277 U.S.

508
48 S.Ct. 591
72 L.Ed. 968

NATIONAL LIFE INS. CO.

v.
UNITED STATES.
No. 228.
Argued April 12, 1928.
Decided June 4, 1928.

Messrs. William Marshall Bullitt, of Louisville, Ky., J.

Harry Covington, of Washington, D. C., Moorfield Storey, of Boston,
Mass., and George B. Young, of Montpelier, Vt., for petitioner.
[Argument of Counsel from pages 509-513 intentionally omitted]
The Attorney General and Mr. Alfred A. Wheat, of Washington, D. C.,
for respondent.
[Argument of Counsel from pages 514-516 intentionally omitted]
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 interest and dividends and rents received,
less certain specified deductions: (1) Interest derived from tax-exempt
securities, if any; (2) a sum equal to 4 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 (63 Ct. Cl. 256).

The Revenue Act of 1921, approved November 23, 1921, chapter 136, tit. 2,

The Revenue Act of 1921, approved November 23, 1921, chapter 136, tit. 2,
Income Tax (42 Stat. 237, 238, 252, 261) provides: 'Sec. 213. That for the
purposes of this title (except as otherwise provided in sec. 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. * * *' Comp. St. 6336 1/8
ff.

'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

10

'(b) For each calendar year thereafter, 12 1/2 per centum of such excess
amount.' Comp. St. 6336 1/8 nn.

11

'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 (was
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:

12

'(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);

13

'(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.' Comp. St. 6336 1/8 t(2).

14

'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.

15

'(b) The term 'reserve funds required by law' includes * * *' Comp. St. 6336
1/8 t(3).

16

'Sec. 244. (a) That in the case of a life insurance company the term 'net income'
means the gross income less

17

'(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);

18

'(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). * * *' Comp. St. 6336 1/8 t(4).

19

(3)(4)(5)(6)(7)(8) and (9) grant other exemptions not now important.

20

The mean of petitioner's reserve funds for 1921 was $67,381,877.92. Four per
centum of this is $2,695,279.12.

21

During 1921 interest derived from all sources amounted to $3,811,132.78; from
dividends, nothing; from rents, $13,460-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.

22

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 per cent. of the reserve fund
($2,695,279.12) and ($1,125,788.26) interest received from exempt securities;
miscellaneous items, not contested and neglible 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 10 per centum, $92,490.20.

23

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 per cent. 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.
24

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 per cent. of the reserves because of
interest received from tax-exempt securities, in effect, defeated the exemption
guaranteed to their owners.

25

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 per cent. 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.

26

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 of assessment, including, of course, deductions from
gross values. What remains after subtracting all allowances is the thing really
taxed.

27

U. S. v. Ritchie (1872) Fed. Cas. No. 16168-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, $1,000 of
it should be applied to the exemption clause. Giles, J., held:

28

'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.'
29

People, etc., v. Commissioners, etc. (1870) 41 How. Prac. (N. Y.) 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.

30

Packard Motor Car Co. v. City of Detroit (1925) 232 Mich. 245, 205 N. W. 106
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 radio 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.

31

See, also, City of Waco v. Amicable Life Ins. Co. (Tex. Com. App. 1923) 248
S. W. 332.

32

Miller et al., Executors, v. Milwaukee, 272 U. S. 713, 47 S. Ct. 280, 71 L. Ed.

487, 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.

33

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, 48 S. Ct. 55, 72 L. Ed. 202 (November 21, 1927);
also that the United States may not tax state or municipal obligations. Metcalf
& Eddy v. Mitchell, Admx., 269 U. S. 514, 521, 46 S. Ct. 172, 70 L. Ed. 384.

34

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 (section 213) expressly disavows any
purpose to tax interest upon the latter's obligations. Section 1403 provides:
35

'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.'
Comp. St. 6371 4/5 n.

36

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.

37

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 per cent. 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.

38

The judgment of the Court of Claims (63 Ct. Cl. 256) 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.

39

On Writ of Certiorari to the Court of Claims.

40

Mr. Justice BRANDEIS, dissenting.

