dissenting. I respectfully dissent.
In my opinion, section 207(a)(2) is unconstitutional as applied to the taxpayer here.
Although disagreeing with the conclusion reached by the majority opinion, I agree with the analysis of the problem contained therein, and I believe that the opinion provides a significant service in clearing away certain misconceptions concerning the nature and scope of the Federal taxing power. Certainly, the 16th amendment did not create a new subject for taxation. The power to tax income had existed from the beginning. Nor did the amendment provide a new limitation upon the exercise of that power. The amendment does no more and no less than its plain words say, namely, that taxes on incomes regardless of source may be imposed without apportionment.
Despite this fact, I think it fair to say that there is a widespread belief, not without support in the case law, that the 16th amendment in some fashion prohibits Congress from levying an income tax on anything which is not income, and that a tax so levied is invalid. For example, it is not an uncommon assumption that in taxing the income of a manufacturer Congress must, by virtue of the 16th amendment, permit an adjustment for cost of goods sold. This example may be multiplied by a number of other related situations involving recovery of capital, adjustments for basis, allowance for losses, and so forth. With respect to all of these, there has been an implicit assumption on the part of many that failure to permit an appropriate adjustment for such items in computing taxable income would be invalid because the result is simply not “income” within the meaning of the 16th amendment. A case in point is our own decision in Lela Sullenger, 11 T.C. 1076 (1948), where we declared at page 1077:
Section 23 makes no provision for the cost of goods sold, but the Commissioner has always recognized, as indeed he must stay within the Constitution, that the cost of goods sold must be deducted from gross receipts in order to arrive at gross income. No more than gross income can be subjected to income tax upon any theory. * * *
Again, in 1 Mertens, Law of Federal Income Taxation sec. 5.06, it is declared:
While there has been considerable theoretical difficulty in determining when an increment in capital has been realized so as to be taxable, there is substantial agreement that amounts received as a return of capital or investment are not income within the general meaning of that term and may not be tawed, under the Siwteenth Amendment. * * * [Emphasis supplied.]
So stated, this reasoning is without basis in the Constitution as is ably demonstrated by the majority opinion. Once it has been determined that a particular tax is imposed on something which is not income, that determination in and of itself decides nothing insofar as the constitutional validity of the tax is concerned. The inquiry must be pushed further. A tax imposed on that which is not income is nonetheless valid unless it is a direct tax uno/pportioned. Thus, the key question is whether the tax is direct or indirect. If it is indirect, as decided by the majority in the instant case, then it is constitutionally irrelevant whether or not the tax is limited to “income.” Moreover, if there is no requirement implicit in the 16th amendment limiting Congress to a tax on “income” only, I do not believe that Congress by simply denominating a certain tax as an “income tax” can be considered to have created such a limitation. Such a denomination may be material, as a matter of statutory construction, in determining whether or not Congress intended to include a certain item in the tax base, but it would be immaterial in determining whether the inclusion of the item exceeded the constitutional power of Congress to tax.
Accepting this analysis as correct, a case such as that before us here may be approached properly in either of two ways. First, the initial inquiry may be to whether the tax is direct or indirect. If found to be the latter, then the inquiry need proceed no further and the tax is valid, assuming uniformity of application. If, on the other hand, the tax is found to be direct under this same approach, then and only then is it necessary to determine whether it is a tax on “income” and, thus, by virtue of the 16th amendment not subject to the requirement of apportionment. The second approach, equally proper under this analysis, is to inquire first whether the tax is levied upon “income” within the meaning of the 16th amendment. If it is, then again we need pursue the matter no further because, regardless of the source of the income, the tax is relieved of the requirement of apportionment, and it makes no difference whether it is direct or indirect. If found not to be levied on income, then it is necessary to determine whether the tax is direct and thus subject to the requirement of apportionment or indirect and thus valid irrespective of apportionment.
All of these premises assume the tax in question to meet the requirement of uniformity of application. There is no question but that the tax involved here does meet that requirement. Moreover, it is equally clear that the tax is not apportioned.
Since either approach set out above is logically correct, I have adopted the second simply because,- initially at least, it leads onto what seems to be more familiar ground, namely, the nature of “income.”
"While the majority opinion sets out in full detail the statutory provisions involved, I believe it appropriate to make clear at the outset that the computations under sections 207(a) (1) and 207(a) (2) are not “alternative” taxes as that term ordinarily is understood. The taxpayer has no choice as to the tax it is to pay but must pay whichever is greater in amount. There is actually only one tax lexied, i.e., the tax imposed by the introductory sentence of section 207 (a) proper, and subsections (a) (1) and (a) (2) are simply methods of computation of that tax.
The primary contentions of the parties can be stated briefly. The petitioner maintains that the tax in question as applied to it is invalid as an income tax because, in failing to allow a deduction for underwriting losses, it taxes gross receipts and is not limited to either gross income or net income. The respondent contends that the tax is valid as an income tax because it is a tax on gross income, not gross receipts, and that in arriving at taxable income Congress has the power to limit or condition deductions from gross income. (It is perhaps noteworthy that the argument of both parties assumes that the validity of the tax turns upon whether or not it is limited to “income” within the meaning of the 16th amendment.)
In Eisner v. Macomber, 252 U.S. 189 (1920), the Supreme Court declared that the term “income” as used in the 16th amendment means the gain derived from capital, from labor, or from both combined, provided it be understood to include proht gained through a sale or conversion of capital assets. In effect, the Court was holding that the 16th amendment used the term in the same sense as it had been construed by the Court in the cases arising under the Corporation Tax Act of 1909. Stratton's Independence v. Howbert, 231 U.S. 399 (1913); Doyle v. Mitchell Brothers Co., 247 U.S. 179 (1918); Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509 (1921). Implicit in this construction is the concept that gain is an indispensable ingredient of “income,” and it is this concept which provides the standard by which we must determine whether the tax computed under section 207 (a) (2) is a tax on “income” within the meaning of the 16th amendment.
In expressing thus my reliance on the principle announced in Eisner v. Macomber, supra, I am not unmindful of the cautionary words of the Supreme Court in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), when it declared at page 431:
The distribution, therefore, was held not a taxable event. In that context— distinguishing gain from capital — the definition [in Eisner v. Macomber] served a useful purpose. But it was not meant to provide a touchstone to all future gross income questions.
However, the Court went on to point out in the latter case that “[h]ere we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” (348 U.S. 426, 431.) Conceding, therefore, that there can be many differences of opinion over what constitutes gain in particular circumstances, and recognizing that the decision in Eisner v. Macomber with respect to whether certain stock dividends represented gain to the taxpayer does not control every other determination of whether a specific item represents gain and, thus, income, I do not conceive that the soundness of the fundamental principle upon which that case was decided can now be questioned, namely, that income within the meaning of the 16th amendment means gain, and, conversely, that where there is no gain there is no income. The dissenting opinion of Mr. Justice Brandéis in Eisner v. Maeomber disputed the Court’s opinion only on the question of whether the particular stock dividends in fact represented gain and, thus, income. (252 U.S. 189, 220-238.)
Moreover, the dissenting opinion of Mr. Justice Douglas in Helvering v. Griffiths, 318 U.S. 371, 404 (1943), while declaring that Eisner v. Maeomber should be expressly overruled, was not based on a conclusion that “income” does not mean “gain.” Bather, the dissent directed its disagreement with Eisner v. Macomber to “[t]he notion that there can be no ‘income’ to the shareholders in such a case within the meaning of the Sixteenth Amendment unless the gain is ‘severed from’ capital and made available to the recipient for his ‘separate use, benefit and disposal.’ ” (318 U.S. 371, 410.) In tlie case before us, we clearly liave no question of whether gain has or has not been severed from capital but simply of whether there is any gain at all.
