TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, Washington, D. C., March 5, 1918. The appended decision of the United States Circuit Court of Appeals for the Eighth Circuit, in the case of Camp Bird (Ltd.) v. Frank W. Howbert, collector of internal revenue, is published for the information of internal-revenue officers and others concerned. DANIEL C. ROPER, Commissioner of Internal Revenue. Approved: W. G. MCADOO, Secretary of the Treasury. UNITED STATES CIRCUIT COURT OF APPEALS, EIGHTH CIRCUIT. No. 4939.-December Term, 1917. Camp Bird (Ltd.), a corporation, plaintiff in error, v. Frank W. Howbert, as collector of internal revenue within and for the district of Colorado, defendant in error. IN error to the District Court of the United States for the district of Colorado Before CARLAND, Circuit Judge, and AMIDON and MUNGER, District Judges. MUNGER, District Judge, delivered the opinion of the court: This action was brought by plaintiff in error, hereafter called plaintiff, against defendant in error, as collector of internal revenue of the United States for the district of Colorado, hereafter called defendant. The object of the action was to recover sums of money that plaintiff had paid to defendant as an internal-revenue tax. A jury was waived and the trial court entered judgment upon special findings of facts, dismissing plaintiff's action. Briefly stated, the court found that the plaintiff was the owner of valuable and productive mining property in Colorado, after the year 1902, and that it made a return for each of the years 1909, 1910, and 1911 to the collector of internal revenue, purporting to set forth its income for each of those years, under the provisions of the act of Congress approved August 5, 1909 (36 Stat., 112), relating to an excise tax on corporations. In these returns the plaintiff stated the items of charge and credit and the net annual income which it considered subject to the tax. The Commissioner of Internal Revenue found that deductions claimed in each of these returns had been overstated, and that the amount subject to the tax had been understated, and made additional assessments against the plaintiff and notified it of his action. The plaintiff, under protest, paid the additional taxes levied. An application to the Commissioner of Internal Revenue for an abatement of the additional tax was denied by the commissioner, and this action was then begun. While the court found that the plaintiff had understated its net income upon which it was required to pay the excise tax, it was further found that the understatement was not made fraudulently, knowingly, willfully, nor for the purpose of defrauding the United States, but was made in good faith and with the belief that the figures presented stated the facts. The only question in the case is whether the judgment is supported by these findings. Section 3225 of the Revised Statutes as it existed at the time these taxes were levied and collected was as follows: When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or contained any understatement or undervaluation, no taxes collected under such assessment shall be recovered by any suit, unless it is proved that the said list, statement, or return was not false nor fraudulent, and did not contain any understatement or undervaluation. It is contended that this section was meant to be applied only to those who intentionally made false statements or undervaluations, because when this act was passed an accurate statement of the facts required in returns by taxpayers could be made, whereas returns under the corporation tax law necessarily must be estimates. By the acts of Congress approved June 30, 1864 (13 Stat., 223), as amended and supplemented by the acts of Congress of March 3, 1865 (13 Stat., 469), of July 13, 1866 (14 Stat., 98), and March 2, 1867 (14 Stat., 471), a general system of internal revenue was provided to meet the financial burdens imposed by the Civil War. Taxes were imposed generally upon property, occupations, industries, and incomes. Many classes of persons subject to taxation were required to make sworn lists or returns of property subject to the tax. The values of property were to be reported and amounts of net income, and the accurate statement of many of the items required were quite as difficult as the ascertainment of the required items under the present corporation tax. Section 14 gave the assessor power to summon a declarant and to examine him and his books, if in his opinion the return was either false or fraudulent or contained any understatement or undervaluation. If the return was false or fraudulent, the assessor was required to increase the tax by 100 per cent. An unexcused neglect or refusal to make or to verify a list was penalized by the addition of 50 per cent to the tax. By section 20 the assessor was empowered to fix the amount of additional tax to be paid, when there had been an omission, understatement, undervaluation, or false or fraudulent statement. Section 44 authorized the Commissioner of Internal Revenue to refund excessive taxes collected and to repay to collectors amounts recovered in court against them for taxes collected by them, but provided that no taxes should be recovered, refunded, or paid back, where