source: Caselaw Access Project

author: Mr. Justice Harlan Mr. Justice White, Mr. Justice GoLnBERG,

license: Public Domain

text:
    JABEN v. UNITED STATES.
    No. 347.
    Argued March 9, 1965.
    Decided May 17, 1965.

      Morris A. Shenker argued the cause for petitioner. With him on the briefs were Bernard J. Mellman and Emanuel Shapiro.

      Nathan Lewin argued the cause for the United States. On the brief were Solicitor General Cox, Assistant Attorney General Oberdorfer, Bruce J. Terris, Joseph M. Howard and Norman Sepenuk.

   Mr. Justice Harlan

delivered the opinion of the Court.

The statute of limitations on the felony of willfully attempting to evade federal income taxes requires the Government to obtain an indictment for that offense within six years of the date of its commission, with the proviso:

“. . . Where a complaint is instituted before a commissioner of the United States within the period above limited, the time shall be extended until the date which is 9 months after the date of the making of the complaint before the commissioner of the United States. . . .” Internal Revenue Code of 1954, § 6531.

On April 15, 1963, the day before the six-year period was to expire, the Government filed a complaint against petitioner Jaben charging him with willfully filing a false return for the year 1956. The Commissioner determined that the complaint showed probable cause for believing that Jaben had committed the offense, and, at the Government’s request, issued a summons ordering Jaben to appear at a preliminary hearing on May 15, 1963. On May 11, 1963, the preliminary hearing on the complaint was continued to May 22, 1963, at the request of the United States Attorney, and without objection by petitioner. The preliminary hearing was never held since, on May 17, 1963, the grand jury superseded the complaint procedure by returning an indictment against Jaben, one count of which covered the 1956 attempted evasion which the complaint had charged. The indictment was not returned within the normal six-year limitation period, but if the complaint filed with the Commissioner was valid for the purpose of bringing the nine-month extension into play, then the indictment was timely. Jaben moved to dismiss the count of the indictment pertaining to 1956, arguing that the complaint was insufficient because it did not show probable cause for believing that he had committed the offense. Both the trial court and the Court of Appeals for the Eighth Circuit rejected this claim, 333 F. 2d 535. We granted certiorari, 379 U. S. 878, to resolve a conflict with United States v. Greenberg, 320 F. 2d 467, decided by the Ninth Circuit, in which an identical claim, based on a virtually identical complaint, was accepted. For reasons that follow we agree with the Eighth Circuit and affirm its judgment.

I.

Under the Government’s interpretation of § 6531, probable cause is not relevant to the complaint’s ability to initiate the extension of the limitation period. Section 6531 provides that the nine-month extension is brought into play “[w]here a complaint is instituted before a commissioner of the United States” within the six-year period of limitations (supra, pp. 215-216). Rule 3 of the Federal Rules of Criminal Procedure defines a complaint as

“. . . a written statement of the essential facts constituting the offense charged. It shall be made upon oath before a commissioner or other officer empowered to commit persons charged with offenses against the United States.”

Since the Government’s complaint stated the essential facts constituting the offense of attempted tax evasion and was made upon oath before a Commissioner, the Government contends that regardless of the complaint’s adequacy for any other purposes, it was valid for the purpose of triggering the nine-month extension of the limitation period whether or not it showed probable cause. The Government would, thus, totally ignore the further steps in the complaint procedure required by Rules 4 and 5. Indeed it follows from its position that once having filed a complaint, the Government need not further pursue the complaint procedure at all, and, in the event that the defendant pressed for a preliminary hearing and obtained a dismissal of the complaint, that the Government could nonetheless rely upon the complaint as having extended the limitation period.

We do not accept the Government’s interpretation. Its effort to look solely to Rule 3 and ignore the requirements of the Rules that follow would deprive the institution of the complaint before the Commissioner of any independent meaning which might rationally have led Congress to fasten upon it as the method for initiating the nine-month extension. The Commissioner’s function, on that view, would be merely to rubber-stamp the complaint. The Government seeks to give his role importance in its version of § 6531 by pointing out that he would administer the oath, receive the complaint, and make sure that it stated facts constituting the offense (a requirement which would be met by a charge in the words of the statute); but surely these matters are essentially formalities. The argument ignores the fact that the Commissioner’s basic functions under the Rules are to make the judgment that probable cause exists and to warn defendants of their rights. Furthermore, if we do not look beyond Rule 3, there is no provision for notifying the defendant that he has been charged and the period of limitations extended. (Indeed, it is not until we reach Rule 4 that we find a requirement that the complaint must show who it was that committed the offense.) Notice to a criminal defendant is usually achieved by service upon him of the summons or arrest warrant provided for in Rule 4. Neither is appropriate absent a judgment by the Commissioner that the complaint shows probable cause, and no other form of notice is specified by the Rules.

More basically, the evident statutory purpose of the nine-month extension provision is to afford the Government an opportunity to indict criminal tax offenders in the event that a grand jury is not in session at the end of the normal limitation period. This is confirmed by the immediate precursor of the present section which provided for an extension “until the discharge of the grand jury at its next session within the district.” I. R. C. 1939, § 3748 (a). Clearly the statute was not meant to grant the Government greater time in which to make its case (a result which could have been accomplished simply by making the normal period of limitation six years and nine months), but rather was intended to deal with the situation in which the Government has its case made within the normal limitation period but cannot obtain an indictment because of the grand jury schedule. The Government’s interpretation does not reflect this statutory intention, for it provides no safeguard whatever to prevent the Government from filing a complaint at a time when it does not have its case made, and then using the nine-month period to make it.

The better view of § 6531 is that the complaint, to initiate the time extension, must be adequate to begin effectively the criminal process prescribed by the Federal Criminal Rules. It must be sufficient to justify the next steps in the process — those of notifying the defendant and bringing him before the Commissioner for a preliminary hearing. To do so the complaint must satisfy the probable cause requirement of Rule 4. Furthermore, we think that the Government must proceed through the further steps of the complaint procedure by affording the defendant a preliminary hearing as required by Rule 5, unless before the preliminary hearing is held, the grand jury supersedes the complaint procedure by returning an indictment. This interpretation of the statute reflects its purpose by insuring that within a reasonable time following the filing of the complaint, either the Commissioner will decide whether there is sufficient cause to bind the defendant over for grand jury action, or the grand jury itself will have decided whether or not to indict. A dismissal of the complaint before the indictment is returned would vitiate the time extension.