The rule of Eisner v. Macomber has been reaffirmed on so many occasions that citation of the cases to this effect would be unnecessarily burdensome. To depart from the rule at this late date would ignore the sound principles upon which that case was decided and would throw into confusion the fundamental income tax structure and law as it has developed in the almost half century which has elapsed since adoption of the 16th amendment. That there cannot be “income” without a “gain” accords with the common understanding of the term, a test of construction which is particularly appropriate in our system of a self-assessed Federal income tax. It is a test which has been applied frequently. For example, in United States v. Kirby Lumber Co., 284 U.S. 1 (1931), Mr. Justice Holmes concluded that the taxpayer there involved “has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here.” See also Brown Shoe Co. v. Commissioner, 133 F. 2d 582 (C.A. 8, 1943); Helvering v. Edison Bros. Stores, Inc., 133 F. 2d 575 (C.A. 8, 1943). Moreover, that which is not income in fact manifestly cannot be made such by the legislative expedient of calling it income. Hoeper v. Tax Commission of Wisconsin, 284 U.S. 206 (1931); Darcy v. Commissioner, 66 F. 2d 581 (C.A. 2, 1933).
The petitioner filed its 1952 return on Treasury Department Form 1120M, entitled “U.S. Mutual Insurance Company Income Tax Be-tum.” Its computation of “Gross Amount of Income (under section 207(a) (2)) ” was as follows:
[ITEM]
19. Total gross income in items 1 to 3, inclusive- $16, 791.21
20. Net premiums_ 1,239, 884. 49
21. Total gross amount of income from interest, dividends, rents, and net premiums (item 19 plus item 20)_$1,256, 675. 70
22. LESS: Dividends to policyholders__
23. Interest wholly exempt from tax * * *_
24. Gross amount of income (item 21 minus the sum of items 22 and 23)_$1,256,675.70
The “Total gross income” referred to above in item 19 was made up as follows:
Interest_ $16, 091. 21
Dividends- 700. 00
Kents-
Total_ 16, 791.21
The tax at 1 per cent of the gross amount of income was computed at $12,566.76, petitioner denying liability for this amount.
Petitioner’s 1952 return with, respect to the tax computation under section 207 (a) (1) listed the following expenses:
Investment expenses_ $30. 00
Taxes- 22. 26
Real estate expenses_ 6, 053. 82
Interest_ 655.15
Total expenses_ 6, 767.23
None of these latter amounts is permitted as a deduction in the computation of the gross amount of income under section 207 (a) (2) nor does petitioner assert that they should be.
In 1952, the petitioner incurred losses on its policies (sometimes hereafter referred to as underwriting losses), which exceeded its gross amount of income ($1,256,675.70) by $206,198.12. Adding the two amounts together, it can he seen that petitioner incurred underwriting losses in 1952 in the amount of $1,462,873.82. It is in the failure to permit these underwriting losses to be excluded or deducted in computing the tax base under section 207(a) (2) that petitioner asserts Congress has exceeded its constitutional power to tax.
Respondent argues that petitioner’s contention is erroneous because deductions are a matter of legislative grace and that Congress may grant them or withhold them as it sees fit in arriving at the net to be taxed. From this principle, he concludes that Congress may validly deny a deduction for underwriting losses even though premium receipts are included in the tax base. The proposition that deductions are a matter of legislative discretion is so well established that it requires no reaffirmation. Helvering v. Independent Life Insurance Co., 292 U.S. 371 (1934); New Colonial Co. v. Helvering, 292 U.S. 435 (1934). Nevertheless, conceding the truth of that proposition, so stated it simply begs the question we must decide.
The income tax is not a tax on gross receipts (Doyle v. Mitchell Brothers Co., supra; Commissioner v. Weisman, 197 F. 2d 221 (C.A. 1, 1952); Lela Sullenger, supra), although it is my considered view that the majority opinion implicitly rejects this principle. Thus, amounts which must be subtracted, whether called “exclusions,” “deductions,” or whatever, in arriving at “income” within the meaning of the 16th amendment have been held not to be matters of legislative grace and to be required by the Constitution. Davis v. United States, 87 F. 2d 323 (C.A. 2, 1937), certiorari denied 301 U.S. 704, rehearing denied 302 U.S. 773. Therefore, while accepting the principle that deductions are a matter of legislative discretion, the question remains of whether the failure to permit an exclusion for miderwriting losses means that petitioner was taxed on something other than “income” in the constitutional sense of the term.
The record before us does not disclose any details of the method of operation of the petitioner. We do not have a copy of its charter, or of its bylaws, or a sample of its policies. Nevertheless, while I recognize that there are a variety of ways in which mutual insurance companies may operate under the laws of the several States, I assume that petitioner possessed the general characteristics common to such companies. “The theory of a mutual insurance company is, that the premiums paid by each member for the insurance of his property constitute a common fund, devoted to the payment of any losses that may occur.” Union Insurance Co. v. Hoge, 21 How. 35, 64 (1858). The members constitute both insurer and insured, contributing by a system of assessments (or premiums) to the creation of a fund from which all losses and liabilities are paid. See 1 Couch, Cyclo. of Ins. Law sec. 250.
Here'the net premiums collected in 1952 were insufficient to pay the policy losses incurred in the same year. Those losses were not estimated losses but were actual and realized in the year in question. How the losses were met, the record does not disclose. However, premiums were collected for the purpose of paying losses, and while we may conjecture reasonably that the amount of the premiums was fixed somewhat in excess of the normal loss expectancy in order to meet ordinary expenses and to provide a reserve against extraordinary contingencies, the fundamental nature of the premiums remains, namely, a fund for the payment of losses.
The definition of “net premiums”1 provided in section 207(b) (2) recognizes that a mutual insurance company may operate by a method of assessment upon its members rather than by levying premiums. Such assessments are treated under the section as the equivalent of premiums. Were a company simply to levy assessments to meet actually incurred losses, I cannot conceive of any concept of “income” which would justify the conclusion that the assessments, to the extent of the losses, represent income to the company. Even in the broadest economic sense, they do not represent gain. I can see no difference here where the fund out of which losses were to be paid was created through the use of premiums.
The record does not disclose what reserves the petitioner possessed but we may infer reasonably that its interest income of $16,091.21 and its dividend income of $700 represented earnings on such a reserve. I also assume that the reserve, whatever its amount may have been, represented the accumulated excess in prior years of petitioner’s premium receipts over underwriting losses and after the payment of the expenses of the operation. Since the very purpose of a reserve is to provide a fund out of which liabilities to policyholders can be met, does that fact provide a valid basis for arguing that Congress may tax current premium receipts as “income” without making allowance for current underwriting losses? Stated another way, do the totality of current premium receipts constitute gain, irrespective of current underwriting losses, simply because the taxpayer possesses a reserve built up in prior years out of which those losses, or part of them, may be met? I do not think so. The reserve exists to pay losses which cannot be met by premium receipts. In a very real sense it represents the “capital” of the mutual insurance company, the pooled resources of its members. To use the existence of such a reserve to support the treatment of premium receipts as gains irrespective of underwriting losses would be equivalent to, and just as illogical as, computing the taxable gains of a manufacturer without allowance for losses on the ground that the manufacturer can provide for those losses out of capital. A tax base so constructed becomes a tax on capital, or potentially so, and that I have never understood the income tax to be. In any event, the argument is unconvincing because the section in question makes no provision with respect to reserves and the tax applies irrespective of whether a reserve in fact exists and irrespective of whether underwriting losses exceed the total of premium receipts and reserves both.