a second assessment had been made because the first list had been, in the opinion of the assessor, either false, fraudulent, or contained any understatement or undervaluation, unless it was proved that the return was not false or fraudulent, or did not contain any understatement or undervaluation. The substance of these enactments has continued in force ever since. (See Rev. Stats., secs. 3173, 3176, 3182, 3220, 3225; U. S. Comp. Stats. Ann., secs. 5896, 5899, 5904, 5944, 5948). They evince a discriminating use of terms as between false and fraudulent returns and those that contain only an understatement or valuation, and provide remedies and penalties apportioned to the several delinquencies. The mere undervaluation or understatement in a return is made a basis for summoning the delinquent to appear and be examined and a basis also for imposing an additional assessment, and prevents the Commissioner of Internal Revenue from making a refund or remission of taxes. The further provision found in section 3225 of the Revised Statutes, denying recovery by suit of any tax imposed under a second assessment, because in the opinion of the collector or his deputy, the former return was false or fraudulent or contained an understatement or undervaluation, unless it is proved that the prior list was not false nor fraudulent nor contained any understatement nor undervaluation, i' in harmony with these provisions, and manifest the intention of Congress that no recovery may be had although the undervaluation or understatement was made unintentionally. See Bergdoll v. Pollock (95 U. S., 337). The proposition is advanced that this construction of section 3225 renders it violative of the Constitution, as it would result in the confiscation of plaintiff's property. It is well settled that "this corporation tax act imposed an excise tax and the only limitation on the power of Congress in the imposition of excise taxes is that they shall be uniform throughout the United States." United States v. Singer (15 Wall., 111, 121); Pacific Insurance Co v. Soule (7 Wall., 433, 446). By this a geographical uniformity is meant. Flint v. Stone Tracy Co. (220 U. S., 107). The provisions laying an additional tax proportionate to the property omitted from the list on all who make any under statement or undervaluation operates uniformly on all of that class of persons wherever found and hence was within the power of Congress. The refusal of a right of action to recover such taxes, unless proof is made that there was no understatement or undervaluation is likewise within the scope of the legislative power. It is claimed that "section 3225, Revised Statutes, does not apply to the suit for the recovery of taxes collected under the corporation tax of 1909. This section applies to internal revenue taxes generally" and the corporation tax is one embraced in that class. In addition the corporation tax law contained a clause as follows (p. 951 Supp. to U. S. Comp. Stats., 1911): All laws relating to the collection, remission, and refund of internal-revenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section. We think that section 3225, Revised Statutes, is a part of the laws relating to the refund of internal-revenue taxes, as section 3220, Revised Statutes, provides that the Commissioner of Internal Revenue is authorized to refund to the collector any amount that may be recovered against him in any court for any internal taxes collected by him. * * Plaintiff also contends that the judgment is erroneous, because after final judgment was entered in this case Congress enacted an amendment to section 3225, Revised Statutes, which reads (p. 6984, 6 U. S. Comp. Stats., Ann.): But this section shall not apply to statements or returns made or to be made in good faith under the laws of the United States regarding annual depreciation of oil or gas wells and .mines." This statute does not purport to be retroactive in its operation and hence can no affect the judgment in this case. This disposes of all questions that require con sideration. The judgment will be affirmed. (T. D. 2662.) Excess-profits tax. When consolidated returns are to be made for purposes of the excess-profits tax. TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, Washington, D. C. To collectors of internal revenue, revenue agents, and others concerned: Pursuant to article 78 of regulations 41 relative to war excessprofits tax, affiliated corporations as limited and defined in paragraphs C and D below are hereby directed to make consolidated returns for the purpose of excess-profits tax. Affiliated corporations other than those falling within the provisions of paragraphs C and D may make a consolidated return only after having secured permission in writing from the Commissioner of Internal Revenue. Affiliated corporations are defined in article 77 of the regulations as follows: For the purpose of this regulation two or more corporations will be deemed to be affiliated (1) when one such corporation owns directly or controls through closely affiliated interests or by a nominee or nominees, all or substantially all of the stock of the other or others, or when substantially all of the stock of two or more corporations is owned by the same individual