In this case the Government obtained a superseding indictment before any preliminary hearing took place. Under the interpretation which we have adopted it follows that if the complaint satisfied the requirements of Rules 3 and 4, in particular the probable cause standard of Rule 4, then the nine-month extension had come into play and had not been cut off by any later dismissal of the complaint. We turn then to the question whether the complaint showed probable cause.

II.

The Jaben complaint read as follows:

“The undersigned complainant, being duly sworn, states:
“That he is a Special Agent of the Internal Revenue Service and, in the performance of the duties imposed on him by law, he has conducted an investigation of the Federal income tax liability of Max Jaben for the calendar year 1956, by examining the said taxpayer’s tax return for the year 1956 and other years; by identifying and interviewing third parties with whom the said taxpayer did business; by consulting public and private records reflecting the said taxpayer’s income; and by interviewing third persons having knowledge of the said taxpayer’s financial condition.
“That based on the aforesaid investigation, the complainant has personal knowledge that on or about the 16th day of April, 1957, at Kansas City, Missouri, in the Western District of Missouri, Max Jaben did unlawfully and wilfully attempt to evade and defeat the income taxes due and owing by him to the United States of America for the calendar year 1956, by filing and causing to be filed with the District Director of Internal Revenue for the District of Kansas City, Missouri, at Kansas City, Missouri, a false and fraudulent income tax return, wherein he stated that his taxable income for the calendar year 1956 was $17,665.31, and that the amount of tax due and owing thereon was the sum of $6,017.32, when in fact his taxable income for the said calendar year was the sum of $40,001.76 upon which said taxable income he owed to the United States of America an income tax of $14,562.99.
“[Signed] David A. Thompson
“Special Agent
“Internal Revenue Service
“Kansas City, Missouri.”

Petitioner argues that the complaint is basically indistinguishable from that which the Court found wanting in Giordenello v. United States, 357 U. S. 480. The Giordenello complaint read in relevant part:

“The undersigned complainant being duly sworn states: That on or about January 26, 1956, at Houston, Texas in the Southern District of Texas, Veto Giordenello did receive, conceal, etc., narcotic drugs, to-wit: heroin hydrochloride with knowledge of unlawful importation; in violation of Section 174, Title 21, United States' Code.
“And the complainant further states that he believes that- are material witnesses in relation to this charge.”

The complaints there and here are materially distinguishable. Information in a complaint alleging the commission of a crime falls into two categories: (1) that information which, if true, would directly indicate commission of the crime charged, and (2) that which relates to the source of the directly incriminating information. The Giordenello complaint gave no source information whatsoever. Its directly incriminating information consisted merely of an allegation in the words of the statute, and even then incomplete, supplemented by “on or about January 26, 1956, at Houston.” If the Jaben complaint were as barren, it would have stated simply that “on or about April 16, 1957, at Kansas City, Missouri, Jaben willfully filed a false income tax return.” In fact, it gave dollars-and-cents figures for the amounts which allegedly should have been returned and the amounts actually returned. As to sources, the affiant indicated that he, in his official capacity, had personally conducted an investigation in the course of which he had examined the taxpayer’s returns for 1956 and other years, interviewed third persons with whom the taxpayer did business and others having knowledge of his financial condition, and consulted public and private records reflecting the taxpayer’s income; and that the conclusion that Jaben had committed the offense was based upon this investigation.

Beyond the substance of the complaint there is a material distinction in the nature of the offense charged. Some offenses are subject to putative establishment by blunt and concise factual allegations, e. g., “A saw narcotics in B’s possession,” whereas “A saw B file a false tax return” does not mean very much in a tax evasion case. Establishment of grounds for belief that the offense of tax evasion has been committed often requires a reconstruction of the taxpayer’s income from many individually unrevealing facts which are not susceptible of a concise statement in a complaint. Furthermore, unlike narcotics informants, for example, whose credibility may often be suspect, the sources in this tax evasion case are much less likely to produce false or untrustworthy information. Thus, whereas some supporting information concerning the credibility of informants in narcotics cases or other common garden varieties of crime may be required, such information is not so necessary in the context of the case before us.

Giordenello v. United States, supra, and Aguilar v. Texas, 378 U. S. 108, established that a magistrate is intended to make a neutral judgment that resort to further criminal process is justified. A complaint must provide a foundation for that judgment. It must provide the affiant’s answer to the magistrate’s hypothetical question, “What makes you think that the defendant committed the offense charged?” This does not reflect a requirement that the Commissioner ignore the credibility of the complaining witness. There is a difference between disbelieving the affiant and requiring him to indicate some basis for his allegations. Obviously any reliance upon factual allegations necessarily entails some degree of reliance upon the credibility of the source. See, e. g., Johnson v. United States, 333 U. S. 10, 13. Nor does it indicate that each factual allegation which the affiant puts forth must be independently documented, or that each and every fact which contributed to his conclusions be spelled out in the complaint. Compare United States v. Ventresca, 380 U. S. 102. It simply requires that enough information be presented to the Commissioner to enable him to make the judgment that the charges are not capricious and are sufficiently supported to justify bringing into play the further steps of the criminal process.

In this instance the issue of probable cause comes down to the adequacy of the basis given for the allegation that petitioner’s income was $40,001.76 instead of the $17,665.31 he had reported. This is not the type of fact that can be physically observed. The amount of petitioner’s income could only be determined by examining records and interviewing third persons familiar with petitioner’s financial condition. Compare Holland v. United States, 348 U. S. 121. Here the affiant, a Special Agent of the Internal Revenue Service, swore that he had conducted just such an investigation and thereafter swore that he had personal knowledge as to petitioner’s actual income. In such circumstances, the magistrate would be justified in accepting the agent’s judgment of what he “saw” without requiring him to bring the records and persons to court, to list and total the items of unreported income or to otherwise explain how petitioner’s actual income was calculated.

We conclude that the challenged count of this indictment is not time-barred.

Affirmed.

Mr. Justice White,

with whom Mr. Justice Black joins,

concurring in the judgment.

