Helvering v. Independent Life Insurance Co.

If an insurance company owned a building, occupied part of that building, and rented other parts, the rent money collected was gross income. A tax-code provision stated that to calculate the net income from that rent, the company could deduct the entire building’s taxes, expenses, and depreciation, as opposed to just the part attributable to the rented portions. If this number was greater than 4 percent of the building’s book value, that was the company’s net rental income. However, if the number was less than 4 percent of the book value, the company was required to add the rental value of the building portion it occupied into the gross-income part of the equation before it could deduct the entire building’s expenses. Independent Life Insurance Company (Independent Life) (plaintiff) owned a building. Independent Life occupied part of its building and rented out other parts. Independent Life calculated its net rental income using the rents as gross income and deducting expenses for the entire building. However, the net rental income Independent Life reported was less than 4 percent of its building’s book value. Internal Revenue Service (IRS) Commissioner Guy Helvering (defendant) argued that, under the tax-code provision, Independent Life was required to include the rental value of its occupied portion as gross income in its net-income calculations. Under these calculations, Independent Life owed more taxes. Independent Life contested the additional taxes, arguing that the tax-code provision was unconstitutional because it was not a tax on the rental income Independent Life had received, but rather a direct federal tax on the value of the building’s occupied portion. The Board of Tax Appeals ruled that the provision unconstitutionally taxed the value of Independent Life’s property. The Sixth Circuit Court of Appeals affirmed. The United States Supreme Court granted certiorari.