It might be suggested that losses are properly a charge first against reserves and from that assumption argued that current premium receipts may be taxed in their entirety as “income” without taking those losses into consideration. However, I consider such reasoning to be without merit. If annual additions to the reserve were allowed as a deduction from premium receipts in computing the tax base, I might take a different view. Under that circumstance, it might not be necessary to permit the deduction of actual losses in the tax year because properly chargeable to reserves, but such a system presupposes that the taxpayer would be permitted to deduct an annual addition to reserves and that this section does not do. It is true that a taxpayer who employs a bad debt reserve method of accounting must charge actual bad debts in the tax year against that reserve rather than against current receipts, but at the same time he is entitled to deduct a reasonable addition to the bad debt reserve. Ho such allowance is provided Rere. On the contrary, the operation of section 207 (a) (2) can be compared to requiring a taxpayer to include accounts receivable in taxable income in their entirety while at the same time refusing to permit the same taxpayer to deduct either bad debts as incurred or a reasonable addition to a reserve for bad debts.
What the underwriting experience of this petitioner was in prior years or what its income, if any, was, we do not know, and I do not see that we are concerned with such questions. The income tax is based upon the annual concept of income and, in the complete absence of any expression of contrary congressional intent here, I assume that section 207 (a) (2) is intended to conform to that concept. We know the petitioner’s receipts in 1952 and we know its underwriting losses incurred in that year. Beyond these facts we need not inquire on the supposititious ground that even though petitioner might have had no taxable income in 1952, the tax computed under section 207 (a) (2) may somehow represent a fair measure of tax on income perhaps earned in another year.
It is true that the tax with which we are here concerned is applied at a very low rate, a fact which may furnish a temptation to overlook deficiencies which might otherwise be more serious in their practical effect. However, just as it is not within the judicial province to inquire as to the propriety of a given rate of tax selected by Congress once it is established that the subject of the tax itself is within the taxing power of Congress, so I believe a corollary principle to be that, once it is determined that a given tax is not within the constitutional power of Congress, the rate of tax cannot be considered as affecting its invalidity. A tax which is beyond the power of Congress to levy, is invalid irrespective of the rate at which applied. Likewise, if the tax is within the power of Congress, then Congress may, in its own judgment, select any rate to apply. Any other rule would, in effect, place the courts in the position of deciding at what point a tax rate becomes unreasonable, of substituting their judgment for that of Congress in an area where the elected representatives of the people should have sole responsibility. In any event, a particular tax rate does not in itself necessarily provide a fair measure of the burden of a tax, or the reasonableness of that burden. Here, the 1 per cent tax rate provided by section 207 (a) (2) results in a tax computed at $12,566.76. This amount is equivalent to a tax of 75 per cent on the petitioner’s gross investment income of $16,791.21, and of more than 100 per cent on the petitioner’s “conventional” net income computed under section 207(a) (1).
In support of the view that this tax can be construed as falling only on “income,” it might be further argued that section 207(a) provides a tax on net investment income at the regular corporation income tax rates subject to the proviso that the tax so computed cannot in any event be less than 1 per cent of net premiums plus dividends, rents, and interest. So described, can the tax computed under section 207(a) (2), if not itself a tax on “income,” be considered simply a measure of such a tax, a “floor” beneath which the tax on income cannot fall? Assuming for the sake of argument that, once there is determined to be taxable “income,” Congress can then select any convenient yardstick by which the actual amount of the tax on that income is to be measured, the proposition still does not aid us here. Section 207 (a) (2) is not applicable only if there is income. On the contrary, it applies irrespective of whether there is income. In this connection, a recent writer on the subject of the taxation of casualty insurers has made the following observation:2
Thus the true net income tax has appealing operating advantages. There is no tax payable for years of over-all loss, and there is an automatic offset of any underwriting loss against investment gain in years of over-all profit. The present tax formula for mutuals has neither of these economically sensible attributes. A mutual insurer with an underwriting loss is taxed upon its net investment income even though its underwriting loss exceeds that investment net. Indeed, in a year of heavy losses the dividends to policyholders must commonly be reduced, thus increasing the “net premium” income base for the one per cent gross income tax despite the fact that gross premium writings show no gain. This can result in an economic idiocy, since in a year of over-all loss, the mutual insurer’s “income” tax burden will not decline from that borne in a profit year, and it may actually increase both proportionately and absolutely.
The tax computed under section 207(a)(2) clearly is in no way dependent upon whether the taxpayer has income. This being the case, I am unable to accept the proposition that the provision somehow represents a valid measure of a tax on income.
Alternatively, it might be suggested that any going business, including a mutual insurance company, can be presumed to have income and that the computation under section 207(a) (2) simply represents a legislative determination of what constitutes, under certain circumstances, a fair and reasonable amount of tax on that income. The argument is ingenious but hardly persuasive. The imputation of “income” to the mere fact of business existence does not accord with reality, as is perhaps partially evidenced by the fact that the taxpayer here has entered receivership.
The petitioner argues that its losses are akin to the “cost of goods sold” to a manufacturer. The principle is well established, as the respondent agrees, that a manufacturer is entitled to deduct the cost of his materials from gross sales receipts in arriving at gross taxable income. Doyle v. Mitchell Brothers Co., supra; Davis v. United States, supra; Ray Edenfield, 19 T.C. 13 (1952); Lela Sullenger, supra. Nevertheless, the respondent disputes the analogy asserted by petitioner in these words:
A mutual insurance company is not a mercantile business having a cost of goods sold, but is engaged in the business of selling a contract right or promise to perform certain acts upon the happening of a contingency. A mutual insurance company does not have an inventory or stock of goods. In the instant case Penn Mutual, as are all mutuals, consists of a group of persons banding together and pooling contributions to protect members from loss in case certain hazards should beset them. Section 207(a) (2) places a tax on items of gross receipts adjusted for premium returns, etc., which are by definition gross income since a mutual insurance company has no cost of goods sold nor is the tax placed upon capital, borrowings, and the like. All the items enumerated under this section are items specifically includible in gross income, i.e., rents, dividends, interest and net premiums. Petitioner’s contentions that gross receipts are being taxed is erroneous.
Obviously, petitioner is not a mercantile business having a cost of goods sold, as such. However, there is nothing in the law which limits deductions from gross receipts to cost of goods sold on the part of a manufacturer. Indeed, the statute itself makes no provision for such a deduction, but rather its allowance arises from the implicit and long-established nature of income itself within the meaning of the 16th amendment. Davis v. United States, supra. Therefore, I assume that any other item, whatever label may be attached to it, which is of the same inherent character must also be allowed as a deduction or exclusion in arriving at “income.” The same thought is expressed in 1 Mer-tens, Law of Federal Income Taxation sec. 5.10, as follows:
To say that items of gross income may be taxed is not the same as to say that under all circumstances the courts would countenance a tax on gross receipts. The terms “gross income” and “gross receipts” are not synonymous. “Gross receipts” is a broader term, including within it receipts which may constitute capital as well as income, and, as shown above, returns of capital may not be taxed.
A contract of insurance is an agreement by which one party for a consideration promises to pay money or its equivalent, or to do an act which is valuable to the insured, upon the destruction, loss, or injury of something in which the other party has an interest. Vance, Insurance 83 (3d ed.). While the analogy is certainly not completely apposite, the payment by an insurance company of valid claims under its policies is little different in its practical effect, in my view, from the delivery of goods by a mercantile company. The payment of claims is what the company is selling. It is the very essence of the business in which it is engaged. In the words of the respondent himself, this taxpayer is “engaged in the business of selling a contract right.” To argue that it does so at no cost to itself is to ignore reality and to indulge in a form of economic fantasy. Its cost, in the clearest sense, is represented by the amounts it pays out in satisfaction of claims of policyholders. The fact that here the cost is incurred subsequent to the sale while that of the manufacturer normally is incurred prior to the sale of goods cannot change the fundamental nature of the payment as “cost.” Thus, while admittedly we are not dealing here with a mercantile business selling goods, I fail to see any distinction in principle.