The Court rejects the contention of the Government that the filing of a complaint fulfilling the requirements of Rule 3 suffices to trigger the provisions of § 6531 extending the period of limitations. The Court holds that the complaint must also satisfy the probable-cause requirement of Rule 4 and that the Government must proceed with the preliminary hearing under Rule 5. Section 6531 provides that “[w]here a complaint is instituted” the time shall be extended. Assuming that the “complaint” specified in this provision is one satisfying Rule 4 as well as Rule 3, the statute affords no basis whatever for the Court’s holding that the Government must proceed with the preliminary hearing and that “dismissal of the complaint before the indictment is returned would vitiate the time extension,” ante, at 220, even though an indictment were obtained thereafter within the nine-month period. The statute is unequivocal that the period is extended when the complaint is instituted and, in my view, requires nothing further of the Government.

Because I agree with the Court that the complaint supplied an adequate foundation for the Commissioner’s determination that probable cause existed, I deem it unnecessary to consider whether § 6531 contemplates a complaint establishing probable cause or merely compliance with Rule 3.

Mr. Justice GoLnBERG,

with whom The Chief Justice and Mr. Justice Douglas join,

concurring in part and dissenting in part.

I.

I agree with the Court that the purpose of the tolling provision in the statute of limitations before us, as evidenced by its language and its legislative history, is to avoid penalizing the Government when a criminal defendant cannot be indicted merely because no grand jury is sitting at the time the limitation period expires. In keeping with this purpose, the Government ought to be allowed to present a case prepared before the expiration of the limitation period to the grand jury when it next convenes, but it ought not to be allowed to take advantage of a nine-month extension to prepare a case which was not ready for submission before the end of the statutory period. I believe that the Court, therefore, is quite correct in rejecting the Government’s argument that the filing of any complaint which meets the formal requirements of Rule 3 of the Federal Rules of Criminal Procedure is sufficient to toll the statute of limitations. The Government’s argument would, in effect, allow it an additional nine months in every case. Rather, the view that I would accept as correct is that the only complaint that tolls the statute is one that begins effectively the criminal process prescribed by the Federal Rules.

I further agree with the Court that a complaint has effectively begun the criminal process only when all of the pre-indictment steps detailed in Rules 3, 4, and 5 have been taken. Only when it has been determined in the preliminary hearing required by Rule 5 that probable cause exists “to believe that an offense has been committed and that the defendant has committed it” can we say with any assurance that the complaint was not filed merely to extend the limitation period, but that it was a complaint which does what a complaint normally does, namely, starts the criminal procedure in motion. A speedy determination by a disinterested magistrate — the United States Commissioner — that probable cause exists also provides assurance that the Government in fact had a case ready for presentation to the grand jury before the limitation period expired. Thus I join the Court’s opinion insofar as it holds that only those complaints toll the statute of limitations which also start the criminal machinery in motion by leading to a preliminary hearing in compliance with Rules 3, 4, and 5.

II.

The facts of this case lead me to conclude, however, that the procedure outlined in Rule 5 was not followed, for a preliminary hearing was not scheduled within a reasonable time as the Rule requires. A person who is arrested must be taken before a Commissioner immediately and informed of his rights, and a preliminary examination to determine whether probable cause exists to believe that an offense has been committed and that he committed it must be held at that time or promptly thereafter. See Mallory v. United States, 354 U. S. 449, 454. This preliminary examination must be held promptly because it normally determines whether holding a defendant in custody pending action by the grand jury is warranted. Even when a defendant is not actually in custody but is free on bond a speedy hearing is still necessary, for he should not be required to maintain bond unless it has been determined by a disinterested Commissioner that probable cause exists. While normally when a summons is issued, rather than an arrest warrant, the period of time within which a preliminary examination must be held may be longer than when a defendant has been arrested, for he is not in custody nor need he post bond, in the special circumstances present here involving a statutory period of repose, it is important that the preliminary hearing be held with expedition similar to that necessary when the defendant is in custody or free on bond. A prompt preliminary hearing in this type of case serves as a check to prevent the Government from beginning a prosecution when a case is not ready for submission to the grand jury before the limitation period expires. I should think that, in view of this purpose, it would be sound practice, consistent with the statutory policy of repose, to hold the preliminary hearing and secure a magistrate’s determination of probable cause before the statutory period expires. Only then can it be certain that the Government has evidence showing probable cause at hand before the end of the limitation period. And, in an exceptional case, such as the one before us, where the complaint is filed so late that the hearing cannot be held within the limitation period, surely, in order to serve the statutory purpose, the hearing must be held with the same promptness as when a defendant is in custody or on bond, even though a summons, rather than an arrest warrant, was issued.

In this case the complaint was filed the day before the limitation period expired. In accordance with the Government’s wishes, the summons was made returnable 30 days later, and, at the Government’s subsequent request, the hearing date was postponed an additional week. In my view, to schedule a hearing to be held 36 days after the limitation period expires, when that hearing normally should have been held before the end of the statutory time for prosecution, is not to schedule it within the “reasonable time” which the Court itself says is required. Nor can it be said under the circumstances here present that the petitioner waived the right to have the probable cause determination made promptly. Whatever the burden on a defendant may be under other circumstances to move to accelerate a date fixed by a Commissioner upon an ex parte application of the Government, it would be unjust to apply any waiver concept here. Until the holding today there was no authoritative construction that the statute, read in conjunction with the Federal Criminal Rules, entitles the charged defendant to a hearing after issuance of a summons. There is no basis, therefore, for concluding that petitioner, by being silent under these circumstances, knowingly and consciously waived his right to a speedy hearing and determination of whether probable cause existed.

I would conclude that a preliminary hearing, which was to determine whether probable cause existed, was not held within a “reasonable time” as Rule 5 requires, and that since the Government did not fulfill all the requirements of this Rule, the complaint did not serve to institute the proper pre-indictment criminal procedure. It therefore, in my view, was not the type of complaint that tolls the statute of limitations under Internal Revenue Code § 6531, and petitioner’s prosecution should be barred.

III.

While it is not necessary, under my view of this case, to determine whether the complaint showed probable cause, since the Court reaches that issue, I believe it appropriate to express my disagreement with its conclusion. If the Court means that the standard of probable cause required for the issuance of a summons directing the defendant to appear for a preliminary hearing is the same as the standard required for issuance of a search warrant or an arrest warrant, which will place the defendant under immediate physical restraint, the complaint before us fails to demonstrate probable cause, for it clearly fails to meet the standards laid down in Giordenello v. United States, 357 U. S. 480, and Aguilar v. Texas, 378 U. S. 108.