or partnership, and both or all of such corporations are engaged in the same or a closely related business; or (2) when one such corporation (a) buys from or sells to another products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or (b) in any way so arranges its financial relationships with another corporation as to assign to it a disproportionate share of net income or invested capital. A. Two or more corporations are not "affiliated" merely because all or substantially all of the stock therein is owned by the same corporation, individual, or partnership; they must also be engaged in the same or a closely related business. B. For purposes of regulation by public service commissions or similar authorities, the identity of public service corporations, when not grouped into one operating unit, must be maintained even though they are owned by the same corporation or taxpayer; and under such regulation the accounts of such public service corporations are deemed to reflect the true invested capital and income of each operating unit. Accordingly railroads, gas, electric, water, and other public service corporations when operated independently and not physically connected or merged-particularly when situated in different jurisdictions and subject to regulation by public service commissions--will not be required or permitted without special permission obtained in advance to make a consolidated return. When, however, a railroad or other public utility is owned by an industrial corporation and is operated as a plant facility or as an integral part of a group organization of affiliated corporations, and such affiliated corporations are required to file a consolidated return, the return of such railroad or other public utility shall be included therein. C. The words "all or substantially all of the stock" as used in the above definition (art. 77) will until further notice be interpreted as meaning an ownership of 95 per cent or more of such stock by the same taxpayer during the taxable year. D. In case of affiliated corporations among which there exist contracts or trade or financial practices which arbitrarily or artificially influence or determine the amount of the invested capital or net income of one or more of the corporations so affiliated and where 95 per cent or more of the stock of the subsidiary affiliated corporations is owned by a parent or controlling corporation or by an individual or partnership, a consolidated return will be required. E. A consolidated return shall be filed by the parent or principal corporation in the office of the collector of the district in which it has its principal office. Each of the other affiliated corporations shall file in the office of the collector of its respective district a return, entering thereon its name and address and replying to the questions in Schedule I, and to questions 1, 2, 3, 4, and 11 on page 4 of Form 1103; and stating also (1) that the corporation is affiliated with a designated parent or principal corporations, (2) that its return is included in the consolidated return of such parent or principal corporation, and (3) the district in which the consolidated return is filed. F. Assets of affiliated or subsidiary corporations which have to be adjusted to meet the statutory limitations, prescribed by section 207 shall be valued as of conditions existing at the dates when such assets were acquired by the respective affiliated or subsidiary corporations and not as of the date when the stock in such affiliated or subsidiary corporations was acquired by the parent or controlling corporation. G. Affiliated corporations filing a filing a consolidated return shall include in such return (1) a specific statement of the number or proportion of the shares in the affiliated corporations held by the parent or controlling corporation during the taxable year, and (2) a schedule showing the proportionate amount of the total tax which it is agreed among them is to be assessed upon each affiliated corporation. H. If the Commissioner of Internal Revenue upon examination of any consolidated return finds that the tax can not in his judgment be properly assessed upon the basis of such return, the affiliated corporations covered by such consolidated return shall, upon notice from the Commissioner of Internal Revenue, file separate returns. DANIEL C. ROPER, Approved March 6, 1918: Commissioner of Internal Revenue. Secretary of the Treasury. (T. D. 2663.) Corporation income tax. Method to be followed in crediting an overpayment of the 2 per cent income tax by a corporation filing supplemental return for a fiscal year ended on the last day of some month during the year 1917, or a "final" return for a period ended during such year. TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, To collectors of internal revenue: Under the act of September 8, 1916, as originally passed, corporations were entitled to take as a deduction all taxes paid. Under the same act as amended by the act of October 3, 1917, they are not entitled to any deduction for income tax paid but are entitled to a credit of the amount of excess-profits tax for which they are liable. They are also liable for the war income tax of 4 per cent imposed by the act of October 3, 1917. |