If a mutual company operating on a pure system of assessments levied no assessments in a given tax year because its members had incurred no losses in that year, I suppose no one would suggest that it had any “income” within the meaning of the 16th amendment (assuming for the purpose of this hypothesis that it had no investment income). Were the same company to incur losses on policies and levy assessments in an amount exactly needed to meet those losses, I am likewise unable to see how those assessments to the extent of the losses would suddenly constitute “income.” The fact that a company operates by means of fixed premiums -rather than by assessments cannot alter this conclusion. By mere possession of the premiums or assessments, at least to the extent that they equal its losses, the company has nothing which it can apply to its own benefit or enjoyment.
The respondent also argues, on brief, that by the section in question Congress did not tax underwriting gains and, therefore, “in its sound discretion was certainly entitled to deny a deduction for underwriting losses.” Elsewhere in his briefs, respondent asserts, “Since underwriting gains were not taxed, it certainly appears reasonable that underwriting losses were not allowed as deduction.” I can only conclude that these statements are based upon a misconception of section 207(a) (2). True, the section does not in terms tax “underwriting gains.” Moreover, the report of the Committee on Finance states that the committee was unable to develop what it considered an equitable tax on underwriting income. However, if the taxpayer had underwriting gains (which this petitioner did not), they would presumably have been derived from the very premiums which are included here in its tax base. While section 207(a) (2) concededly does not tax net investment income or net underwriting income, as such, it taxes the sum total of their ingredients. Since total net premiums are included in the “gross amount of income” subjected to tax, I am unable to accept the respondent’s argument that Congress has excluded underwriting gains from the tax base. His argument would seem to suggest that a tax on a manufacturer’s total sales receipts would not be a tax on manufacturing gains and, therefore, would not have to permit a deduction for cost of goods sold. The argument do'es not bear analysis. The mere fact that a tax base is not limited to gains, which is the instant case, hardly leads to the conclusion that gains are not included in the base at all.
The net premiums received by the petitioner do not by themselves constitute gains to it. I conclude, therefore, that section 207(a) (2), to the extent that it includes net premiums in the tax base unreduced by underwriting losses, is not a tax on “income” within the meaning of the 16th amendment. Eisner v. Macomber, supra; Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926).
In the latter case, involving losses, the Supreme Court had the following to say:
In determining what constitutes income substance rather than form is to be given controlling weight. Eisner v. Macomber, supra, 206 (40 S. Ct. 189).
* * * The transaction here in question did not result in gain from capital and labor, or from either of them, or in profit gained -through the sale or conversion of capital. The essential facts set forth in the complaint are the loans in 1911, 1912, and 1913, the loss in 1913 to 1918 of the moneys borrowed, -the excess of such losses over income by more than the item here in controversy, and payment in the equivalent of marks greatly depreciated in value. The result of the whole transaction was a loss.
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The contention that the item in question is cash gain disregards the fact that the borrowed money was lost, and that the excess of such loss over income was more than the amount borrowed. When the loans were made and notes given, the assets and liabilities of defendant in error were increased alike. The loss of the money borrowed wiped out the increase of assets, but the liability remained. The assets were further diminished by payment of the debt. The loss was less than it would have been if marks had not declined in value; but the mere diminution of loss is not gain, profit, or income.
The question still remains of whether section 207(a) (2) is an invalid exercise of the taxing power. As pointed out previously, once it is decided that the subject of a tax is not “income” within the meaning of the 16th amendment, no more has been decided than that the tax is not free from the requirement of apportionment if it is a direct tax. Thus, the next and crucial focus of inquiry must be upon whether the tax computed under section 207(a)(2) is a direct tax. Since the tax is unapportioned, a determination that it is a direct tax would require us to decide that it is invalid. “The Amendment allows a tax on ‘income’ without apportionment, but an unapportioned direct tax on anything that is not income would still, under the rule of the Pollock case, be unconstitutional.” Commissioner v. Obear-Nester Glass Co., 217 F. 2d 56 (1954). So stated, this principle means nothing more than a clear recognition that article I, section 9, clause 4 of the Constitution remains in full force and effect today except to the extent that it is modified by the 16th amendment in the case of taxes on income.
I am not unaware of the fact that distinguished authorities have suggested what may be a contrary view. For example, in his dissenting opinion in Eisner v. Macomber, supra, Mr. Justice Holmes declared (252 U.S. 189, 220): “The known purpose of this Amendment was to get rid of nice questions of what might be direct taxes.” However, the 16th amendment did not repeal the constitutional requirement as to direct taxes. It could have done so but it did not. The only question it removed for the future was whether a tax on income was a direct tax. Brushaber v. Union Pac. R.R., 240 U.S. 1 (1916).
The 16th amendment was the outgrowth of the decision of the Supreme Court in Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895), which had held invalid an earlier effort of Congress to levy an income tax.3 However, in that decision, the Court did not decide that Congress had no power to levy an income tax under the Constitution. What it did decide was that a tax on incomes of certain types was a direct tax and, thus, invalid in the absence of apportionment. It held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose, imposed by reason of ownership; and that Congress could not impose such taxes without apportioning them among the States according to population, as required by article I, section 2, clause 3, and section 9, clause 4 of the original Constitution. Pollack v. Farmers' Loan, & Trust Co., supra.
Thus, the Pollooh decision did not declare that any income tax would be a direct tax but limited its decision on this point to taxes on income from real estate and taxes on income from invested personal property. The Court specifically declared, at page 635:
We have considered the act only in respect of the tax on income derived from real estate, and from invested personal property, and have not commented on so much of it as bears on gains or profits from business, privileges, or employments, in view of the instances in which taxation on business, privileges, or employments has assumed the guise of an excise tax and been sustained as such.
Nevertheless, despite this limitation upon the scope of the opinion, the Court found that, since so many of the income tax provisions were invalid and since all of the income tax provisions together constituted “one entire scheme of taxation,” all of the income tax provisions were void.
The Pollock decision itself represented an expansion by the Supreme Court of its earlier decisions as to what constituted a direct tax within the meaning of the Constitution. As early as 1196, the Court had decided in Hylton v. United States, 3 Dall. 171 (1796), that a direct tax included only capitation taxes and taxes on real estate. To the same effect, see Pacific Insurance Co. v. Soule, 7 Wall. 433 (1868); Veazie Bank v. Fenno, 8 Wall. 533 (1869); Springer v. United States, 102 U.S. 586 (1880). Some hundred years after the Hylton decision, the Court concluded that a tax imposed on property or the income therefrom by reason of its ownership is a direct tax. Pollock v. Farmers’ Loan & Trust Co., supra. It would serve no useful purpose to review here the authorities set out in exhaustive detail by the Court in reaching that conclusion. See, in particular, the first Pollock opinion. (157 U.S. 429 (1895)).