This Court in Giordenello held that a finding of “probable cause” must be made by a “neutral and detached” magistrate who “assess [es] independently the probability that ... [an accused] committed the crime charged.” Giordenello v. United States, supra, at 486-487. (Emphasis added.) The Court also stated,

“The purpose of the complaint ... is to enable the appropriate magistrate ... to determine whether the ‘probable cause’ required to support a warrant exists. The Commissioner must judge for himself the persuasiveness of the facts relied on by a complaining officer to show probable cause. He should not accept without question the complainant’s mere conclusion that the person whose arrest is sought has committed a crime.” Id., at 486.

In order to make an independent determination that probable cause exists, the magistrate must be presented with more than the fact that the affiant or his sources are reliable and the affiant’s conclusion that the accused is believed to have committed a crime. As we stated in Aguilar v. Texas, supra, at 114, the magistrate or commissioner must also “be informed of some of the underlying circumstances” supporting the affiant’s belief that the accused has committed a crime. This statement was recently reaffirmed in United States v. Ventresca, 380 U. S. 102, 108. To allow a magistrate to find probable cause when a reliable affiant does no more than swear, as the agent did here, that his investigations led him to conclude that petitioner understated his income, is to remove the function of making an independent determination of probable cause from the hands of the magistrate and to place it in the hands of the agent.

The affidavit presented by the revenue agent in this case does no more than list the agent’s sources of information — examination of public and private records and interviews with third persons — and concludes that the petitioner understated his income. Without the slightest indication of what the agent’s examinations and interviews revealed, it is impossible for a “neutral and detached magistrate” to determine for himself whether probable cause existed. The agent need not set out all the information obtained, but, as we held in Aguilar, some of the underlying facts must be indicated.

I cannot accept the Court’s view that the nature of the offense charged in this case excuses the Government from setting out any of the facts underlying the conclusion that the petitioner understated his income. Surely, defendants in criminal tax cases — whether based upon a net worth theory or otherwise — are as entitled to a magistrate’s independent determination of “probable cause” as any other defendants. Furthermore, I do not believe it impossible, or even very difficult, for the Government to give some indication of the type of information obtained through its perusal of petitioner’s books and its interviews with third persons. But I do believe that it is impossible for a magistrate or commissioner to determine whether probable cause exists without some indication of the facts which led the affiant to his conclusion.

It is as true of the complaint before us as of the affidavit in Giordenello that “it is difficult to understand how the Commissioner could be expected to assess independently the probability that petitioner committed the crime charged.” 357 U. S., at 486-487. In my view, Giordenello and Aguilar require that the complaint not only state the ultimate conclusion that petitioner understated his income and set out the sources of information leading to that conclusion, but that it also set out some of the underlying facts upon which that conclusion is based. Since none of the underlying facts are set out in the complaint before us, I conclude that the probable cause standard of Giordenello and Aguilar is not met. For all the reasons stated, I would reverse the judgment of the Court of Appeals.

       Rule 4 (a) provides:
      “If it appears from the complaint that there is probable cause to believe that an offense has been committed and that the defendant has committed it, a warrant for the arrest of the defendant shall issue to any officer authorized by law to execute it. Upon the request of the attorney for the government a summons instead of a warrant shall issue. ... If a defendant fails to appear in response to the summons, a warrant shall issue.”
      Rule 5 (c) provides:
      “. . . If the defendant waives preliminary examination, the commissioner shall forthwith hold him to answer in the district court. If the defendant does not waive examination, the commissioner shall hear the evidence within a reasonable time. The defendant may cross-examine witnesses against him and may introduce evidence in his own behalf. If from the evidence it appears to the commissioner that there is probable cause to believe that an offense has been committed and that the defendant has committed it, the commissioner shall forthwith hold him to answer in the district court; otherwise the commissioner shall discharge him. . . .”

       This provision was introduced into the tax laws in 1884 by way of an amendment to a bill providing for a limitation period. In proposing the amendment on the floor of the Senate, Senator Hoar stated:
      “As has already been said, this limitation which purports to be a limitation of two years is in point of fact in many districts but a limitation of one year, because the indictment must be found by a grand jury within two years within the commission of the offense. If the offense be concealed, or if it be discovered a year before the grand jury meet, it would be too late to make the prosecution. I move this amendment:
      “ ‘Provided, That where a complaint shall be instituted before a commissioner of the United States within the period above limited, the period shall be extended until the discharge of the grand jury at its next session within the district.’
      “I think there will be no objection to that.” 15 Cong. Rec. 5771. The time for which the period was extended was changed to nine months in 1954.

       A dissenting opinion accepts our interpretation of the statute, but, likening petitioner’s position to one who is incarcerated awaiting a preliminary hearing, argues that petitioner was not scheduled to have a preliminary hearing within the “reasonable time” required by Rule 5 (c). We reject this view of the case. (1) Although the statute should be interpreted to reflect its intent, it greatly overplays that intent to invest the procedure required to effectuate it with the same sense of urgency which might be thought to attend a preliminary hearing for an incarcerated prisoner. (2) A defendant can fully protect himself from unreasonable delay by moving for advancement of the preliminary hearing date and by objecting to any postponements. Petitioner made no such motion or objection, and at no point in the trial or appellate review of this case has he objected to the scheduling of the preliminary hearing.

        Mallory v. United, States, 354 U. S. 449, did not deal with preliminary hearings under Rule 5 (c), but with the requirement of Rule 5 (a) that a person who is arrested must be taken “without unnecessary delay before the nearest available commissioner” so that he can be apprised of his rights.

       So in original.


author: Mr. Justice White

text:
    UNITED STATES v. ATLAS LIFE INSURANCE CO.
    No. 489.
    Argued March 31, 1965.
    Decided May 17, 1965.

      Solicitor General Cox argued the cause for the United States. With him on the briefs were Assistant Attorney General Oberdorfer, Wayne G. Barnett and Philip B. Heymann.

      Norris Darrell argued the cause for respondent. With him on the brief were M. Bernard Aidinoff, Kendyl K. Monroe, Dickson M. Saunders and Thomas C. Thompson, Jr.

      Daniel B. Goldberg argued the cause for certain state and local governments, as amici curiae, urging affirmance. With him on the brief were Grant Sawyer, Governor of Nevada, John J. O’Connell, Attorney' General of Washington, Jack P. F. Gremillion, Attorney General of Louisiana, John J. Gunther, Charles S. Rhyne, Robert B. Mathias, C. D. Ward and Charles E. Norman.

   Mr. Justice White

delivered the opinion of the Court.

