An Evaluation of the Life Insurance Company Income Tax Act of 1959: Comment

Abstract

In his article in this Journal on the Life Insurance Company Income Tax Act of 1959, Dr. Abelle has a section on the treatment of tax exempt interest.' This question has perplexed many students of the subject, and Dr. Abelle is certainly entitled to reach his own conclusions. He purports, however, to present both sides of the question. Unfortunately, in his ready acceptance of the arguments put forth by the Treasury, he ignores most of the major considerations advanced by all spokesmen for state and local governments and by a significant group of tax paying companies which oppose the Treasury's position. The considerations are these: 1. In addition to the provisions described by Dr. Abelle, the Congress included in the Life Insurance Company Income Tax Act of 1959 the so-called These clauses specifically provide that if it is established that the definition of taxable investment income (or the definition of taxable net gain from operations) places a tax on tax exempt income, an adjustment in the tax shall be made. 2. The Treasury interpretation is contrary to the meaning of tax exemption established by the Supreme Court in the National Life v. U.S.A. and Missouri v. Gehner cases.2 In the former case, the Court said one may not be subject to greater burdens on his taxable income solely because of the receipt of tax exempt interest-yet it is agreed by both sides that this is precisely what happens in the 1959 Act unless adjustment is made under the exception clauses. In the latter case the Court struck down the attempt to dilute the exemption by prorating tax exempt securities over the deductions, thereby reducing the otherwise available deductions-yet this is now precisely the logic advanced by supporters of the Treasury position.