2. Property taxable by a state may not be taxed more heavily
because the owner owns also tax-exempt bonds of the United States.
P. 281 U. S.
3. A state statute providing generally that, in taxing the
assets of insurance companies, the amounts of their legal reserves
and unpaid policy claims shall first be deducted is
unconstitutional in its application to an insurance company owning
nontaxable United States bonds if it require that the deduction in
such case shall be reduced by the proportion that the value of such
bonds bears to total assets,
Page 281 U. S. 314
thus inflicting upon the company a heavier tax burden than it
would have borne had it not owned the bonds. P. 281 U. S.
322 Mo. 339 reversed.
Appeal from a judgment of the Supreme Court of Missouri
sustaining on certiorari a property tax assessed against the
relator insurance company by the city board of equalization.
Page 281 U. S. 317
MR. JUSTICE BUTLER delivered the opinion of the Court.
Appellant is an insurance company organized under the laws of
Missouri. It maintains that, as construed in this case, § 6386,
Revised Statutes of Missouri 1919, is repugnant to the Constitution
and laws of the United States.
Section 6386 provides:
"The property of all insurance companies organized under the
laws of this state shall be subject to taxation for state, county,
municipal and school purposes as provided in the general revenue
laws of this state in regard to taxation and assessment of
Page 281 U. S. 318
Every such company or association shall make returns, subject to
the provisions of said laws: first, of all the real estate held or
controlled by it; second, of the net value of all its other assets
or values in excess of the legally required reserve necessary to
reinsure its outstanding risks and of any unpaid policy claims,
which net values shall be assessed and taxed as the property of
individuals. . . ."
The company made a return in pursuance of that section. The
total value of its personal property was $448,265.33, including
$94,000 in United States bonds. The legal reserve and unpaid policy
claims amounted to $333,486.69. It deducted such bonds, reserve,
and claims, leaving.$20,778.64 as the net value to be taxed.
The board of equalization declined to accept the return, and,
after hearing, the parties held that the bonds of the United States
are not taxable, that § 6386 contravenes provisions of the state
constitution requiring uniform taxation, and that therefore the
company was not entitled to deduct the amount of such reserve and
Page 281 U. S. 319
The board assessed the company's taxable property at $50,000
without disclosing how it arrived at the amount.
On the company's application, the state supreme court issued its
writ of certiorari to bring up for review the record and action of
the board. The court held the section valid, found the company's
liabilities were chargeable against all its assets -- taxable and
nontaxable alike -- declared that such reserve and claims should be
apportioned between the two classes of assets according to their
respective amounts, and determined that approximately 79.03 percent
of such liabilities should be deducted from the value of the
taxable personal property, leaving $90,710.80 as the net value to
be taxed. [Footnote 2
] And, as
that exceeded the amount fixed by the board, the court refused to
disturb the assessment, and entered judgment quashing the writ.
The company made a motion for rehearing on the ground, among
others, that § 6386, as construed, violated the clause of § 8, Art.
I, of the Constitution, which gives to Congress the power to borrow
money on the credit of the United States, and also § 3701, Revised
Statutes (31 U.S.C. § 742), which provides that all bonds of the
United States shall be exempt from taxation by or under state,
municipal, or local authority. The court overruled the motion and
modified its opinion. The modified opinion was the same as the
earlier one except as to details of calculation. It found
$74,136.52 to be the taxable
Page 281 U. S. 320
net value. [Footnote 3
court did not refer to the federal questions raised by the motion
1. It is well settled that this Court will not consider
questions that were not properly presented for decision in the
highest court of the state. Ordinarily, it will not consider
contentions first made in a petition to the state court for
rehearing where the petition is denied without more. Citizens'
National Bank v. Durr, 257 U. S. 99
257 U. S. 106
But here, the company, at the first opportunity, invoked the
protection of the federal Constitution and statute. It could not
earlier have assailed the section as violative of the Constitution
and laws of the United States. The board of equalization completely
eliminated the bonds from its calculations, and there is nothing in
the language of the section to suggest that it authorizes any
diminution of the amount of the deductible reserve and unpaid
claims or an apportionment of such liabilities between taxable and
nontaxable assets. It may not reasonably be held that the company
was bound to anticipate such a construction or in advance to invoke
federal protection against the taxation of its United States bonds.
Upon the facts disclosed by this record, it is clear that appellant
sufficiently raised in the highest court of the state the federal
questions here presented, and is entitled to have them considered.
Saunders v. Shaw, 244 U. S. 317
244 U. S. 320
Ohio ex rel. Bryant v. Akron Park District, 281 U. S.
2. It is elementary that the bonds or other securities of the
United States may not be taxed by state authority.