The Life Insurance Company Income Tax Act of 1959 which represents a comprehensive overhaul of the laws relating to the taxation of life insurance companies, places a tax upon taxable investment income and upon one-half the amount by which total gain from operations exceeds taxable investment income. In arriving at taxable investment income and gain from operations, the 1959 Act, consistent with prior law in this regard, recognizes that life insurance companies are required by law to maintain policyholder reserves to meet future claims, that they normally add to these reserves a large portion of their investment income and that these annual reserve increments should not be subjected to tax. The question in this case is whether the method by which Congress chose to deal with these annual reserve increments and to arrive at taxable investment income places an impermissible tax on the interest earned by life insurance companies from municipal bonds, within the meaning of the Act itself and the relevant cases in this Court.

I.

The 1959 Act defines life insurance company reserves, provides a rather intricate method for establishing the amount which for tax purposes is deemed to be added each year to these reserves and in § 804 prescribes a division of the investment income of an insurance company into two parts, the policyholders’ share and the company’s share. More specifically, the total amount to be added to the reserve — -the policy and other contract liability requirements — is divided by the total investment yield and the resulting percentage is used to allocate each item of investment income, including tax-exempt interest, partly to the policyholders and partly to the company. In this case, approximately 85% of each item of income was assigned to the policyholders and was, as the Act provides, excluded from the company’s taxable income. The remainder of each item is considered to be the company’s share of investment income. From the total amount allocated to the company the Act allows a deduction of the company’s share of tax-exempt interest (and of other nontaxed items) to arrive at taxable investment income. The taxable investment income for the purposes of arriving at the portion of gain from operations which is to be subjected to tax is arrived at by much the same process as above described.

Section 804 (a)(6), however, provides as follows:

“(6) Exception. — If it is established in any case that the application of the definition of taxable investment income contained in paragraph (2) results in the imposition of tax on—
“(A) any interest which under section 103 is excluded from gross income,
“adjustment shall be made to the extent necessary to prevent such imposition.”

An identical exception is contained in § 809 (b)(4) providing for the calculation of gain from operation. Section 103 of the Code provides for the exclusion from gross income of the interest earned on state and municipal bonds.

According to the Commissioner, the company’s income from investments includes only its pro rata share of tax-exempt interest and since this share is fully deductible by the company, the law imposes no tax at all on exempt interest. Atlas, however, claims otherwise: The company is entitled to deduct from total investment income both the full amount of the annual addition to reserves and the full amount of exempt interest received; by assigning part of exempt interest to the reserve account rather than assigning only taxable income, the Act necessarily places more taxable income in the company’s share of investment return; the company thus pays more tax because it has received tax-exempt interest of which a portion must be allocated to the reserve account.

Claiming that it was entitled to the adjustments provided for in §§ 804 (a)(6) and 809 (b)(4), the company sued for a refund in the District Court. The complaint also alleged the treatment accorded tax-exempt interest was contrary to the Constitution of the United States and to the principles set forth in National Life Ins. Co. v. United States, 277 U. S. 508, and Missouri Ins. Co. v. Gehner, 281 U. S. 313. The District Court rejected these claims, 216 F. Supp. 457 (D. C. N. D. Okla.), but the Court of Appeals reversed, 333 F. 2d 389 (C. A. 10th Cir.). That court considered the 1959 formula to impose a tax on tax-exempt interest within the meaning of the National Life and Gehner cases and hence by the terms of §§ 804 (a)(6) and 809(b)(4) an adjustment was required. We granted certiorari to consider this important question relating to the taxation of life insurance companies. 379 U. S. 927.

We reverse, holding that in the circumstances of this case there is no statutory or constitutional barrier to the application of the formula provided in § 804 to arrive at the taxable investment income of Atlas and hence the exceptions provided in §§ 804 (a)(6) and 809 (b)(4) are not applicable.

II.

Under the 1959 Act the undivided part of a life insurance company’s assets represented by its reserves is considered as a fund held for the benefit of the policyholders. The required annual addition to reserve is drawn from the income earned from investments of the commingled assets. Each item of investment income, including tax-exempt interest, is divided into a policyholders’ share and a company’s share. The policyholders’ share is added to the reserve, is excluded for tax purposes from the gross income of the company and is not taxed to either the company or the policyholders. The company’s share of investment income is then reduced by its share of tax-exempt interest to arrive át taxable investment income. It is apparent from the face of the Act that this is the formula which Congress intended to be of general application and that Congress did not consider the application of the formula in the usual case to lay a tax on exempt interest, or to have any such effect, so as to bring the exception clauses into operation. Otherwise the exception would become the rule and the general formula of little, if any, utility.

This view of the section is fully supported by its legislative history. As H. R. 4245 came to the Senate after passage by the House, it provided for deducting the annual addition to reserves, but to prevent a “double deduction” reduced the deduction by a portion of tax-exempt interest. This treatment of tax-exempt interest was one of many subjects of comment in the extensive hearings which followed before the Senate Committee on Finance. It was repeatedly and strongly argued by many that life insurance companies were entitled to deduct in full both the annual addition to reserves and the entire amount of tax-exempt interest, that the provisions of H. R. 4245 with regard to tax-exempt interest discriminated against the insurance companies, that the section was constitutionally invalid under the National Life and Gehner cases and that the formula would have adverse consequences on the municipal bond market. Other witnesses, however, including those representing the Treasury Department, supported the bill and considered it to accord proper and constitutionally permissible treatment to municipal bond interest. It is very doubtful that there remained at the conclusion of the hearings any unexplored facts or legal arguments concerning this aspect of the bill.

The Senate Committee, with the hearings behind it, reported out a bill with amendments which, among other things, took a decidedly different approach to the ascertainment of the annual addition to reserves and to the handling of tax-exempt interest. This approach was essentially that which is contained in the statute as described above.

As time and again stated in the Committee Report and by those who presented the bill on the floor of the Senate, the purpose of the formula provided by the Senate was to avoid taxing exempt interest. Senator Byrd, the Committee chairman, stated that "[i]n providing the formula I have described to the Senate it was the intention of the committee not to impose any tax on tax-exempt interest.” 105 Cong. Rec. 8401. It is extremely difficult to read the hearings, the reports, and the debates without concluding that in the opinion of Congress the formula it provided, without adjustment under § 804 (a)(6) or § 809 (b)(4), did not impose a tax on exempt interest in either the statutory or constitutional sense.