41

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 receipts.1 See New York Life Insurance
Co. v. Edwards, 271 U. S. 109, 46 S. Ct. 436, 70 L. Ed. 859; McCoach v.
Insurance Co. of North America, 244 U. S. 585, 37 S. Ct. 709, 61 L. Ed. 1333.

Compare Penn Mutual Life Insurance Co. v. Lederer, 252 U. S. 523, 40 S. Ct.
397, 64 L. Ed. 698. The inclusion of premium receipts, with corresponding
deductions, was found to be unsatisfactory. After much consideration,
Congress, upon consultation with the life insurance companies and with the
approval of at least most of them, substituted a new basis for computing the
tax. 2 Act of November 23, 1921, c. 136, 243-245, 42 Stat. 227, 261. The
validity of that act is now attacked by the National Life Insurance Company.
Other companies have, as amici curiae, filed a brief in support of the legislation.
42

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 herethe provisions in paragraphs (1) and (2) of section 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 and this deduction is to
be made to the full extent, under all circumstances. Paragraph (2) provides that
there shall be deducted such amount, if any, as is required to be added to the
income from the tax-exempt securities, to equal 4 per cent. of the mean
insurance reserve. Thus, no deduction under paragraph (2) will be allowed, if
the income from the tax-exempt securities equals or exceeds 4 per cent. of the
required reserve. And if the company has any income from tax-exempt bonds,
it will not receive the full deduction of 4 per cent. of the required reserve, under
paragraph (2). The reason for allowing the deduction of 4 per cent. of the
reserve is that a portion of the 'interest, dividends, and rents' received have to be
used each year in maintaining the reserve; i. e., adding to it on the basis of a
certain interest rate, varying from 3 per cent. to 4 per cent. according to the
requirements of the statutes of the several states.

43

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.

44

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 the one laid upon other property; that a person may
not be subjected to greater burdens upon his taxable property because he owns
some that is free; that here the company has been required to pay more upon its
taxable income than could have been demanded under the statute had the
income come been derived solely from taxable securities; that to permit this to
be done would destroy the guaranteed exemption for which the bondholder
lawfully contracted, and would enable the federal government to burden the
states; and that this cannot be done, whatever the device or form of words
employed by Congress. The argument rests, I think, upon misconceptions.

45

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, 20 L. Ed. 122;
Metcalf & Eddy v. Mitchell, 269 U. S. 514, 521-524, 46 S. Ct. 172, 70 L. Ed.
384. As to the United States bonds, the claim is that the due process clause of
the Fifth Amendment is violated, because the act nullifies the provision in the
bond that it shall be exempt from federal taxation.4 On this contention the court
does not pass. Compare Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 25,
36 S. Ct. 236, 60 L. Ed. 493. But it holds, nevertheless, that there must be
deducted the full 4 per cent. of the reserve in addition to the tax-exempt interest
from federal as well as from state securities. It interprets the will of Congress to
be that such a deduction should be made, because otherwise federal obligations
would have less favorable treatment than must be accorded state bonds.

46

As the tax imposed by the Act of 1921 is on net income, I should have
supported that it was settled by Flint v. Stone-Tracy Co., 220 U. S. 107, 147,
162, 31 S. Ct. 342, 55 L. Ed. 589, Ann. Cas. 1912B, 1312, 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, 38 S. Ct. 432, 62 L. Ed.
1049; Barclay & Co. v. Edwards, 267 U. S. 442, 447, 45 S. Ct. 135, 69 L. Ed.
703, or the inclusion in a state tax of receipts from interstate commerce, United

States Glue Co. v. Oak Creek, 247 U. S. 321, 326, 38 S. Ct. 499, 62 L. Ed.
1135, Ann. Cas. 1918E, 748; Shaffer v. Carter, 252 U. S. 37, 57, 40 S. Ct. 221,
64 L. Ed. 445; Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 120,
41 S. Ct. 45, 65 L. Ed. 165, would not have rendered the tax objectionable.
Compare Interbore Rapid Transit Co. v. Sohmer, 237 U. S. 276, 284, 35 S. Ct.
549, 59 L. Ed. 951. 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).
47

The only factual basis for complaint by the company is that, although a holder
of tax-exempt bonds, it is, in respect to this particular tax, no better off than it
would have been had it held only taxable bonds. Or, to put it in another way,
the objection is not that the plaintiff is taxed on what is exempt, but that others,
who do not hold tax-exempt securities, are not taxed more. But neither the
Constitution, nor any Act of Congress, nor any contract of the United States,
provides that, in respect to this tax, a holder of tax-exempt bonds, shall be better
off than if he held only taxable securities. Nowhere can the requirement be
found that those who do not hold tax-exempt securities shall, in respect to every
tax, be subjected to a heavier burden than the owners of tax-exempt bonds.