Page 281 U. S. 321
That immunity always has been deemed an attribute of national
supremacy and essential to its maintenance. The power of Congress
to borrow money on the credit of the United States would be
burdened and might be destroyed by state taxation of the means
employed for that purpose. As the tax-exempt feature tends to
increase and is reflected in the market prices of such securities,
a state tax burden thereon would adversely affect the terms upon
which money may be borrowed to execute the purposes of the general
government. It necessarily follows from the immunity created by
federal authority that a state may not subject one to a greater
burden upon his taxable property merely because he owns tax-exempt
government securities. Neither ingenuity in calculation nor form of
words in state enactments can deprive the owner of the
tax-exemption established for the benefit of the National Life
Ins. Co. v. United States, 277 U. S. 508
277 U. S. 519
and cases cited; McCulloch v.
4 Wheat. 316, 17 U. S.
-432, 17 U. S.
After deducting government bonds (exempt), real estate
(otherwise taxed), legal reserve and unpaid policy claims from
total assets, there remained the amount returned by
appellant.$20,778.64. The court held the section to require the
reserve and unpaid claims to be reduced by the proportion that the
value of the United States bonds bears to total assets. It found
$74,136.52 to be appellant's taxable net value. And so it used the
value of the bonds, $94,000, to increase the taxable amount by
The section discloses a purpose as a general rule to omit from
taxation sufficient assets of the insurance companies to cover
their legal reserve and unpaid policy claims. It would be competent
for the state to permit a less reduction or none at all. But where,
as in this case, the ownership of United States bonds is made the
basis of denying the full exemption which is accorded to those
Page 281 U. S. 322
who own no such bonds, this amounts to an infringement of the
guaranteed freedom from taxation. It is clear that the value of
appellant's government bonds was not disregarded in making up the
estimate of taxable net values. That is in violation of the
established rule. National Life Ins. Co. v. United States,
supra; Northwestern Ins. Co. v. Wisconsin, 275 U.
; Miller v. Milwaukee, 272 U.
THE CHIEF JUSTICE concurs on the ground that this case is
governed by National Life Ins. Co. v. United States,
277 U. S. 508
The substance of the return follows:
Real Estate, Improvement, etc. . . . . . . . . . . . . . .
Bonds, Municipals. . . . . . . . . . . . . . . . . . . . .
Bonds, government. . . . . . . . . . . . . . . . . . . . .
Bonds, Mortgages . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets. . . . . . . . . . . . . . . . . . . . .
Less Real Estate assessed as above and on
which the Company pays taxes . . . . . . . $142,000.00
Less reserve required by law . . . . . . . . 326,522.69
Less U.S. government Bonds . . . . . . . . . 94,000.00
Less Unpaid Policy Claims. . . . . . . . . . 6,964.00
The calculation in the first opinion was in substance as
The court divided total taxable assets $354,265.33 ($349,000
bonds and $5,265.33 cash) by total personal assets $448,265.33
($349,000 bonds, $5,265.33 cash and $94,000 United States bonds).
The result was .7903. Total liabilities $333,480.69 ($326,522.69
reserve and $6,964.00, unpaid policy claims) was multiplied by
.7903. The result was $263,554.53. This was subtracted from
$354,265.33, and the difference was $90,710.80.
The court divided total taxable assets $496,265.33 ($349,000
bonds, $5,265.33 cash, and $142,000 real estate) by total assets
$590,265.33 ($349,000 bonds, $5,265.33 cash, $94,000 United States
bonds and $142,000 real estate). The result was .84. Total
liabilities $333,486.69 was multiplied by .84. The result was
$280,128.81. This was subtracted from $354,265.33, taxable personal
assets, and the difference was $74,136.52.
Opinion of MR. JUSTICE STONE, dissenting.
To state the problem now presented in its simplest concrete
form, if an insurance company has policy liabilities of $100,000,
$100,000 of taxable personal property, and $100,000 of government
bonds, its net assets would be $100,000. Under the statute of
Missouri taxing net assets, as applied by the state court, one-half
of this net worth or $50,000 would be subject to the tax, since
one-half of its entire property consists of taxable assets, and so
contributes one-half of the net. Under the decision of this Court,
the company would go tax-free, on the theory that the Constitution
requires that, in ascertaining the taxable net worth, tax-exempt
bonds must be excluded from the computation as though they were not
liable for the debts of the taxpayer.
That conclusion appears to me to open a new and hitherto
unsuspected field of operation for the immunity from taxation
enjoyed by national and state securities as instrumentalities of
government, and to accord to their owners a privilege which is not
justified by anything that has been decided or said by this
Page 281 U. S. 323
Since Weston v.
