United States v. Atlas Life Ins. Co.,
381 U.S. 233 (1965)

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U.S. Supreme Court

United States v. Atlas Life Ins. Co., 381 U.S. 233 (1965)

United States v. Atlas Life Ins. Co.

No. 489

Argued March 31, 1965

Decided May 17, 1965

381 U.S. 233


The Life Insurance Company Income Tax Act of 1959 provides for the division of an insurance company's investment income into two parts, the policyholder's share (to be added to reserves for payment of future claims), and the company's share, with a pro rata allocation of each item of income to each share, including tax-exempt interest. Only the company's share is subject to the tax, and, from this share, the Act permits a deduction of its pro rata amount amount of tax-exempt interest to arrive at taxable income. The Act contains exceptions where the application of the definition of taxable investment income results in the imposition of tax on "any interest which, under section 103, is excluded from gross income" -- interest earned on state and municipal bonds -- in which case an adjustment shall be made to prevent such imposition. Respondent claims that it is entitled to deduct from total income both the full amount of the policyholders' share and the full amount of exempt interest received; otherwise, by assigning part of the exempt interest to the policyholders' share, the statute would place more taxable income in the company's share, and thus the company would pay more tax because it has received tax-exempt interest, since it must allocate a portion thereof to the reserve account. Respondent sued in District Court for a refund, claiming an adjustment under the statutory exceptions and asserting that the treatment of tax-exempt interest was unconstitutional and contrary to National Life Ins. Co. v. United States, 277 U. S. 508, and Missouri Ins. Co. v. Gehner, 281 U. S. 313. The District Court rejected these claims, but the Court of Appeals reversed.

Held: there is no statutory or constitutional barrier to the application in this case of the pro rata formula set forth in the Act to compute respondent's taxable income, and the statutory exceptions are not applicable. Pp. 381 U. S. 239-251.

(a) The legislative history clearly shows that Congress intended the pro rata formula to be of general application, and that Congress did not consider it to lay a tax on exempt interest in the usual case, such as this one. Pp. 381 U. S. 239-242.

Page 381 U. S. 234

(b) This tax is not inconsistent with the rule of National Life, supra, that "one may not be subjected to greater burdens upon his taxable property solely because he owns some that is free," since the displacement of taxable income with exempt income under the formula reduces the tax bas and the burden per taxable dollar remains the same. Pp. 381 U. S. 243-244.

(c) The extension of the rule of National Life in Missouri Ins. Co. v. Gehner, supra, was unexplained, and was not followed in Denman v. Slayton, 282 U. S. 514, decided but one term after Gehner, and Helvering v. Independent Life Ins. Co., 292 U. S. 371, which hold that disallowance of an expense attributable to the production of nontaxable income is not to impose an impermissible tax on the exempt receipts. Pp. 381 U. S. 244-247.

(d) Respondent has an obligation to set aside each year a large portion of its income for the benefit of policyholders, from whom it obtains most of its funds; the policyholders' claim against income is sufficiently direct and immediate to justify treating a major portion of income not as income to the company, but as income to the policyholders. Pp. 381 U. S. 247-248.

(e) The pro rata formula treats taxable and exempt income in the same way, deeming that both are saddled with an equal share of the company's obligation to policyholders. It does no more than charge the exempt income with a fair share of the burdens properly allocable to it, which is permissible under Denman and Independent Life, supra. Pp. 381 U. S. 249-251.

333 F.2d 389 reversed.

Page 381 U. S. 235

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