292 U.S.

371
54 S.Ct. 758
78 L.Ed. 1311

HELVERING, Com'r of Internal Revenue,

v.
INDEPENDENT LIFE INS. CO.
No. 689.
Argued April 4, 1934.
Decided May 21, 1934.

The Attorney General and Mr. J. Crawford Biggs, Sol. Gen., of

Washington, D.C., for petitioner.
[Argument of Counsel from pages 372-373 intentionally omitted]
Mr. William Marshall Bullitt, of Louisville, Ky., for respondent.
[Argument of Counsel from pages 374-376 intentionally omitted]
Mr. Justice BUTLER delivered the opinion of the Court.

This case involves the validity of deficiency assessments of income axes 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 received 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 4
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, including a reasonable allowance for obsolescence.' But it is
provided, section 245(b), that no deduction shall be made under paragraphs (6)
and (7) 'on account of any real estate owned and occupied in whole or in part by
a life insurance company 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 occupied.' Provisions similarly
worded and having the same meaning are contained in the Revenue Act of
1924, 244, 245, 43 Stat. 289 (26 USCA 1003, 1004).
2

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 4 per cent. of book value amounted to $18,400. The result for 1924
was minus $14,629.76, 4 per cent. of the then book value being $19,770.32.
The Commissioner, following section 245(b), added to the rents received from
lessees in each year a sum sufficient to make the net equal to the required 4 per
cent. On that basis the amount of the deficiency for 1923 was $298.97 and for
1924 $1,115.65.1 The Board of Tax Appeals held them direct taxes and
therefore invalid. 17 B.T.A. 757. The Circuit Court of Appeals affirmed, one of
the judges dissenting. 67 F.(2d) 470. Its decision conflicts with Commissioner
v. Lafayette Life Ins. Co. (C.C.A.7) 67 F.(2d) 209, and Commissioner v.
Rockford Life Ins. Co. (C.C.A.7) 67 F.(2d) 213.

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. 1, 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 tha would be to
lay a direct tax requiring apportionment. Pollock v. Farmers' Loan & Trust Co.,
157 U.S. 429, 580, 581, 15 S.Ct. 673, 39 L.Ed. 759; Id., 158 U.S. 601, 635,
637, 659, 15 S.Ct. 912, 39 L.Ed. 1108; Brushaber v. Union Pac. R. Co., 240
U.S. 1, 16, 17, 36 S.Ct. 236, 60 L.Ed. 493, L.R.A. 1917D, 414, Ann. Cas.
1917B, 713; Eisner v. Macomber, 252 U.S. 189, 205, 40 S.Ct. 189, 64 L.Ed.
521, 9 A.L.R. 1570; Dawson v. Kentucky Distilleries & Warehouse Co., 255
U.S. 288, 294, 41 S.Ct. 272, 65 L.Ed. 638; Bromley v. McCaughn, 280 U.S.
124, 136, 50 S.Ct. 46, 74 L.Ed. 226; Willcuts v. Bunn, 282 U.S. 216, 227, 51
S.Ct. 125, 75 L.Ed. 304, 71 A.L.R. 1260. 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 of 252 U.S., 40 S.Ct. 189;
Stratton's Independence v. Howbert, 231 U.S. 399, 415, 417, 34 S.Ct. 136, 58

L.Ed. 285; Doyle v. Mitchell Brothers Co., 247 U.S. 179, 185, 38 S.Ct. 467, 62
L.Ed. 1054; Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 174, 46 S.Ct. 449,
70 L.Ed. 886; Taft v. Bowers, 278 U.S. 470, 481, 482, 49 S.Ct. 199, 73 L.Ed.
460, 64 A.L.R. 362; MacLaughlin v. Alliance Ins. Co., 286 U.S. 244, 249, 250,
52 S.Ct. 538, 76 L.Ed. 1083. Cf. Burk-Waggoner Oil Ass'n v. Hopkins, 269
U.S. 110, 114, 46 S.Ct. 48, 70 L.Ed. 183.
5

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 foundas concededly the fact was
that the annual net yields from investments in such buildings ordinarily
amounted to at least 4 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 4 per cent. of book value. All calculations
contemplated by section 245(b) are made subject to that limitation. Congress
intended that the rule should apply only where rents exceed such 4 per cent.
Where they are less than that, addition of the prescribed rental value and
deduction of expenses operate to increase taxable income.2 The classification is
not without foundation.

The company is not required to include in gross any amount to cover rental
value of space used by it, but in order that, subject to the specified limitation, it
may have the advantage of deducting 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 any basis for the apportionment of expenses between
space used by the company and that for which it receives rents. The calculation
indicated operates as such an opportionment where the rents received are more
than 4 per cent. of book value, but less than that amount plus expenses.3 In such
cases the addition, called rent l value of space occupied by the company, is
employed to permit a deduction on account of expenses. That, as is clearly
shown in the dissenting opinion, supra, page 473 of 67 F.(2d), is the
arithmetical equivalent of lessening the deduction by the amount of the socalled rental value.

Respondent cites nat. Life Ins. Co. v. United States, 277 U.S. 508, 48 S.Ct.
591, 72 L.Ed. 968, 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, 51 S.Ct. 269, 75 L.Ed. 500, 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 Nat. Life Ins.
Co. v. United States. As shown above, the prescribed calculation, section
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, 36 S.Ct. 17, 60 L.Ed. 152.

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, 51 S.Ct. 418, 75 L.Ed. 1049;
Stanton v. Baltic Mining Co., 240 U.S. 103, 36 S.Ct. 278, 60 L.Ed. 546;
Brushaber v. Union Pac. R. Co., supra, 23, 24 of 240 U.S., 36 S.Ct. 236. 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.

10

Mr. Justice McREYNOLDS is of opinion the judgment should be affirmed.

In 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 per cent. 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
deductions, including the $70,005.18.
In 1924, rents were $71,289.21. Taxes, expenses, and depreciation were
$85,918.97. Book value was $494,257.97. The commissioner added $19,770.32
(4 per cent. 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 so increased were subtracted the deductions, including the
$85,918.97.
2

Take for example: Book value of building, $1,000,000; 4 per cent. of book
value, $40,000; rents received, $30,000; expenses, $60,000. If the calculation
prescribed by section 245(b) is not made, taxable income is $30,000.
The calculation prescribed by section 245(b) follows: Rents, $30,000, plus
'rental value,' $70,000 (expenses, $60,000, minus rents, $30,000, plus the 4 per
cent.$40,000) amounts to $100,000, less expenses, $60,000, leaves taxable
income, $40,000. Cf. Article 686, Treasury Regulations, 62 and 65.

Take for example: Book value of building, $1,000,000; 4 per cent. of book
value, $40,000; rents received, $50,000; expenses, $60,000.
On that basis the calculation is: Rents, $50,000 plus 'rental value,' $50,000
(expenses, $60,000 minus rents $50,000 plus 4 per cent., $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.
Assume rents received were $100,000. No rental value need be added.
Deducting expenses, $60,000, leaves taxable income $40,000.