2 Pet. 449, this Court, by a long line
of decisions, has so restricted the immunity as to relieve only
from the burden of taxation imposed on such securities or their
income. The immunity has not been supposed to confer other special
benefits on their owners. In every case, it has been consistently
applied so as to leave reasonable scope for the exercise by both
national and state governments of the constitutional power to tax.
Railroad Co. v. Peniston,
18 Wall. 5; Plummer v.
Coler, 178 U. S. 115
South Carolina v. United States, 199 U.
, 199 U. S. 461
Flint v. Stone Tracy Co., 220 U.
, 220 U. S.
-165; Greiner v. Lewellyn, 258 U.
; Blodgett v. Silberman, 277 U. S.
, 277 U. S. 12
see Metcalf & Eddy v. Mitchell, 269 U.
, 269 U. S.
The present tax differs from those which have previously been
considered by the Court in this connection in that it is not
imposed on any specific identifiable property or its income. It is
a tax on net worth, the value of the taxpayer's property after
providing for the policy liabilities. Net worth is the result of a
mathematical computation, into which, of necessity, enter all his
assets subject to liabilities and all such obligations of the
taxpayer as the statute permits to be deducted. It is the result of
the computation which is the subject of the tax, and it is the
subject of the tax to which exemptions are to be applied.
The immunity of government bonds from taxation does not carry
with it immunity from liability for debts. Scottish Insurance
Co. v. Bowland, 196 U. S. 611
196 U.S. 632
whether the measure of the tax be technically described as taxable
net worth or as taxable assets less an allowed deduction
representing liabilities to which they are subject, the state, in
fixing the tax, does not infringe any constitutional immunity by
requiring liabilities to be deducted from all the assets, including
Page 281 U. S. 324
or, what comes to the same thing, by deducting from taxable
assets their proportionate share of the burden of policy
To say that debts must be deducted from taxable assets alone,
that no part of the net worth of the taxpayer who owns tax free
securities may be taxed if his debts equal his tax free assets, is
equivalent to saying, in such a situation, either that the taxable
assets constitute no part of the net worth or that, even though
they are a part, still that part is not taxable. But it is not to
be supposed that a mathematician, an accountant, or a businessman
would regard the taxable assets as contributing nothing to surplus,
or, where one-half of the taxpayer's property is tax free, that
there is any basis for saying that net worth could, on any theory,
be attributed more to one class of assets than the other. Yet the
result now reached would seem to presuppose that the tax-exempt
securities alone had contributed to the taxpayer's net worth. These
incongruous consequences of the rule applied seem to be
attributable to the only assumption on which the rule itself could
proceed -- that government bonds, because they are tax-exempt, are
also debt exempt, or may not be used for the payment of debts,
when, in fact and in law, tax-exempt securities constitute a part
of the corporate reservoir of capital, all of which, without
distinction, may be drawn on for the payment of obligations.
If Missouri, as it undoubtedly might, had levied a tax on all
the property of appellant except its tax-exempt bonds, without any
deduction for its policy reserve, it is difficult to see upon what
articulate principle the tax would be rendered invalid by
permitting the taxpayer to deduct from the value of its assets the
same proportion of all its reserves which the taxable assets bear
to the total property, all of which is liable for its policies. It
would certainly not be because the ownership of the bonds was
discriminated against in the apportionment of
Page 281 U. S. 325
the deduction, or burdened by the tax. Or if, one-half of the
gross assets of a taxpayer being chattels without the state, it had
taxed his property within the state allowing as a deduction
one-half his indebtedness, I do not suppose it would have occurred
to anyone to say that the levy was invalid as a tax upon the
property beyond the taxing jurisdiction. Yet neither of these taxes
differs from the present in its effect on the ownership of either
taxable or tax-free property.
The apportionment of net worth according to the amounts of the
constituent elements which enter into its computation has long been
a familiar method of accountants, and has repeatedly been
incorporated in taxing statutes where, for one reason or other, it
is desirable or necessary not to impose a tax on some of these
elements. The fairness and accuracy of that method has not hitherto
In National Leather Co. v. Massachusetts, 277 U.
, the state levied a tax upon
"such proportion of the fair cash value of all the shares
constituting the capital stock . . . as the value of the assets . .
. employed . . . within the Commonwealth . . . bears to the . . .
total assets of the corporation."
The fair cash value of all the shares was, like net worth, the
result of subtracting all the obligations of the company from its
gross assets. See First National Bank of Wellington v.
Chapman, 173 U. S. 205
173 U. S. 215
cf. State Railroad Tax cases, 92 U. S.