48

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 on intangibles, or an income
tax, for the heavy general property tax to which all taxable bonds had
theretofore been subject. The amendment of the state Constitution involved in
Florida v. Mellon, 273 U S. 12, 47 S. Ct. 265, 71 L. Ed. 511, by which Florida
prohibited its Legislature from imposing taxes on succession or on income, and
offered to the rich a haven of tax immunity, reduced the potential demand for,
and hence the value of, tax-exempt bonds. By all such legislation the relative
advantage, with respect to some taxes, of tax-exempt over taxable bonds was
lessened. With respect to other taxes, the relative advantage was wholly
removed. And the relative value of the tax-exempt bonds to the holder was

thereby necessarily reduced. But obviously that lessening of relative advantage

and of value did not impair any legal right possessed by the holder.
49

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. Plumber v. Coler, 178 U. S. 115, 20 S. Ct. 859, 44 L.
Ed. 988; Orr v. Gilman, 183 U. S. 278, 22 S. Ct. 213, 46 L. Ed. 196. Compare
Greiner v. Lewellyn, 258 U. S. 384, 42 S. Ct. 324, 66 L. Ed. 676. This is true
also of the tax upon Connecticut savings banks, upheld in Society for Savings
v. Coite, 6 Wall. 594, 18 L. Ed. 897; of that upon Massachusetts savings banks,
upheld in Provident Institution v. Massachusetts, 6 Wall. 611, 18 L. Ed. 907; of
that upon Massachusetts manufacturing corporations, upheld in Hamilton Co. v.
Massachusetts, 6 Wall. 632, 18 L. Ed. 904; of that upon insurance corporations,
upheld in Home Insurance Co. v. New York, 134 U. S. 594, 10 S. Ct. 593, 33
L. Ed. 1025. 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 not been a holder of United States bonds. 7
Similarly it has been held, in a long line of cases sustaining state laws taxing
shares in a national bank to the shareholders, that no deduction need be made in
the assessment on account of the United States bonds constituting a part of the
assets of the bank by which the value of the shares is measured. Van Allen v.
Assessors, 3 Wall. 573, 583, 18 L. Ed. 229; People v. Commissioners, 4 Wall.
244, 255, 18 L. Ed. 344; Peoples National Bank of Kingfisher v. Board of
Equalization, 260 U. S. 702, 43 S. Ct. 98, 67 L. Ed. 471; Des Moines National
Bank v. Fairweather, 263 U. S. 103, 114, 44 S. Ct. 23, 68 L. Ed. 191.

50

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, 17 S. Ct. 829, 42 L. Ed.
236. 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, 47 S. Ct. 265, 71 L. Ed.
511; nor to give to holders of its own bonds privileges not granted by its
contract with them. As was stated by counsel for the amici curiae:
51

'This allowance of a deduction of a fixed percentage, or 4 per cent. of the mean

of the reserve, itself points to the nature of the deduction, not as a right but as a
favor. In granting this favor, in the interest of policyholders, Congress was
entitled to consider the deduction already allowed for income in tax-exempt
securities.'8

52

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
stated that all the life insurance companies favored the measure.10 There is no
suggestion of a purpose in Congress to favor some companies at the expense of
others. But, even if the possibility of such discrimination appeared, the
objection of inequality in operation, if it were applicable to federal legislation,
Brushaber v. Union Pacific R. R., 240 U. S. 1, 25, 36 S. Ct. 236, 60 L. Ed. 493;
La Belle Iron Works v. United States, 256 U. S. 377, 392, 41 S. Ct. 528, 65 L.
Ed. 998; Barclay v. Edwards, 267 U. S. 442, 450, 45 S. Ct. 135, 348, 69 L. Ed.
703, would not be open here. For there is no finding of the Court of Claims that
the National Life fares less well than some other company. See Pullman Co. v.
Knott, 235 U. S. 23, 26, 35 S. Ct. 2, 59 L. Ed. 105; Oliver Iron Co. v. Lord, 262
U. S. 172, 180, 181, 43 S. Ct. 526, 67 L. Ed. 929.