The majority opinion discusses in some detail Supreme Court decisions involving the validity of various Civil War taxing statutes, particularly Pacific Insurance Co. v. Soule, supra. In the latter case, involving a tax very similar to that before use here, the Court held the tax valid, rejecting the contention that it was a direct tax, unap-portioned. However, the Court based its decision on the narrow ground that direct taxes were only capitation taxes and taxes on real estate, relying on Hylton v. United States, supra. I think there can be no real question but that the Supreme Court rejected this view of the scope of direct taxes in its Pollock decision. This conclusion has been recognized by the Supreme Court itself. In Eisner v. Macomber, for example, the Court pointed out with respect to one of the Civil War cases, namely, Collector v. Hubbard, 12 Wall. 1 (1870), that it must be considered to have been overruled by Pollock. Collector v. Hubbard involved the validity of the Act of June 30, 1864, 13 Stat. 281, one of the statutes referred to in the majority opinion as an example of the numerous indirect taxes imposed by Congress. Thus, while Pacific Insurance Co. v. Soule, supra, and other contemporaneous decisions of that period are of considerable historical interest, I do not believe that the conclusions reached therein can be considered determinative today of the issue before us here.
Among the considerations involved in the determination of the nature of the tax under section 207(a) (2) is whether or not it is an excise tax. In this connection, it has long seemed apparent that the Federal taxing power might in effect reach through excise taxation subjects which it seemingly could not reach through direct taxation. For example, the portion of the Pollock decision quoted earlier points out that taxes on the gains and profits of business, privileges, and occupations had been sustained when they assumed the guise of an excise tax. (158 U.S. 601, 635). Subsequently, in Flint v. Stone Tracy Co., 220 U.S. 107 (1911), the Supreme Court upheld as an excise tax the Corporation Tax Act of 1909 4 which imposed a tax on net income. Prior to that time, an 1898 tax on the gross receipts of businesses engaged in sugar refining had been upheld as an excise tax. Spreckels Sugar Refining Co. v. McClain, 192 U.S. 397 (1901). Prior to the Pollock case, the Court had had before it the various Civil War tax acts. As noted previously, among these was a tax on the gross premiums of insurance companies which the Court upheld as an excise tax. Pacific Insurance Co. v. Soule, supra. Moreover, the Court has upheld as excise taxes, as against the contention that they were direct taxes, the Federal estate tax in Knowlton v. Moore, 178 U.S. 41 (1900), and the Federal gift tax in Bromley v. McCaughn, 280 U.S. 124 (1929).
It seems to me that the question of whether or not a particular tax is an excise is basically the same question as whether it is direct or indirect. If found not to be direct, it can make no difference whether it is an excise or something else. I certainly subscribe to the statement in the majority opinion that the “validity of an exercise of congressional power cannot depend upon the verbal tag attached to it.” It would be preposterous to have the Federal taxing power circumscribed by the artificialities of mere form. Nevertheless, I believe that the intent of Congress as evidenced by the statute itself and its legislative history is of significance in determining the nature of the tax imposed.
In Spreckels Sugar Refining Co. v. McClain, supra, the Court accorded great weight to the intent of Congress as evidenced by the exact words of the particular statute. The section of the statute involved5 provided in part:
That every person, firm, corporation, or company carrying on or doing the business of refining petroleum, or refining sugar, or owning or controlling any pipe line for transporting oil or other products, whose gross annual receipts exceed two hundred and fifty thousand dollars, shall he subject to pay annually a special excise tax equivalent to one quarter of one per centum on the gross amount of all receipts of such persons, firms, corporations, and companies in their respective business in excess of said sum of two hundred and fifty thousand dollars. * * *
Rejecting the argument that the tax so imposed was a direct tax, the Court interpreted the quoted provision in these words (192 U.S. 397, 411):
Clearly the tax is not imposed upon gross annual receipts as property, but only in respect of the carrying on or doing the business of refining sugar. It cannot be otherwise regarded because of the fact that the amount of the tax is measured by the amount of the gross annual receipts. The tax is defined in the act as “a special excise tax,” and, therefore, it must be assumed, for what it is worth, that Congress had no purpose to exceed its power under the Constitution, but only to exercise the authority granted to it of laying and collecting excises.
The tax imposed on corporation incomes by the Act of 1909 and upheld by the Supreme Court in Flint v. Stone Tracy Co., supra, was denominated in the statute itself as a “special excise tax with respect to the carrying on or doing business” as a corporation. Referring to this evidence of the nature of the tax, the Court declared (p. 145) :
While the mere declaration contained in a statute that it shall be regarded as a tax of a particular character does not make it such if it is apparent that it cannot be so designated consistently with the meaning and effect of the act, nevertheless the declaration of the lawmaking power is entitled to much weight, and in this statute the intention is expressly declared to impose a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or company. * * *
Can the tax computed under section 207(a) (2) be considered as an excise tax on the carrying on of business as a mutual' insurance company (other than life or marine) ? I think not. The only possible evidence in the statute itself in support of such a proposition is the fact that the tax is limited to corporations of a certain type. Indeed, it is even more limited in scope because section 207(a), in the first instance, only applies to those mutual insurance companies (other than life or marine) which are not totally exempt under section 101 (11) because of their small size. Further, even though not exempt under section 101(11), a company is only subject to the tax computed under section 207 (a) (2) if the tax under (a) (1) — a net income tax— is smaller. To conclude from the very limitations on the scope of the tax that the tax must therefore be construed as having been imposed as an excise with respect to carrying on the particular type of activity which finds itself subject to the tax, would seem to require that any tax is an excise so long as the taxpayer class is sufficiently narrow. The illogic of such a conclusion is fatal to the proposition.
Alternatively, can the tax be considered as an excise tax on the receipt of premiums? Recognizing that such a tax is commonly imposed by the States, which have no constitutional limitations in terms of direct taxes, I fail to see how section 207(a) (2) can be so construed in view of the fact that the gross amount of income taxed under the section includes dividends, rents, and interest. Certainly, there is a complete absence of any language evidencing an intent to impose such a tax.