. The proportion of the net worth which was taxable
because attributable to Massachusetts was computed after the
deduction was made. If the theory of tax immunity here sustained
had been followed, all the debts of the company would have been
deducted from that part of the gross assets attributable to the
state, since a taxpayer whose gross assets were all taxable would
have had that privilege. While the methods of computing the taxable
portion of net worth vary, the principle that
Page 281 U. S. 326
"deductions for obligations" are to be apportioned among
taxables and nontaxables is supported in Underwood Typewriter
Co. v. Chamberlain, 254 U. S. 113
Bass, Ratcliff, etc., Ltd. v. Tax Commission, 266 U.
; Shaffer v. Carter, 252 U. S.
, 252 U. S. 56
and United States Glue Co. v. Oak Creek, 247 U.
, 247 U. S.
It is said that the present tax must be held invalid because, as
a matter of law, exemptions may not be reduced, nor may tax burdens
be increased in consequence of the ownership of tax free
securities, and that, in the present case, their ownership was in
fact used to
Page 281 U. S. 327
increase taxable values. Neither proposition can, I think, be
supported. First, it is not universally true that ownership of
tax-exempt securities may not increase the burden of a tax. Taxes
upon transfer at death, state or federal, may be increased by the
ownership by deceased of tax-exempt securities. Plummer v.
Coler, supra; Knowlton v. Moore, 178 U. S.
; Greiner v. Lewellyn, supra; Blodgett v.
Notwithstanding Macallen v.
Massachusetts, 279 U. S. 620
do not understand that tax-exempt securities of a corporation, or
the income from them, may under no circumstances enter into the
computation of a corporate franchise tax and increase it
proportionately, or that a broker or dealer in securities may not
be taxed on his profits from the purchase and sale of government
and state securities. Compare Peck & Co. v. Lowe,
247 U. S. 165
Barclay & Co. v. Edwards, 267 U.
. In National Leather Co. v. Massachusetts,
an increase of property outside the taxing state might
increase the tax on net assets within the state. For like reasons,
it would seem that the tax-free securities might rightly enter into
the computation of net worth, since they are liable for debts, and
so contribute to net worth, and that the net worth thus computed
should be held subject to the state tax except insofar as
tax-exempt securities contribute to it.
Second, in the present case, it is difficult to see in what
respect the mere ownership of the appellant's tax free securities
has been resorted to in order to increase taxable net values. That
conclusion does not follow from the fact that the state court, in
its second opinion, found a larger taxable value upon a different
interpretation of the statute than in its first. It could be true
only if, by the consistent application of the rule finally laid
down, the shifting of some of the taxpayer's investments from
taxable to exempt securities would result in an increase of
Page 281 U. S. 328
the tax. But such is not the effect of the statute, for, if the
taxpayer who owns no exempt property may be taxed on his full net
worth, but is taxed only half as much if he converts one-half of
his gross assets into tax-exempt bonds, it would seem that
ownership of the latter had resulted in a decrease, and not an
increase, of taxable values, and that the burden of the tax is
diminished with mathematical exactness in the proportion that the
taxpayer has chosen to invest in tax-exempt securities.
Invoking the rule now laid down, a taxpayer having no tax-exempt
securities and legitimately bearing the burden of a state tax on
net worth may put off the burden completely by the simple expedient
of purchasing, on credit, government bonds equal in value to his
net taxable assets. The success of a device so transparently
destructive of the taxing power of the state may well raise doubts
of the correctness of the constitutional principle supposed to
sustain it. So construed, the Constitution does more than protect
the ownership of government bonds from the burdens of taxation. It
confers upon that ownership an affirmative benefit at the expense
of the taxing power of the state by relieving the owner from the
full burden of taxation on net worth to which his taxable assets
have in some measure contributed.
But it is no less our duty to recognize and protect the powers
reserved to the state under the Constitution than the immunities
granted to the federal government. South Carolina v. United
The right of the state to tax net worth, so far
as it is attributable to taxable assets, and that of the national
government to insist upon its exemption so far as tax free property
enters into its computation, stand on an equal footing. There is
nothing in the Constitution nor in the decisions of this Court to
justify a taxpayer in demanding that the one should be sacrificed
to the other, or which would
Page 281 U. S. 329
support the national government in saying to the state that, in
ascertaining taxable net worth, debts must be deducted from taxable
assets alone any more than it would support the state in insisting
that debts should be deducted exclusively from the taxpayer's
government bonds in ascertaining taxable net worth.
Nothing said by this Court in National Life Insurance Co. v.
