This case involves the validity of deficiency assessments of income axes made by the Commissioner against the life insurance company for 1923 and 1924. The 1921 Revenue Act (42 Stat. 261), § 244(a), defines 'gross income' of such companies as that received from interest, dividends, and rents. Premiums and capital gains are excluded. Section 245(a) directs that net income be ascertained by making specified deductions from gross income. These include 4 per cent. of the company's reserve, '(6) Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company * * *' and '(7) A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence.' But it is provided, section 245(b), that no deduction shall be made under paragraphs (6) and (7) 'on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.' Provisions similarly worded and having the same meaning are contained in the Revenue Act of 1924, §§ 244, 245, 43 Stat. 289 (26 USCA §§ 1003, 1004).
During 1923 and 1924 respondent owned a building of which it occupied part and rented part. Its tax return for each year included in gross income the rents received for the space let and deducted the taxes, expenses, and depreciation chargeable to the whole building. The result for 1923 was a net of $3,615.30, whereas 4 per cent. of book value amounted to $18,400. The result for 1924 was minus $14,629.76, 4 per cent. of the then book value being $19,770.32. The Commissioner, following section 245(b), added to the rents received from lessees in each year a sum sufficient to make the net equal to the required 4 per cent. On that basis the amount of the deficiency for 1923 was $298.97 and for 1924 $1,115.65. The Board of Tax Appeals held them direct taxes and therefore invalid. 17 B.T.A. 757. The Circuit Court of Appeals affirmed, one of the judges dissenting. 67 F.(2d) 470. Its decision conflicts with Commissioner v. Lafayette Life Ins. Co. (C.C.A.7) 67 F.(2d) 209, and Commissioner v. Rockford Life Ins. Co. (C.C.A.7) 67 F.(2d) 213.
The question for decision is whether the statutory provisions relied on violate the rule that no direct tax shall be laid unless in proportion to the census. Constitution, art. 1, § 9, cl. 4. In support of the decision below, respondent maintains that the 'rental value' of the space occupied by it was included in net income and taxed and that the exaction is a direct tax on the land itself and void for lack of apportionment.
If the statute lays taxes on the part of the building occupied by the owner or upon the rental value of that space, it cannot be sustained for tha would be to lay a direct tax requiring apportionment. Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 580, 581, 15 S.Ct. 673, 39 L.Ed. 759; Id., 158 U.S. 601, 635, 637, 659, 15 S.Ct. 912, 39 L.Ed. 1108; Brushaber v. Union Pac. R. Co., 240 U.S. 1, 16, 17, 36 S.Ct. 236, 60 L.Ed. 493, L.R.A. 1917D, 414, Ann. Cas. 1917B, 713; Eisner v. Macomber, 252 U.S. 189, 205, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570; Dawson v. Kentucky Distilleries & Warehouse Co., 255 U.S. 288, 294, 41 S.Ct. 272, 65 L.Ed. 638; Bromley v. McCaughn, 280 U.S. 124, 136, 50 S.Ct. 46, 74 L.Ed. 226; Willcuts v. Bunn, 282 U.S. 216, 227, 51 S.Ct. 125, 75 L.Ed. 304, 71 A.L.R. 1260. The rental value of the building used by the owner does not constitute income within the meaning of the Sixteenth Amendment. Eisner v. Macomber, supra, 207 of 252 U.S., 40 S.Ct. 189; Stratton's Independence v. Howbert, 231 U.S. 399, 415, 417, 34 S.Ct. 136, 58 L.Ed. 285; Doyle v. Mitchell Brothers Co., 247 U.S. 179, 185, 38 S.Ct. 467, 62 L.Ed. 1054; Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 174, 46 S.Ct. 449, 70 L.Ed. 886; Taft v. Bowers, 278 U.S. 470, 481, 482, 49 S.Ct. 199, 73 L.Ed. 460, 64 A.L.R. 362; MacLaughlin v. Alliance Ins. Co., 286 U.S. 244, 249, 250, 52 S.Ct. 538, 76 L.Ed. 1083. Cf. Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 114, 46 S.Ct. 48, 70 L.Ed. 183.