53

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, 48 S. Ct. 55, 72 L. Ed.
202. In Miller v. Milwaukee, 272 U. S. 713, 47 S. Ct. 280, 71 L. Ed. 487, 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, 25 L. Ed. 705, in Farmers' & Mechanics' Savings Bank v. Minnesota,
232 U. S. 516, 521, 34 S. Ct. 354, 58 L. Ed 706, and in each of the cases from
the state courts cited, was a direct property tax imposed upon federal
obligations.11

54

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 the 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 Trucker v. Ferguson, 22 Wall. 527, 575, 22 L. Ed. 805; Wilmington
& Weldon R. R. v. Alsbrook, 146 U S. 279, 294, 13 S. Ct. 72, 36, L. Ed. 972;
Bank of Commerce v. Tennessee, 161 U. S. 134, 146, 16 S. Ct. 456, 40 L. Ed.
645; Ford v. Delta & Pine Land Co., 164 U. S. 662, 17 S. Ct. 230, 41 L. Ed.
590; Chicago Theological Seminary v. Illinois, 188 U. S. 662, 674, 23 S. Ct.
386, 47 L. Ed. 641; People ex rel. Metropolitan Street Ry. Co. v. St. Bd. of Tax
Com'rs, 199 U. S. 1, 36, 25 S. Ct. 705, 50 L. Ed. 65; Jetton v. University of the
South, 208 U. S. 489, 499, 28 S. Ct. 375, 52 L. Ed. 584. The rule was acted
upon as recently as Millsaps College v. City of Jackson, 275 U. S. 129, 48 S.
Ct. 94, 72 L. Ed. 196.
55

Moreover, even if the decision of the court on the main question be accepted as
the rule of substantive law, I am unable to see how the company can be allowed
to recover anything. The provision of section 245 is that there shall be deducted
from the gross income:

56

'(2) An amount equal to the excess, if any, over the deduction specified in
paragraph (1) of this subdivision (i. e., the interest on tax-exempt securities), of
4 per centum of the mean of the reserve funds required by law.' (Comp. St.
6336 1/8 t(4)(a2)).

57

The court has, of course, power to declare that the system of taxation
established by Congress is unconstitutional. But I find no power in the court to
amend paragraph (2) of section 245 so as to allow the company to deduct 4 per
cent. of its reserves, in addition to its income from tax-exempt securities.
Congress was confessedly under no obligation to allow any deduction on
account of the insurance reserves of any company. To expand the scope of the
permitted deduction is legislation-and none the less so because the operation
can be performed by striking out certain words of the act.

58

The power so to legislate is not conferred on this court by section 1403 of the
Act. That section declares:

59

'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.'
Comp. St. 6371 4/5 n.

60

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, 42 S. Ct. 453, 459, 66 L. Ed. 822:

61

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.'

62

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 exercise of such a power. Here the asserted
unconstitutionality can be cured as readily by striking out the whole of
paragraph (2) as by enlarging it. Section 1403 gives no light as to which course
Congress would prefer. So far as there are indications elsewhere, they would
point to the former course. The new method of taxation was intended by
Congress to procure additional revenue from the insurance companies. House
Report, 67th Cong. 1st Sess. No. 350, p. 14. And the deduction permitted by
paragraph (2) was a concession which Congress need not have made. Whether,
in view of these facts, a court could properly save the act by striking out
paragraph (2), or whether the alleged unconstitutionality necessarily renders
invalid the whole scheme of taxation, thus leaving in force the tax on insurance
companies contained in the Act of 1918,12 there is no need to consider.
Compare Springfield Gas & Electric Co. v. Springfield, 257 U. S. 66, 69, 42 S.
Ct. 24, 66 L. Ed. 131; Dorchy v. Kansas, 264 U. S. 286, 290, 44 S. Ct. 323, 68
L. Ed. 686. On either view there can, in my opinion, be no recovery on the
findings here.