None of the materials called to our attention, however, explain why or for what purpose §§ 804 (a)(6) and 809 (b)(4) were added to the Act, save for mere recitations in the reports and the debates that an adjustment would be required in any case where tax-exempt interest was shown to be subjected to tax. It may be that Congress thought that peculiar facts and circumstances in particular cases would require different treatment than the general formula would provide. If this was the case, no examples or illustrations of these aberrational situations were referred.to or explained. And if this was to be the sole function of §§ 804 (a)(6) and 809 (b)(4) the Commissioner is surely entitled to a judgment, for there is nothing in this record indicating that this case is anything but the typical one to which Congress intended to apply the general formula.

Atlas, however, in effect views §§ 804 (a)(6) and 809 (b)(4) as built-in safety valves to be triggered and become fully operational by a final determination in a lawsuit, such as this one, that the new formula, contrary to the judgment of Congress, does indeed place a tax on exempt interest within the meaning of the relevant cases heretofore decided by this Court. This is not an unreasonable view of the purposes which Congress may have had in writing the exception provisions into the Act, but we cannot agree with Atlas or the Court of Appeals that National Life, 277 U. S. 508, and Gehner, 281 U. S. 313, provide the necessary triggering to bring these clauses into play.

III.

In National Lije, 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. Under that provision, a company shifting its investments from taxable to nontaxable securities would have lowered neither its taxable income nor its total tax. 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. Unable to perceive any purpose in reducing one deduction by the full amount of another, save for an intent to impose a tax on exempt receipts, the Court ruled that “[o]ne may not be subjected to greater burdens upon his taxable property solely because he owns some that is free.” 277 U. S., at 519.

It is obvious that this is not the case under the 1959 Act. Here, a company receiving income from both exempt and nonexempt securities pays not the same, but less, tax than the company with an identical amount of gross income derived from only taxable sources. As the taxpayer displaces taxable income with exempt income, the size of the tax base, and the tax, are reduced. The tax burden per taxable dollar of taxable gross income does not increase, but remains the same.

But Atlas urges that the rule of National Life, when read in conjunction with Missouri Ins. Co. v. Gehner, 281 U. S. 313, means that a tax is imposed on tax-exempt interest whenever the liability of the taxpayer receiving such interest is greater than it would have been if the tax-exempt interest had not been received. In the Gehner case a state ad valorem property tax was imposed on the net personal property of an insurance company. Exempt government bonds were excluded from the tax base but only 84% — the ratio of taxable assets to total assets — of the legally required reserves was allowed as a deduction. The Court considered National Life to hold that “a State may not subject one to a greater burden upon his taxable property merely because he owns tax-exempt government securities.” 281 U. S., at 321. This paraphrase of the National Life holding was correct and states the principle for which both of these cases have been cited. But it is obvious that the tax in Gehner did not infringe this rule. Reducing the reserve deduction by the ratio of taxable assets to total assets did not result in an increased tax burden on taxable property. The Court, nevertheless, invalidated the tax because “the ownership of United States bonds is made the basis of denying the full exemption which is accorded to those who own no such bonds.” 281 U. S., at 321-322. The company was apparently to have the full benefit of both the exclusion of the government bonds and the deduction for the full amount of policyholder reserves. Otherwise, the law would not disregard the ownership of the bonds in exacting the tax. The Gehner case does, therefore, condemn more than an increase in the tax rate on taxable dollars for those owning exempt securities.

This extension of National Life was soon repudiated. In Denman v. Slayton, 282 U. S. 514, decided but one Term after Gehner, the Court unanimously upheld § 214 (a) (2) of the Revenue Act of 1921, which permitted the deduction of interest generally except interest on indebtedness incurred or continued to purchase or carry tax-exempt securities, as applied to a dealer in securities whose disallowed interest incurred to carry exempt bonds exceeded the return from the bonds. Although the parties argued both Gehner and National Lije, the Court did not mention Gehner and said National Life was radically/different, since the dealer “was not in effect required to pay more upon his taxable receipts than was demanded of others who enjoyed like incomes solely because he was the recipient of interest from tax-free securities.” 282 U. S., at 519. But he was, like the taxpayer in Gehner, required to pay a greater tax than would be the case if the exempt securities were ignored entirely; absent ownership of the exempt bonds, the disallowed interest would have been deductible from taxable income. Ownership of exempt bonds was indeed the “basis of denying the full exemption which is accorded to those who own no such bonds.” Gehner, 281 U. S., at 321-322. Thus the Court not only refused to follow the implications of Gehner in the context of the federal income tax, but also sustained the propriety of disallowing an expense attributable to the production of nontaxable income. Such disallowance was not to impose an impermissible burden on the exempt receipts. “While guaranteed exemptions must be strictly observed, this obligation is not inconsistent with reasonable classification designed to subject all to the payment of their just share of a burden fairly imposed.” 282 U. S., at 519.

The Court followed Denman, and again distinguished National Life, without mentioning Gehner, in Helvering v. Independent Life Ins. Co., 292 U. S. 371, where the Revenue Acts of 1921 and 1924 permitted deduction of depreciation and expenses of buildings owned by life insurance companies only if the company included in its gross income the rental value of space it occupied. The Court assumed that the rental value was not income, and could not constitutionally be taxed, but upheld the measure as a valid apportionment of expenses attributable to the space occupied by the company and the space for which rents are received. Denman v. Slayton was said to make clear the distinction between a permissible exclusion from deductions of the amount attributable to exempt income and a tax on exempt property. This apportionment fell within the former and did not lay a tax on the rental value of the owner’s use of his building.

IV.

We affirm the principle announced in Denman and Independent Life that the tax laws may require tax-exempt income to pay its way. In our view, Congress has done no more in the 1959 Act than to particularize this principle in connection with taxing the income of life insurance companies.

An insurance company obtains most of its funds from premiums paid to it by policyholders in exchange for the company’s promise to pay future death claims and other benefits. The company is also obligated to maintain reserves, which, if they are to be adequate to pay future claims, must grow at a sufficient rate each year. The receipt of premiums necessarily entails the creation of reserves and additions to reserves from investment income. Thus the insurance company is not only permitted to invest, but it must invest; and it must return to the reserve a large portion of its investment income. As no insurance company would deny, there is sufficient economic and legal substance to the company’s obligation to return a large portion of investment income to policyholder reserves to warrant or require the exclusion of investment income so employed from the taxable income of the company. And we think the policyholders’ claim against investment income is sufficiently direct and immediate to justify the Congress in treating a major part of investment income not as income to the company but as income to the policyholders. Whether viewed as income to the policyholders, or, as Atlas would have it, as the principal cost of carrying on the business which produces the company’s net investment income, a large portion of total investment income is credited to the reserve and eliminated from taxable investment income.