I am unable to find any persuasive evidence here that the tax in question is an excise tax. Indeed, all of the evidence is to the contrary. Section 207 (a) (2) is part of chapter 1 of the Internal Revenue Code of 1939 entitled “Income Tax.” That its administration by the Treasury Department has recognized this classification is indicated by the return form entitled “U.S. Mutual Insurance Company Income Tax Return For Mutual Insurance Companies Other than Life or Marine Insurance Companies or Fire Insurance Companies Issuing Perpetual Policies.” Section 207(a) specifically imposes a tax upon “income” as such, the tax being computed under (a) (1) or (2) whichever produces the greater amount. As I have already pointed out, companies are subject to section 207(a) and its various parts only if not exempt from tax under section 101(11). Section 101 has always been conceived of as an income tax exemption section only. Certainly, organizations exempt from tax under section 101 have never been exempt, for that reason, from liability for any of the Federal excise taxes. Section 207(a) (2) excludes tax-exempt interest from the base of the tax and yet the Supreme Court had made it clear in Flint v. Stone Tracy Co., supra, that such an exclusion was not necessary to the validity of an excise tax. The whole framework of this tax evidences an intent to levy an income tax, a conclusion borne out by the debates in the Senate on the Revenue Act of 1942. In explaining these provisions of the bill, Senator George, who was chairman of the Committee on Finance where section 207(a)(2) had originated, declared:
The tax does not apply to corporations if the gross amount received during the taxable year from interest, dividends, rents, and premiums, including deposits and assessments, does not exceed $75,000. Therefore practically all the farmers’ and other small and local mutual companies will not be required to file income-taw returns or pay income tames. It is estimated that over 80 percent of all mutual companies will be exempt from filing returns under this provision. [Emphasis supplied.]6
Similarly, Chairman Doughton of the Committee on Ways and Means, in explaining the conference report to the House described section 207 (a) (2) as a tax on “gross income.”7
In determining whether section 207(a) (2) is an excise tax, consideration must be given to Stanton v. Baltic Mining Co., 240 U.S. 103 (1916), referred to in the majority opinion and accorded considerable weight therein. In that case, arising under the 1913 income tax act, it was argued by the taxpayer that a failure to provide an adequate allowance for depletion of a mineral property resulted in the tax being a direct tax on property which must be apportioned. With reference to this argument, the Supreme Court stated:
It moreover rests upon the wholly fallacious assumption that looked at from the point of view of substance a tax on the product of a mine is necessarily in its essence and nature in every case a direct tax on property because of its ownership jinless adequate allowance be made for the exhaustion of the ore body to result from working the mine. We say wholly fallacious assumption because independently of the effect of the operation of the Sixteenth Amendment it was settled in Stratton’s Independence v. Howbert, 231 U.S. 399, [58 L. Ed. 285, 34 Sup. Ct. Rep. 136] that such a tax is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations * * *
The apparent meaning of the quoted language would seem to be that any tax on a mining corporation, and presumably on any other business entity,' is per se an excise tax, sustainable as such without regard to the limitations normally demanded of an income tax. Yet Stratton’s Independence v. Howbert, supra, cited in support of the statement, provides no authority for such a rule. Stratton's Independence v. Howbert involved the Corporation Tax Act of 1909, which, as pointed out above, had been upheld in Flint v. Stone Tracy Co., supra, specifically on the basis that it was intended to be and was enacted as an excise tax. The decision in the latter case, upon which Stratton's Independence v. Howbert was, in large part based, very carefully pointed out that its specific nature as an excise was the material and significant distinction between the 1909 tax and the 1894 income tax held invalid in Pollock. To interpret Stanton v. Baltic Mining Co., supra, ’as standing for the proposition that this is merely a distinction without a difference seems to me to be contrary to the reasoning of both Pollock and Flint v. Stone Tracy Co., and, perhaps more significant, completely contrary to subsequent Supreme Court decisions, notably Doyle v. Mitchell Brothers Co., supra, and Eisner v. Macomber, supra.
Since, in my opinion, the tax here involved is nothing more or less than a tax on gross receipts, to hold it to be an excise tax in the complete absence of any real indicia of such a tax could only be grounded on the premise that a tax on the gross receipts of a business is per se an excise tax and sustainable as such. Certainly, to seize upon the phrase “special tax” employed in one instance in the lengthy Senate Finance Committee report8 on section 207(a) as somehow being sufficient to impart to the tax the magical quality of being an excise is hardly convincing, especially in view of the bulk of the legislative history which demonstrates overwhelmingly that the tax was conceived and designed as an income tax. “Special” the tax may well be but “special” only in the sense of being unusual, different, a departure from the normal. Since the essential question here is whether the tax is direct or indirect, I cannot believe that, by mere reference to a tax as “special,” Congress can thus make it “indirect.” To hold otherwise, would be to elevate form over substance with a vengeance. The use of the descriptive word “special” obviously can have no relevancy whatsoever to a determination of what it is that is being taxed or how it is being taxed. This being the case, I consider the use of the word “special” equally irrelevant to a determintion of whether the tax is direct or indirect.
Indeed, even though the tax were specifically denominated an “excise” in the statute, that fact alone, while entitled to great weight in determining the intent of Congress, could not preclude a holding that it is direct and thus must be apportioned. As declared by the Supreme Court in Brushaber v. Union Pac. R. R., supra at 16:
Moreover, in addition, the conclusion reached in the Polloclc Case did not in any degree involve holding that income taxes generically and necessarily came within the class of direct taxes on property, but, on the contrary, recognized the fact that taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it. * * * [Emphasis supplied.]
Thus, whether called an excise or not, a direct tax is still subject to the constitutional requirement of apportionment.
It is true, as pointed out earlier in this opinion, that the Supreme Court in the Pollock case limited its opinion to a decision that taxes on the income from real estate and on the income from invested personal property were direct taxes. It refused to decide whether taxes on the “gains or pro-fits from businesses, privileges, or employments” (emphasis supplied) were equally direct taxes. In fact, the Court’s opinion leaves the distinct impression that it might not have considered them as such had it been confronted squarely by the issue but would have sustained them as excises. Since the petitioner here is certainly a “business,” must we conclude in conformity with the above-quoted dictum that the tax computed under section 207 (a) (2) is sustainable as an excise? I am satisfied that such a result is not required because the subject of the tax with which we are here concerned is not “gains or profits” but gross receipts. A direct tax is defined as a tax on property because of ownership. Pollock v. Farmers’ Loan & Trust Co., supra. Gross receipts in the hands of an insurance company are property under any conceivable definition of the term. Here we do not have, as did the Supreme Court in Pollooh, nice questions concerning the source of the receipts. Because Pollooh involved a tax on net income, the Court felt impelled to consider the sources of the income in question in order to determine whether or not those sources fell within the category of “property.” Admittedly, the Pollooh decision has not been entirely free from criticism over the years. More than one authority has questioned its basic premise, namely, that a tax on net income is per se a tax on the property from which the income is derived, and it can he argued with some force that a tax on the income from property is not a burden on the property itself because being limited to “income” (whether called gross or net) it cannot diminish the underlying property. But, in my view, no such argument can be made reasonably with respect to a tax on gross receipts. In the simplest, most understandable sense, they are themselves property. Therefore, the tax here on petitioner’s gross receipts, to the extent they are not reduced by losses and thus not limited to “income,” is a tax on property because of ownership. This being the case, it is a direct tax, and being unapportioned, it is invalid.
Is this view contrary to Pacific Insurance Co. v. Soule; Spreckels Sugar Refining Co. v. McClain; Stanton v. Baltic Mining Co., all supra?
I have indicated earlier the view that, since Pacific Insurance Co. v. Soule, supra, rested on the premise that direct taxes were only capitation taxes and taxes on real estate, the reasoning of the Court in that case must be considered to have been rejected, at least by implication, in the Pollock decision. The fact remains, however, that subsequent to Pollock the Supreme Court placed primary reliance upon the Pacific Insurance Co. case in its Spreckels Sugar Refining Co. decision which upheld a gross receipts tax on sugar refiners. In the latter case, following the statement previously quoted in this opinion, the Court went on to say:
This general question has been considered in so many cases heretofore decided that we do not deem it necessary to consider it anew upon principle. It was held in Pacific Ins. Co. v. Soule, 7 Wall. 433, 19 L. ed. 95, that the income tax imposed by the internal revenue act of June 30th, 1864, amended July 13th, 1866 (13 Stat. at L. 276, chap. 173, 14 Stat. at L. 98, chap. 184), on the amounts insured, renewed, and continued by insurance companies, on the gross amount of premiums received, on dividends, undistributed sums and income, was not a direct tax, but an excise duty or tax within the meaning of the Constitution; * * *
Are we to understand that these two cases, taken together, stand for the principle that a tax on the gross receipts of a business is inherently an indirect tax ? If so, then candor requires me to admit that my own conclusions in the instant case are plainly inconsistent therewith. On the other hand, does the fact that in its Spreckels decision the Supreme Oourt attached great weight to the announced intention of Congress to levy an excise together with the fact that it there interpreted its earlier decision in Pacific Insurance Co. v. Soule as being based upon a similar consideration, permit the conclusion that the statutes there involved are distinguishable from that with which we are here concerned ? This question forces us to return to the troublesome inquiry of whether the form of the tax carries with it real constitutional significance. Certainly, the decided cases suggest that it does and yet this is a rationale which I find difficult to accept. I would suppose that constitutional limitations upon the Federal taxing power might be designed to accomplish any number of purposes, such as insulating certain subjects from the exercise of that power or reserving the taxation of those subjects to the States, but whatever their purpose, I think we must assume that the limitations were intended to be real and not directed to form alone. If, for example, the purpose of a given limitation is to reserve the exercise of a particular power to tax to the States, what possible difference does it make, in terms of whether the prerogative of the States is being invaded thereby, if the tax in question is levied as an excise tax, income tax, or just as a plain tax? So long as the base and the rate are identical, the substantive effect and the real nature of the tax must remain the same, no matter what it is called.