United States, 277 U. S. 508
decided one week later than the National Leather Company case,
should lead to a reversal of the judgment below. In
that case, an act of Congress taxing the income of insurance
companies granted an exemption of 4% of their reserve. By the terms
of the statute, the benefit of the exemption was withheld to the
extent that the taxpayer received income from tax-exempt
securities. The statute regulated only the exercise of the power of
the national government to tax. Neither it nor the decision of the
court affected the taxing power of a state. The statute was
assailed solely on the ground that it discriminated against the
holder of tax-exempt securities merely because they were
tax-exempt, to the extent that the statutory exemption was withheld
from the holder of government, state, and municipal bonds. The
effect of this discrimination was that, if the taxpayer shifted
investments from its taxable to its tax-exempt list, its tax
remained undiminished until the income from the tax free list
equalled the statutory exemption.
After pointing out that the collector, in applying the statute,
had diminished the statutory exemption by the amount of interest
received from tax-exempt securities, the Court said, p.
277 U. S.
"This, he [the tax collector] 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
Page 281 U. S. 330
subjected to greater burdens upon his taxable property solely
because he owns some that is free."
But the present statute has no such effect. Calling the
deduction of policy liabilities, required for the computation of
the tax, an "exemption," and saying that ownership of tax-exempt
securities is made the basis of denying the "full exemption," may
give this case a verbal resemblance to that, but it does no more.
True, a change by appellant from taxable to tax free investments
would result in a smaller deduction from its taxable assets, but it
would also result in a proportionate reduction of its taxable
assets with a corresponding decrease in taxable values, always, in
exact proportion to appellant's investment in tax-exempt
Only if the taxpayer were the fortunate recipient of a gift of
tax-exempt securities could the net worth of its taxable securities
be increased, and this not solely or at all because its newly
acquired securities are "free," but because they, like its taxable
assets, may be used to meet policy obligations, and thus
proportionately relieve taxable assets from that burden. Similarly,
a gift by way of payment of policy obligations or reinsurance would
increase the tax, although it would not increase taxable assets. So
the increase, by gift of property outside the state, would increase
the tax upon net assets within the state. The property outside the
state is not subject to a tax, but it must pay its share of the
debts. But, in every case, as in the present, the tax assessed
would correspond with mathematical exactness to the contributions
made by the taxable assets to the total not worth. Hence, the
question here is not whether the taxpayer has been discriminated
against because he owns government bonds, but only whether the
privilege which the state recognizes as attaching to their
ownership is sufficiently great.
If the constitutional inhibition is not directed against the
imposition of burdens, but affirmatively compels the
Page 281 U. S. 331
annexation of such benefits to the ownership of government bonds
as will increase their currency and stimulate the market for them,
even though those privileges are extended at the expense of the
constitutional powers of the states, it is difficult to see what
the limits of such a doctrine may be. I suppose that the sale and
market value of government bonds would be materially increased if
we were to say that the Constitution sub silentio
forbidden their seizure for debts, or rendered their possessor
immune from the various forms of state taxation to which this Court
has said he is subject. But however desirable such a consequence
might be thought to be, that could hardly be taken as a sufficient
ground for saying it.
I think the judgment should be affirmed.
MR. JUSTICE HOLMES and MR. JUSTICE BRANDEIS concur in this
* The difference between the two methods may be illustrated by
supposing a corporation with gross assets of $15,000,000 and
obligations of $5,000,000. The fair cash value of all the shares
would then be $10,000,000. Assume that one-tenth of its property is
in Massachusetts. The assessment would be $1,000,000 under the
case. By the present method, $5,000,000
would be deducted from one-tenth of the gross assets, $1,500,000,
because a concern owning no exempt property might make that
deduction. Under the present case, the company would be free from
In Shaffer v. Carter,
Oklahoma levied a net income tax;
in the case of residents, upon income derived from all sources; in
the case of nonresidents, upon locally derived income. Residents
were permitted to deduct all losses; nonresidents were permitted
deductions only for local losses. The Court said (p. 252 U. S.
"The difference, however, is only such as arises naturally from
the extent of the jurisdiction of the state in the two classes of
cases, and cannot be regarded as an unfriendly or unreasonable
discrimination. As to residents, it may, and does, exert its taxing
power over their income from all sources, whether within or without
the state, and it accords to them a corresponding privilege of
deducting their losses, wherever these accrue. As to nonresidents,
the jurisdiction extends only to their property owned within the
state and their business, trade, or profession carried on therein,
and the tax is only on such income as is derived from those
sources. Hence, there is no obligation to accord to them a
deduction by reason of losses elsewhere incurred."
There seems to be as colorable reason in that case as in this
for asserting that the receipt of exempt income is made the basis
for a reduction or elimination of an exemption granted to