Under the 1959 Act this portion is arrived at by subjecting each dollar of investment income, whatever its source, to a pro rata share of the obligation owed by the company to the policyholders, from whom the invested funds are chiefly obtained. In our view, there is nothing inherently arbitrary or irrational in such a formula for setting aside that share of investment income which must be committed to the reserves. Undoubtedly policyholders have not contracted to have assigned to them either taxable or exempt dollars. Their claim can be fully satisfied with either, but it runs against all investment income, whatever its source. We see no sound reason, legal or economic, for distinguishing between the taxable and nontaxable dollar or for saying that the reserve must be satisfied by resort to taxable income alone. Interest on municipal bonds may be exempt from tax, but this does not carry with it exemption from the company’s obligation to add a large portion of investment income to policyholder reserve.

Tax exemption cannot change the substance of this undertaking. And the statutory formula allocating so much of each dollar of investment income as the reserve increment bears to total investment income is quite clearly consistent with it. For the formula treats taxable and exempt income in the same way, deeming that both are saddled with an equal share of the company’s obligation to policyholders. We think that Congress can treat the receipts from investment of a pool of fungible assets in this manner and that the taxpayer’s desired allocation of these receipts is not constitutionally required.

It is said, however, that a company investing “idle” assets in municipal bonds and thereby adding exempt interest to its income will pay more tax, and at a higher rate per dollar of taxable income, than if it had not made the additional investment at all. Likewise, it is claimed, two companies having the same amount of investment in taxable securities and the same amount of commitments to policyholders, but one having some municipal securities in addition, will have a different tax bill, the latter paying more tax and at a higher rate because of the ownership of the bonds. 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. It is likewise unrealistic to compare the tax burdens of two companies, each with the same amount of taxable income but one with exempt income in addition, and to assume in the comparison that each has the same obligation to augment reserves. The likelihood is that if the one company has additional exempt income which the other does not have, it also has more assets, larger reserves and a greater reserve claim against investment income, which will reduce taxable income and substantially offset the alleged disparity in tax burden between the two companies.

Undoubtedly the 1959 Act does not wholly ignore the receipt of tax-exempt interest in arriving at taxable investment income. The formula does pre-empt a share of tax-exempt interest for policyholders and the company will pay more than it would if it had the full benefit of the exclusion for reserve additions and at the same time could reduce taxable income by the full amount of exempt interest. But this result necessarily follows from the application of the principle of charging exempt income with a fair share of the burdens properly allocable to it. In the last analysis Atlas’ insistence on both the full reserve and exempt-income exclusions is tantamount to saying that those who purchase exempt securities instead of taxable ones are constitutionally entitled to reduce their tax liability and to pay less tax per taxable dollar than those owning no such securities. The doctrine of intergovernmental immunity does not require such a benefit to be conferred on the ownership of municipal bonds. Congress was entitled to allocate investment income to policyholders as it did. The formula “was designed to subject all to the payment of their just share of a burden fairly imposed,” Denman, supra, at 519, and as applied to this case did not impose a tax on income excludable under § 103 of the Internal Revenue Code.

Reversed.

       73 Stat. 112, Int. Rev. Code §§ 801-820.

       The Act provides a three-phase procedure for taxation of life insurance companies. 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. § 809. It also may include a portion of investment income which is not taxed under phase one, since in calculating the amount of investment income to be allocated to policyholders under phase two, the reserves are multiplied by the company’s required interest rate rather than the company’s average or current earnings rate used in phase one. § 809 (a). This difference is minimized by other adjustments to the reserve under phase one whenever the applicable earnings rate exceeds or is less than the assumed rate. See note 4, infra. If there is underwriting loss under phase two, the entire loss is deducted from the taxable investment income as computed under phase one. If there is gain, half of this gain is added to the phase one tax base.
      Phase three imposes a tax on certain underwriting gains made available to shareholders which are not taxed under phase two. § 815.

       Int. Rev. Code §801 (b)(1).
      Life insurance reserves may be defined simply as that fund which, together with future premiums and interest will be sufficient to pay future claims. Under the statute such reserves are defined as amounts computed or estimated on the basis of recognized mortality tables and assumed rates of interest, set aside to mature or liquidate future claims arising from life, annuity, and noncancellable health and accident insurance policies, and required by law, with some exceptions not pertinent here.

       Int. Rev. Code § 805.
      This amount is called the “policy and other contract liability requirements” and is determined by a series of calculations. The company’s “adjusted life insurance reserves” are multiplied by the current earnings rate or the average earnings rate for the current and four preceding years, whichever is lower. “Adjusted life insurance reserves” are the life insurance reserves required by law adjusted for the difference between the assumed interest rate used by the company in computing such reserves and the actual earnings rate. The reserve is reduced by 10% for every 1% by which the applicable earnings rate exceeds the company’s assumed interest rate. To the amount so calculated are added pension plan reserves multiplied by the current earnings rate and interest paid during the taxable year.

       Int. Rev. Code §804 (a)(1):
      “Exclusion of policyholders’ share of investment yield. — The policyholders’ share of each and every item of investment yield (including tax-exempt interest, partially tax-exempt interest, and dividends received) of any life insurance company shall not be included in taxable investment income. For purposes of the preceding sentence, the policyholders’ share of any item shall be that percentage obtained by dividing the policy and other contract liability requirements by the investment yield; except that if the policy and other contract liability requirements exceed the investment yield, then the policyholders’ share of any item shall be 100 percent.”

       Investment yield is gross investment income less specified deductions, including investment expenses, real estate expenses, depreciation, depletion and trade and business expenses, subject to certain exceptions and limitations. Int. Rev. Code §§804 (b), (c).

       Included in the investment yield which is divided between the policyholders and company, in addition to interest on state and municipal bonds, are partially nontaxed interest on federal bonds and intracorporate dividends. Section 804 (a) (2) permits deduction of the company’s nontaxed share of these items along with interest on exempt bonds.

       H. R. Rep. No. 34, 86⅛ Cong., 1st Sess., 28-29, 31.

       See Hearings on H. R. 4245 before the Senate Committee on Finance, 86th Cong., 1st Sess., 45-46, 48, 121, 187, 248-266, 304r-318, 404-409, 516-518, 613-614, 694-699, 700-702.

