U.S. Supreme Court HELVERING v. INDEPENDENT LIFE INS. CO., 292 U.S. 371 (1934)

[Page 292 U.S. 371, 380]

prescribed rental value and deduction of expenses operate to increase taxable income. [Footnote 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. [Footnote 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

[Page 292 U.S. 371, 381]

of lessening the deduction by the amount of the so-called rental value.

Respondent cites nat. Life Ins. Co. v. United States, , 48 S.Ct. 591, 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, 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.

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; Stanton v. Baltic Mining Co., , 36 S.Ct. 278; 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.

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

Footnote 1 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.

Footnote 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.

Footnote 3 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.