Inability to accept the result in the Pacific Insurance Co. and Sprockets cases as having been based upon form alone might seem to lead inevitably to the principle stated above that a tax on gross receipts is inherently an indirect tax and, thus, valid in the absence of apportionment and irrespective of whether there is “income” or not. Yet, adoption of this alternative would seem to be directly contrary to the rationale implicit in Southern Pacific Co. v. Lowe, 247 U.S. 330 (1918), Eisner v. Macomber, supra, and Bowers v. Kerbaugh-Empire Co., supra, among others, as well as such lower court decisions as Davis v. United States, supra, and Commissioner v. Weisman, supra. Moreover, it would be contrary to what I conceive to be the commonly held view.
Stanton v. Baltic Mining Co., supra, is sometimes considered to stand for the principle that Congress may levy an income tax on receipts without allowance for recovery of capital because in that case the Supreme Court rejected the taxpayer’s contention that the statute failed to permit him an adjustment for true depletion. If that is the proper interpretation of the decision, it would certainly seem to have been rejected in Doyle v. Mitchell Brothers Co., supra, and the other cases to which reference has just been made. However, I am satisfied that such an interpretation is not required. In the first instance, the value of a mineral deposit is often so conjectural as to make a computation of “trae” depletion difficult if not impossible. Second, the statute involved did in fact provide for a deduction of a reasonable allowance for depletion, subject merely to an overall limitation. Thus, the Court was not presented with the question of whether Congress could have validly denied the taxpayer any allowance for depletion. This being the case, I see no reason to impute to that decision a principle plainly at variance with subsequent declarations of the Court,
The majority opinion upholds the validity of section 207(a) (2) on the basis that it is an indirect tax. Having done so, it does not concern itself with whether something other than “income” under the 16th amendment is being taxed. It does not inquire as to the nature of the tax base, other than to set forth the statutory provisions involved. With respect to the contentions of the petitioner concerning its underwriting losses, the opinion states simply:
It is familiar doctrine that deductions are a matter of legislative grace * * *, and it seems unlikely that there is a constitutional requirement based upon the 16th amendment calling for the deduction which petitioner insists is indispensable to the validity of the unapportioned tax. However, that is an issue that we need not reach.
As I stated previously, under the majority’s approach, the question of whether the tax is limited to “income” is constitutionally irrelevant once it is determined that it is not direct.
Moreover, aside from the passing reference to it as a “special tax,” which I have indicated can hardly be considered to carry with it real constitutional significance, the majority decision that this is an indirect tax clearly does not seem to turn upon a determination that it is an excise. True, the opinion cites Stanton v. Baltic Mining Co., supra, as authority for the assertion that the tax here involved is “sustainable as an excise on carrying on an insurance business.” However, since the opinion does not inquire as to whether any of the usual indicia of an excise tax are present, I can only assume that this result is based upon the conclusion that any tax upon the receipts of a business is inherently an excise and inherently indirect. I say “any tax” advisedly because the majority opinion apparently considers any question of what elements go to make up the tax base under section 207(a) (2) to be immaterial, and it does not discuss them. This conclusion does seem to accord with the apparent holding in Stanton that the 1913 income tax is an excise tax, at least insofar as the particular taxpayer is engaged in business. The principle likewise accords with the statement by the Supreme Court in Spreckels Sugar Refining Co. v. McClain, supra, that the 1864 income tax on insurance companies had been sustained as an excise in Pacific Insurance Co. v. Soule, supra.
If it is true that a tax on the receipts of a business is per se indirect, irrespective of whether imposed in terms as an income tax or as an excise tax or otherwise, then it is certainly true that there is no constitutional bar with respect to the taxation of business receipts without any allowance for cost of goods sold, without any allowance for losses incurred, and without allowance for recovery of capital. Certainly, the statute involved in SprecJcels permitted no adjustment for such items. However, if one believes, as I do, that these items and others of a similar nature are constitutionally protected, then I think it necessary to take issue with the concept of “indirect” taxation embraced by the majority here. I have already agreed that it is incorrect to conceive of the 16th amendment as barring the taxation of such items because of their not being “income” within the meaning of the amendment. Thus, the only conceivable remaining constitutional barrier to such taxation would have to be based upon the conclusion that it is unapportioned direct taxation. This being the case, one’s understanding of the scope of the term “direct tax” becomes of critical importance in determining the scope of the Federal taxing power.
I cannot accept a conclusion that the receipts of a business taxpayer are entitled to a different constitutional protection than are the receipts of a nonbusiness taxpayer. Such a distinction would be untenable in principle as well as impractical of application in many instances. We are all too familiar with the difficulties inherent in the determination of whether an individual is engaging in business or not. Nowhere in the Constitution do I find any warrant for such a distinction. Moreover, since recovery of capital is most frequently involved in what are business or business-type transactions, the drawing of such a distinction would simply make any constitutional restriction with regard to such an item quite meaningless.
Certainly, the Pollock decision required no such distinction. While the opinion indicated that a tax on the gains and profits of businesses, privileges, and employments would be an indirect tax, there is no suggestion in the opinion that a tax on property in the hands of those so engaged would not be a direct tax invalid in the absence of apportionment to the same extent as if held by persons not so engaged. Indeed, the particular taxpayer as against which the validity of the tax was tested was a bank. That it was the type of property rather than who owned it which was the test applied by the Court was indicated by Mr. Justice Harlan in his dissent at 158 U.S. 601, 673:
And it is now the law, as this day declared, that under the Constitution, however urgent may be the needs of the Government, however sorely the administration in power may be pressed to meet the moneyed obligations of the nation, Congress cannot tax the personal property of the country, nor the income arising either from real estate or from invested personal property, except by a tax apportioned among the States, on the basis of their population, while it may compel the merchant, the artisan, the workman, the artist, the author, the lawyer, the physician, even the minister of the Gospel, no one of whom, happens to own real estate, invested, personal property, stocks or bonds, to contribute directly from their respective earnings, gains, and profits, and under the rule of uniformity or equality, for the support of the government. [Second emphasis supplied.]
The severest contemporaneous criticisms of the Pollock decision were directed to the fact that it resulted in different kinds of income being accorded different constitutional protections, m income from real estate, stocks, and bonds being elevated to a preferred position.9 It was to remove this very distinction that the 16th amendment was framed and adopted so that incomes regardless of source could be treated and taxed alike. To read now into the Constitution a new distinction based, not upon source, but upon the status of the recipient would simply be to develop new disparities and new inequities of the very sort which the 16th amendment was adopted to proscribe. Such distinctions may be proper as a matter of legislative discretion but should not be established as constitutionally required.
While the majority opinion makes no attempt to define a “direct” tax, it gives considerable weight to the suggestion that to require apportionment of the tax here involved would have “bizarre and inequitable consequences.” While one can hardly take exception to such a characterization, I do not consider that it furnishes a very significant criterion of the nature of the tax. It is not a logical argument to say that a particular tax cannot be construed to be direct simply because it may be impractical to impose it by apportionment. The Supreme Court specifically rejected the same argument in the PoTlooh case. To levy a Federal tax on real estate by apportionment among the States according to population would certainly lead to disparate results as between different taxpayers, but it has always been accepted that such a tax would be direct and would have to be apportioned.