        Id., at 19-60, 646-654.

       S. Rep. No. 291, 86th Cong., 1st Sess., 6.

       As stated in the Senate Report on H. R. 4245, the Committee on Finance was of the opinion that the formula provided in §804 did not impose a tax on tax-exempt interest — “[t]he purpose of your committee in providing this treatment is to exempt a life insurance company from tax on any tax-exempt interest . . . .” S. Rep. No. 291, 86th Cong., 1st Sess., 17. See also pp. 6, 18, 46.
      Senator Byrd in explaining the bill to the Senate presented a letter from the Department of the Treasury which said that the formula provided by the bill did not place a tax on exempt interest, that the additional language of § 804 (a)(6) establishing an exception was not at all necessary but that just to make sure it had been provided that in any case the formula resulted in taxing interest excludable under § 103, an adjustment would be made. 105 Cong. Rec. 8402. The more detailed explanation of the bill by Senator Byrd was to the same effect. 105 Cong. Rec. 8404. Senator Curtis, a member of the Senate Committee, delivered a comprehensive speech in support of the bill in the course of which he said that his earlier concern about inadvertently taxing exempt interest had been fully met by the bill. After reviewing the formula, with examples illustrating its operation and without mentioning the exception of § 804 (a) (6) he remarked that “no tax-exempt income or credits of life insurance companies will be included in the tax base of such companies, under this bill. This should allay any fear that any constitutional provision is transgressed.” 105 Cong. Rec. 8429. The bill passed in the Senate, 105 Cong. Rec. 8438, and the Conference Report, which may be said to have adopted the Senate approach to the problem involved in this case, H. R. Rep. No. 520, 86th Cong., 1st Sess., 4, 14 — 15, 105 Cong. Rec. 10412, was adopted by both Houses.

       See S. Rep. No. 291, 86th Cong., 1st Sess., 17, 24; H. R. Rep. No. 520, 86th Cong., 1st Sess., 15; 105 Cong. Rec. 8401, 10400,10412-10414. Representative Mills, Chairman of the House Ways and Means Committee, stated:
      “As agreed to by the conferees, the final version of H. R. 4245 extensively rewrites the provisions of the House bill dealing with tax-exempt interest and dividends received, including the addition of a proviso to the effect that if in any particular case the formula under the bill does not provide the proper treatment of these items, appropriate adjustment will be made. It is my belief that the appropriate deduction was allowed by the House bill and that these provisions of the final bill, which closely follow the Senate amendment, make no change of substance." 105 Cong. Rec. 10412.

       Where income from taxable sources is displaced by the same amount of income from exempt bonds, the total investment yield and the reserve exclusion remain the same. Thus the proportion of each item of income allocated to the policyholders’ share and the company’s share also remains the same. Since the amount of exempt income allocated to the company is larger and that share is fully deductible, the tax base is correspondingly smaller.
      The result is a decrease in the tax commensurate with the extent to which the company’s taxable income is taxed. With a fully taxable investment yield of $1,000,000 and a policyholders’ share of $800,000, 20% of the investment yield would be included in gain from operations. Gain from operations would be reduced by 20% of any part of the investment yield that was shifted from taxable income to tax-exempt income.

       See, e. g., Denman v. Slayton, 282 U. S. 514, 519; Helvering v. Independent Life Ins. Co., 292 U. S. 371, 381; Schuylkill Trust Co. v. Pennsylvania, 296 U. S. 113, 119; New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 338 U. S. 665, 674-675, 677.

       This is true insofar as Gehner rested on a doctrine of implied constitutional immunity. The tax there was. a state ad valorem property tax said to be on federal bonds and then, as now, a federal statute insulated such bonds from state taxation. See 73 Stat. 622, § 105 (a), 31 U. S. C. § 742 (1958 ed., Supp. V).

         The statement of Stanford Rothschild, a representative of one of the life insurance companies objecting to the proposed pro rata disallowance of the reserve deduction in H. R. 4245, before the Senate Committee provides a clear exposition of this view:
      “Life insurance companies have two kinds of gross investment income: On the one hand, there is the income which has to be set aside to cover actual expenses and the liabilities to the policyholders. On the other hand, there is free investment income, not needed for the operation of the company; this excess income is fully taxable.
      “All tax laws dealing with life insurance companies have allowed deductions from income for required interest. Even the excise tax formulas have provided for such deductions. The basic reason for this deduction is that required interest cannot be construed to be true income or profit, just as the cost of goods sold by a merchant must be eliminated from his gross income.” Hearings on H. R. 4245 before the Senate Committee on Finance, 86th Cong., 1st Sess., 696-697.
      Under this view of the reserve increment, we think this case is strikingly similar to Denman v. Slayton. On this theory the reserve increment is an accrued expense in the nature of interest on the funds obtained from policyholders for investment, and the denial of that part of the deduction which exempt income bears to total investment receipts represents disallowance of an expense attributable to the production of exempt income, which is precisely what Denman permits. It is argued, however, that the rule of Denman disallowing deduction of exempt interest is limited to “but for” situations: Interest incurred on loans used to purchase exempt bonds may be disallowed only where there would have been no interest charge except for the purchase of exempt securities. It is by no means clear that this is not the case here, for there is a relationship between the amount of the reserve increment, representing interest on funds obtained from policyholders, and the amount of a company’s investments, exempt or otherwise, unless it be assumed that a company does not sell policies and obtain funds for the purpose of investment. However this may be, we do not read Denman so narrowly. We think interest can be said to be incurred or continued as a cost of producing exempt income whenever a taxpayer borrows for the purpose of making investments and in fact invests funds in exempt securities.
      There was no problem of allocating interest in Denman, but surely no one doubts that the case would not have been any different if the dealer there borrowed and purchased taxable securities with half the loan and used the other half to purchase exempt securities.

       There is nothing to the argument that since the reserve obligation remains the same whether there is exempt income or not, no part of the obligation is fairly chargeable to exempt income. It could as well be argued that because the reserve requirement is the same whether there is taxable income or not, none of the reserve increment may be obtained by pre-empting taxable income. The fact is that the annual addition to reserve must be made up from investment income, whatever its source, and the company owes to its policyholders a share of the tax-exempt dollar fully as much and in the same sense that it owes a part of the taxable dollar.