63

Mr. Justice HOLMES and Mr. Justice STONE join in this dissent.

64

Mr. Justice STONE, dissenting.

65

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.

66

In granting a bounty of any short, Congress has a particular purpose: The

generous protection of insurance reserves in the interest of the policyholders.
For that purpose an exemption of 4 per cent. of the reserves was considered
sufficient. In the case of companies already entitled to an exemption of 4 per
cent., a further act of bounty was of course unnecessary to accomplish the end
in view. Unless established principles require it, I do not think we should hold
that Congress was powerless to act as generously as was necessary to achieve
its useful purpose without granting additional and unnecessary bounties to
insurance companies fortuitously in possession of tax-exempt bonds.

67

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.

68

But, even though the result now reached were to be deemed a logical
implication of the doctrine announced in Collector v. Day, 11 Wall. 113, 20 L.
Ed. 122, 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, 46 S. Ct. 172, 70 L. Ed. 384. 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 States was
obliged to pay the same amount in taxes that it would have been required to pay
if it had not been a holder of United States bonds.' Not all income earned in the
employment of a state is exempt from federal taxation, Metcalf & Eddy v.
Mitchell, supra; instrumentalities affecting indirectly or remotely the functions
of one government may nevertheless be taxed by the other, Gromer v. Standard
Dredging Co., 224 U. S. 362, 32 S. Ct. 499, 56 L. Ed. 801; Baltimore
Shipbuilding Co. v. Baltimore, 195 U. S. 375, 25 S. Ct. 50, 49 L. Ed. 242;
Fidelity & Deposit Co. v. Pennsylvania, 240 U. S. 319, 36 S. Ct. 298, 60 L. Ed.
664.

69

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 taxpayer 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.
70

Mr. Justice BRANDEIS joins in this dissent.

Act of August 5, 1909, c. 6, 38, 36 Stat. 11, 112; Act of October 3, 1913, c.
16, 38 Stat. 114, 172, 173; Act of September 8, 1916, c. 463, 39 Stat. 756, 765768; Act of February 24, 1919, c. 18, 40 Stat. 1057, 1075-1079. Under all these
acts the companies were allowed to deduct the amount paid on policies (except
as dividends) and the amount required by law to be added to their reserves.

In a memorandum filed with the Committee on Ways and Means of the House
of Representatives at the time when the Revenue Bill of 1918 (40 Stat. 1057)
was being considered, the Association of Life Insurance Presidents stated:
'Although only a minor proportion of the premiums received by the insurance
companies constitutes true income, the greater part being the policyholders'
contributions toward current losses and to permanent capital, the entire
premium income is included in gross income under the income tax law. This
departure from principle is, however, rendered innocuous through deductions
expressly allowed by the statute.' Hearings before the Committee on Ways and
Means, House of Representatives, 65th Cong. 2d Sess., on the Proposed
Revenue Act of 1918, Pt. I, p. 811. The Senate Finance Committee
recommended in 1918 the plan later included in the Act of 1921, namely, that
the basis of the tax be changed so as to include only the investment income, and
that the deductions should be similarly limited. Senate Report, 65th Cong. 3d
Sess. No. 617, p. 9. In presenting the bill Senator Simmons stated that it had
been framed after consultation with many representatives of the life insurance
companies. 57 Cong. Rec. 254. The plan was adopted by the Senate, but had to
be abandoned in conference.
At the Annual Meeting of Life Insurance Presidents, December, 1920, it was
stated that the basis of the income tax was unsatisfactory both to the companies
and to the government, and that a plan similar to that embodied in the Senate
amendment to the 1918 bill should be adopted. Proceedings of the Fourteenth
Annual Meeting, pp. 140, 141, 143-145. The Revenue Bill of 1921 (42 Stat.
227), as introduced in the House, contained the plan of taxation which had been

adopted by the Senate is 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.
3

The scope of the deduction to be made on account of tax-exempt securities is

defined by paragraph 4 of subdivision (b) of section 213 of act: '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; or (d) bonds issued by the War Finance Corporation.
In the case of obligations of the United States issued after September 1, 1917
(other than postal savings certificates of deposit), and in the case of bonds
issued by the War Finance Corporation, the interest shall be exempt only if and
to the extent provided in the respective acts authorizing the issue thereof as
amended and supplemented, and shall be excluded from gross income only if
and to the extent it is wholly exempt to the taxpayer from income, war profits
and excess profits taxes.' 42 Stat. 227, 238 (Comp. St. 6336 1/8 ff).

