to another matter a preferred status. The preference claimed is that it shall be allowed, in addition to tax exemption on its bonds, a deduction of 4 per cent of the reserve. The Constitution does not require the United States to hold out special inducements to invest in state bonds, compare Florida v. Mellon, 273 U. S. 12, 17, nor to give to holders
There is no suggestion that, in fact, Congress discriminated against tax-exempt bonds, or against insurance companies as holders thereof.9 In the Senate, it was
I find nothing in the cases cited by the petitioner which lends support to the view that its rights have been violated. Directly to tax the gross income from securities amounts, of course, to taxing the securities themselves. Northwestern Mutual Life Insurance Co. v. Wisconsin, 275 U. S. 136. In Miller v. Milwaukee, 272 U. S. 713, as was stipulated, the dividends which this Court held could not be taxed by the State were directly declared from interest accruing from United States bonds. Thus the dividends from tax-exempt bonds were taxed while those from other sources were free from the tax. The tax challenged in People v. Weaver, 100 U. S. 539, in Farmers & Mechanics Savings Bank v. Minnesota, 232 U. S. 516, 521, and in
Federal farm loan bonds, of which $420,763,315 were outstanding October 31, 1921, ibid., p. 963, or the obligations of the insular possessions and the District of Columbia, of which there were $52,970,750 outstanding on June 30, 1921. Ibid., pp. 750, 754. The estimated total of tax-free securities, issued by States, counties, etc., outstanding January 1, 1922, was $8,142,000,000. Memorandum of the Government Actuary, Hearings before the Committee on Ways and Means, House of Representatives, 67th Cong., 2d Sess., on Tax Exempt Securities, p. 21.
To hold that Congress may not legislate so that the tax upon an insurance company shall be the same whether it holds tax-exempt bonds or does not, would, in effect, be to read into the Constitution a provision that Congress must adapt its legislation so as to give to state securities, not merely tax exemption, but additional privileges; and to read into the contract of the United States with its own bondholders a promise that it will, so long as the bonds are outstanding, so frame its system of taxation that its tax-exempt bonds shall, in respect to all taxes imposed, entitle the holder to greater privileges than are enjoyed by holders of taxable bonds. But no rule is better settled than that provisions for tax exemption, constitutional or contractual, are to be strictly construed. Compare Tucker v. Ferguson, 22 Wall. 527, 575; Wilmington & Weldon R. R. v. Alsbrook, 146 U. S. 279, 294; Bank of Commerce v. Tennessee, 161 U. S. 134, 146; Ford v. Delta & Pine Land Co., 164 U. S. 662; Chicago Theological Seminary v. Illinois, 188 U. S. 662, 674; People ex rel. Metropolitan Street Ry. Co. v. New York, 199 U. S. 1, 36; Jetton v. University of the South, 208 U. S. 489, 499. The rule was acted upon as recently as Millsaps College v. City of Jackson, 275 U. S. 129.
The power so to legislate is not conferred on this Court by § 1403 of the Act. That section declares: “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.” The limited purpose and the narrow effect of such a clause was stated by this Court in Hill v. Wallace, 259 U. S. 44, 71. It “furnishes assurance to courts that they may properly sustain separate sections or provisions of a partly invalid act without hesitation or doubt as to whether they would have been adopted, even if the legislature had been advised of the invalidity of part. But it does not give the court power to amend the act.”
Even if such a clause could ever permit a court to enlarge the scope of a deduction allowed by a taxing statute, the present case would be wholly inappropriate for the
MR. JUSTICE HOLMES and MR. JUSTICE STONE join in this dissent.
MR. JUSTICE STONE, dissenting.
While it may be conceded that the petitioner has been discriminated against, the discrimination occurs only in respect of an act of bounty. Petitioner‘s only complaint is that Congress has not granted it as large an exemption—purely a matter of grace—as it has accorded to others owning no tax-exempt securities.
There is a distinction between imposing a burden and withholding a favor. By the Constitution or by contract the holders of tax-exempt securities are protected from burdens; but from neither source do they derive an affirmative claim to favors. If Congress voted to subsidize all insurance companies except those holding tax-exempt bonds, whatever other objections might be made to such a course I do not think petitioner could complain because it had not been made the recipient of a gift. For the same reason I believe that its present contention is insubstantial.
But even though the result now reached, were to be deemed a logical implication of the doctrine announced in The Collector v. Day, 11 Wall. 113, that neither national nor state governments may tax the instrumentalities of the other, still, as this Court has often held, that rule may not be pressed to the logical extreme of forbidding legislation which affects only remotely or indirectly the holders of the other‘s securities. See Metcalf & Eddy v. Mitchell, 269 U. S. 514, 523. As Mr. Justice BRANDEIS has just pointed out, “a state inheritance or legacy tax is valid although the tax is as high when the estate transmitted consists in part of bonds of the United States as when none are held“; and this Court has sustained statutes under which “a corporation holding bonds of the United
Now, the rule which, under the decisions of this Court, has been thus narrowly limited, is extended into a new field; and the Government is forbidden to grant any benefit or immunity to a tax-payer unless it be extended in addition to the immunity already assured by reason of his possession of tax-exempt securities. Here, too, the remedy is not the cancellation of the benefits to others of which petitioner complains, but the grant to it of an added bounty which Congress has not authorized and which the Constitution, it seems to me, neither requires Congress nor permits this Court to give.
MR. JUSTICE HOLMES and MR. JUSTICE BRANDEIS join in this dissent.