There is no suggestion in the majority opinion that it rejects any of the traditionally accepted views as to the meaning of “direct” taxes. Thus, while the opinion does not offer any definition of the term, I would suppose that it would adhere to the principles laid down in Pollock and elsewhere that capitation taxes, taxes on real estate, taxes on personal property, and taxes on the receipts from real estate and personalty are direct taxes which must be apportioned save to the extent the particular tax is limited to income and, thus, freed of apportionment by the 16th amendment. For example, I assume that a taxpayer’s receipts from real estate are taxable, without apportionment, only to the extent that the receipts constitute income within the meaning of the 16th amendment. Thus, I conceive of a reasonable allowance for depreciation in such a case as being constitutionally required. In Helvering v. Independent Life Insurance Co., 292 U.S. 371 (1934), the Supreme Court clearly stated, in the case of an insurance company taxpayer, that the mere rental value of a building used by the owner does not constitute income within the meaning of the 16th amendment, citing Eisner v. Macomber, supra, and that a tax on such value as income would be a direct tax requiring apportionment, citing Pollock and a number of subsequent decisions. Yet, if one accepts the premise implicit in the majority opinion, based upon Stanton v. Baltic Mining Co., supra, that an income tax on an insurance company is sustainable in all events as an excise, then the principle stated by the Supreme Court in Helvering v. Independent Life Insurance Co., supra, must have been in error because excise taxation has never been considered as limited constitutionally to “income.” Certainly, I find no suggestion in the latter case, consistent with the rationale of the majority opinion here, that the income tax there involved was simply an indirect tax on carrying on an insurance business so that no question of income under the 16th amendment was material to its decision. On the contrary, the entire opinion is reasoned within the framework of established concepts of “income.”
I assume that the cases do not require the elevation of real estate, or the receipts therefrom, to a preferred position under the Constitution. Pollock made it clear that personal property was entitled to at least equivalent treatment, and in Willcutts v. Bunn, 282 U.S. 216 (1931), the Supreme Court pointed out that a tax on the interest from bonds would be a tax on the owner “by virtue of the mere fact of ownership.” Basically, it seems to me that an attempt to draw a distinction between different types of property is unwarranted in determining constitutional protection, and, as previously suggested, would be the very type of distinction which the 16th amendment was adopted to prevent. Property is property, whether it is real or personal, tangible or intangible, and a tax on gross receipts because of ownership, whether derived from real estate, invested personalty, or indeed from a valuable contractual right, is a direct tax on property requiring apportionment to the extent not limited to “income.” Any other rule would lead to such disparate treatment of different types of property as to be foreign to established concepts of uniform treatment.
In any event, as I have stated previously, we need not concern ourselves here with the source of the receipts involved in the instant case because they are themselves property. If the tax computed under section 207(a) (2) is valid at 1 per cent, I assume it would be equally valid at 10 per cent, 50 per cent, or at any other rate. Levied annually, such a tax is an exaction, not out of income, but out of the underlying assets of the taxpayer and could result in their progressive liquidation. It is a clear example, in my mind, of direct taxation of property.
To decide that gross receipts are property is not to signal a new point of departure in delineating the scope of the Federal taxing power but simply establishes a logical basis for the often-announced doctrine that an income tax on gross receipts, to the extent that it falls on that which is not “income,” is invalid. Indeed, no other conclusion is possible if one is convinced that such receipts in excess of “income” are not within the Federal taxing power except by-apportionment. Nor would the principles suggested by myself disturb the basic scheme of Federal income taxation as embodied in the Internal Revenue Code. Section 207(a) (2) is the only provision of the entire income tax law, insofar as I have been able to determine, that seeks to tax gross receipts in excess of income. Elsewhere, the statute, the regulations issued thereunder, and the decisions of the courts have sought to exclude from the tax base those elements of gross receipts, such as return of capital, cost of goods sold, and losses, which do not constitute income. Moreover, my analysis does not contravene the fact that, in many and perhaps most instances, gross receipts are identical to gross income and, thus, taxable in then-entirety absent statutory deductions.
I realize that in the recent case of Commissioner v. Sullivan, 356 U.S. 27 (1958), the Supreme Court appeared to give some support to the view that Congress could tax gross receipts when it stated at page 29:
If we enforce as federal policy the rule espoused by the Commissioner in this case, we would come close to mating this type of business taxable on the basis of its gross receipts, while all other business would be taxable on the basis of net income. If that choice is to be made, Congress should do it. * * *
The Court had before it the question of whether amounts paid by professional bookmakers as wages and rent were deductible from gross income as ordinary and necessary business expenses. In their tax computation, the taxpayers presumably had already applied section 23(h) of the 1939 Code which permitted the deduction of gambling losses to the extent of the gambling gains. Thus, there was no question involved in the Sullivan case of a tax on gross receipts but simply of deductions from gross income.
I certainly agree with the majority that there is a strong presumption in favor of the validity of a taxing statute and that doubts must be resolved in favor of its validity, and I cannot dispute the fact that some decisions of the Supreme Court appear to support the majority view. However, I am satisfied that the great weight of authority is contrary to that view and is largely embodied in decisions of the Supreme Court handed down subsequent to those relied upon by the majority. One fact is abundantly clear and that is that the scope of the Federal taxing power does not lend itself to dogmatism or categorical opinion. The concept of taxable income is at best “elusive and restless.” United States v. Wyss, 239 F. 2d 658 (C.A. 7, 1957). Recognizing that judicial doctrine in the area necessarily has been developed on a case-by-case basis, it is perhaps inevitable that some lack of harmony may have arisen. In view of this fact, I do not conceive of the presumption of validity as necessarily requiring adoption in all events of those cases which extend the Federal taxing power especially when there are contrary cases of later date. Such a course inevitably would subject the constitutional limitations and qualifications on the exercise of that power to a process of judicial erosion.
On the question of jurisdiction, I agree thoroughly with the concurring opinion of Judge Murdock.
FoeResteR, Jagrees with this dissent.The use of the -word “net” Is misleading to the extent that it may imply gain after the allowance of deductions as in the case of “net income.” The premiums here are “net” only in the sense that return premiums to policyholders are taken out because they are not part of the actual total premiums finally collected. The following quotation from Mutual Benefit Life Insurance Co. v. Herold, 198 F. 199, 205 (1912), concerning excess premiums returned to policyholders is relevant although that case involved a mutual level premium life insurance company:
This excess payment represents, not profits or receipts but an overpayment — an overpayment because, being entitled to his insurance at cost and having paid more than it cost, he [the policyholder] is equitably entitled to have such excess applied for hifl benefit. It makes no difference what this excess is called. * * *
See Penn Mutual Life Insurance Co. v. Lederer, 252 U.S. 523 (1920).
Scott. “Casualty Insurers,” 44 Va. L.R. 935, 937, 938 (1958).
Act of Aug. 27,1894 ; eh. 349, sec. 27, 28 Stat. 509, 553.
Ch. 6, sec. 88, 86 Stat. 112.
Act of June 13, 1898, eh. 448, sec. 27, 30 Stat. 448, 464.
88 Cong. Rec., 77th Cong., 2d Sess., p. 7795.
88 Cong. Rec., 77th Cong., 2d Sess., p. 8456.
Report of the Committee on Finance, U.S. Senate, to accompany H.R. 7378, S. Rept No. 1631, 77th Cong., 2d Sess., pp. 150-154.
For a discussion of this background, see S. Kept. No. 2140, Part 2, 76th Cong., 3d Sess., p. 33 et seg.