The precise terms of the exemption are not the same in all issues of United
States bonds. Thus, bonds issued under the First Liberty Loan are declared to be
'exempt, both as to principal and as to interest, from all taxation, except estate
or inheritance taxes, imposed by authority of the United States, or its
possessions, or by any state 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.

For the effect of the pending federal reserve legislation and its enactment
(December 23, 1913, c. 6, 38 Stat. 251), on the market value of United States
bonds held to secure national bank circulation, see Commercial & Financial
Chronicle, vol. 97, pp. 91, 153, 271, 1083, volume 98, pp. 131, 200.

Act of June 2, 1924, c. 234, 43 Stat. 253, 265 (26 USCA 952(a); Comp. St.
6336 1/6 ee(a)); Act of February 26, 1926, c. 27, 44 Stat. 9, 21 (26 USCA
952(a)).

Recently, these cases were cited with approval in Flint v. Stone-Tracy Co., 220

U. S. 107, 165, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312, and in
Kansas City, Ft. Scott & Memphis Ry. Co. v. Botkin, 240 U. S. 227, 232, 36 S.
Ct. 261, 60 L. Ed. 617.
8

The brief for the amici curiae states further: 'The petitioner has neither
constitutional nor statutory right to deduct from its income an amount equal to 4
per centum of the mean of its reserve or to deduct any percentage of its reserve
funds, or to deduct any interest derived from the investment of its reserve funds
(in addition to that from tax-exempt securities). * * * Every life insurance
company that has tax-exempt securities is treated exactly on the same basis.
Companies that have tax-exempt securities are not entitled to a double
deduction and those that have no tax-exempt securities still have reserves which
they hold for the protection of their policy holders and Congress has fairly
allowed a deduction of a percentage of those reserves. * * * This was a mere
question of policy which Congress was free to adopt as it chose. * * * What the
petitioner wants is not simply to have its constitutional right protected, and to be
immune from taxation on its investment in government securities, but to get a
further advantage, to which it has no constitutional right, that is, to include its
tax-exempt income in figuring its deduction on its reserve. It seeks not freedom
from taxation, but a preferred position in calculating its reserve. What is there
in the Constitution which comples Congress to give such an advantage? * * *
The petitioner has no constitutional right to gain an advantage from its
investment in tax-exempt securities beyond the fact that it is not to be deprived
in whole or in part of its investment and that the investment is not to be made a
subject of taxation.'

The amount of the United States securities outstanding on June 30, 1921, was
$23,748,292.000. See Annual Report of Secretary of the Treasury for 1921, pp.
680-685. This figure does not include federal farm loan bonds, of which
$420,763,315 were outstanding October 31, 1921, Id., 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. Id., 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.

10

See note 1.

11

In Packard Motor Co. v. Detroit, 232 Mich. 245, 247, 248, 205 N. W. 106, the
decision was rested expressly upon that ground. In City of Waco v. Amicable
Life Insurance Co. (Commission of Appeals of Texas), 248 S. W. 332; (Court
of Civil Appeals, 230 S. W. 698, 702, the case was rested upon the construction

of the state statute. The constitutional question was treated slightly and obiter.
In People v. Board of Commissioners of Taxes, 41 How. Pr. 459, 474 (Supreme
Court of New York, at General Term 1871), there 'was no written opinion, the
decision being rendered on argument.' It does not appear whether it was placed
on the construction of the statutes or on a constitutional ground. This is also
true of U. S. v. Ritchie, Fed. Cas. No. 16168.
12

That tax was repealed by section 1400(a) of the Act of 1921 (Comp. St. 6371
4/5 m(a)). But section 1400(b) provides: 'In the case of any tax imposed by any
part of the Revenue Act of 1918 repealed by this act, if there is a tax imposed
by this act in lieu thereof, the provision imposing such tax shall remain in force
until the corresponding tax under this act takes effect under the provisions of
this act.' 42 Stat. 227, 321 (Comp. St. 6371 4/5 m(b)).