Byron White

“ In National Life, the Court struck down a provision of the federal income tax law which permitted insurance companies to exclude municipal bond interest from their gross income and at the same time reduce the reserve deduction otherwise available to the company by the full amount of the exempt interest which was excluded from gross income, the result being that the company paid as much tax as it would have paid had the same total income been entirely from taxable sources. ”

“ But insurance companies accumulate funds to invest and they must, and do, invest. Their choice is not between investing and not investing at all but between investing in one kind of securities or another. Under the 1959 formula investing in exempt securities results in a lower total tax than investing in taxable securities and the tax rate per taxable dollar does not increase. ”

“ As compared with the company deriving its income only from taxable sources, the enterprise with the same total amount of investment income derived partly from exempt and partly from taxable sources would pay more tax per dollar of taxable gross income, i.e., taxable income before deduction for the reserve. ”

“ Under phase one the tax base represents the life insurance company's share of income from interest, dividends, rents, royalties, and other investment sources less investment expenses and deduction of the company's share of exempt interest and other items. § 804. Under phase two the tax base represents 50% of the excess of total net income from all sources 'gain from operations'-over taxable investment income. ”

“ This excess, referred to as underwriting gain, consists of mortality and loading savings, i.e., savings resulting from fewer deaths per age group than were assumed in establishing premiums and reserves and any reduced expenses in servicing policies. ”