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published for the information of internal-revenue officers and others concerned.

DANIEL C. ROPER, Commissioner of Internal Revenue.

COURT OF CLAIMS OF THE UNITED STates, No. 33198.

(Decided Dec. 3, 1917.) Chicago & Alton Railroad Company v. The United States. This case having been heard by the Court of Claims, the court, upon the evidence, makes the following

FINDINGS OF FACT.

1.

Prior to the years 1911 and 1912 the Chicago & Alton Railroad Co. had disposed of, at a discount, refunding bonds of a face value of $11,000,000 and equipment potes of a face value of $1,960,000, which bonds and notes were, during said years, outstanding, not paid, and not yet due.

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Under the rule of administration established by the Commissioner of Internal Revenue for arriving at the net income of corporations in reckoning the tax due under the act of August 5, 1909 (36 Stats., 11-112), where bonds or notes issued by a corporation are disposed of for a price above or less than par, the same being redeemable at par, the prolit or loss thereby resulting is required to be prorated yearly during the period for which the bonds or notes are to run.

The commissioner did not, however, extend the above rule to bonds or other indebtedness of corporations issued prior to 1909.

III. The Chicago & Alton Railroad Co., in making its return under the said act of August 5, 1909, for the years 1911 and 1912, failed to deduct the proportionate amount of the discount sustained on the above-mentioned outstanding bonds and notes, and by reason of such failure there was passed against said company and said company paid to the collector of internal revenue for the first district of Illinois, as taxes due under said act for each of said years, a sum in excess of that which should hav been assessed and paid had the proportionate deduction been made, and allowed as a proper deduction by the Treasury Department, amounting to $574.97 for each of the years 1911 and 1912.

The assessments next above stated were voluntarily paid by plaintiff company, not under protest or with notice of intention to test their validity, and not under duress. No claim for refund was made until several months after the tax was paid.

IV. Thereafter, and within two years after the said payments were made, the Chicago & Alton Railroad ('o, filed due and formal claims with the Commissioner of Internal Revenue for the refund of $574.97, as amounts paid in excess of those due under the above-mentioned act for each of the years 1911 and 1912.

V. On March 9, 1914, the Commissioner of Internal Revenue, upon consideration of the claims for refund, allowed the same under section 3220, Revised Statutes, and in his decision grantino said allowance made the following findings of lact:

“The claims are based upon the ground that the company in preparing its returns for the years in question failed to deduct, under item 4, what is claimed was the proportion of the amount of discount sustained upon the issuance of bonds in 1906. “Upon receipt of the claims in this office, Revenue Agent Chapin was directed to investigate the books and accounts of this corporation, in order to determine the correctness of claimant's contention. From the report received it appears that this company sustained and charged off in 1906 losses by reason of discount in the sale of bonds, and that it did not claim or take any credit for any part of these items in its returns for 1909 to 1912, inclusive.

"The revenue agent states that if permitted to prorate this loss over the life of the bond, the company would be entitled to increase its deductions each year in the sum claimed, thus decreasing its taxable income in a like amount.

"It appears that this office has in similar cases allowed corporations to deduct each year, up to the year of redemption, a prorated proportion of the amount of discount sustained upon the issuance of bonds, even though such discount had been charged off on its books prior to January 1, 1909."

VI. Thereafter, and on March 13, 1914, the Deputy Commissioner of Internal Revenue reconsidered the above-mentioned claims for refund and disallowed the claims. In his decision of that date denying the above-mentioned claims for refund, it was said:

“Referring to office letter of the 9th instant, relative to the claims of the Chicago & Alton Railroad Co., of Chicago, for the refunding of $574.97 and $574.98, special excise taxes claimed to have been paid in excess for the years 1911 and 1912, respectively, you are advised that after a recent consultation and discussion of the question involved, this office has formed the opinion that where losses suffered by reason of discount in the sale of bonds have been fully charged off, they become a 'closed incident,' and that it would be improper for the corporation to go back and bring forward those losses and prorate them for the purpose of securing a deduction from gross income of the amounts apportionable to the years subsequent to January 1, 1909.

"This office now holds that discounts, to be prorated and so deducted, must be charged off year by year in proportion to the number of years constituting the life of the bonds, and that losses previously charged off must stand as a charge against the income of the year in which so charged off."

CONCLUSION OF LAW.

Upon the foregoing findings of fact the court decides, as a conclusion of law, that the plaintiff is not entitled to recover, and its petition should be, and the same is hereby, dismissed.

OPINION.

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Booth, Judge, delivered the opinion of the court:

The claimant railroad company in 1906 issued and sold at a discount $11,000,000 refunding bonds and $1,960,000 of equipment notes. The transaction was fully consummated within the above year, and the books of the company disclose the loss under the profit and loss account. Subsequently Congress passed the act of August 5, 1909 (36 Stat. L., 112), the material portions of which are as follows:

“SEC. 38. That every corporation * * organized for profit and having a capital stock represented by shares * now or hereafter organized under the laws of any State or Territory of the United States

* * shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation * equivalent to 1 per cent upon the entire net income over and above $5,000 received by it from all sources during each year, exclusive of amounts received by it as dividends upon stocks of other corporations subject to the tax hereby imposed.

Second. Such net income shall be ascertained by deducting from the cross amount of the income of such corporation * received within the year from all sources (first) all the ordinary and necessary expenses actually paid within the year out of income in the mainte

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nance and operation of its business and properties, including all charges, such as rentals or franchise payments, required to be made as a condition to the continued use or possession of property (Second.) All losses actually sustained within the year and not compensated by insurance or otherwise, including reasonable allowance for de. preciation of property, if any. (Third.) Interest actually paid within the year on its bonded or other indebtedness,

not exceeding the paid up capital stock of such corporation * (Fourth.) All sums paid by it within the year for taxes * (Fifth.) All amounts received by it within the year as dividends upon stock of other corporations * * subject to the tax hereby imposed."

The claimant company, following the terms of the above legislation, made its annual returns to the Commissioner of Internal Revenue for the purpose of excise assessment, omitting in each instance to claim a reduction of taxes because of the lond-and-note transaction now in issue. It now claims the right to a refund of a proportionate amount for the years 1911 and 1912 of the full discount suffered by it in the sale of said bonds and notes. The claim is not predicated upon any express provisions of the corporation excise act; on the contrary, relief is sought under a ruling of the Commissioner of Internal Revenue wherein it was held that the contention now put forward by the claimant company was tenable. This court had occasion in the case of the Maryland Casualty Co. v. United States (52 C. Cls., - ), announced, February 12, 1917, to treat the issue here involved. We defined, in the above case, our views as to taxable income under the excise law of 1909. This case falls within the rule there laid down. It is, indeed, a much weaker case, for the claimant company prior to the passage of the act of 1909, supra, had fully close. I the transaction now insisted upon. As affecting its income or deductions therefrom in the year 1909 it was then simply one of the claimant company's past fiscal transactions appearing upon its books to be treated under the excise law by the commissioner as its terms demanded. This, we think, we have fully discussed heretofore.

The petition will be dismissed. It is so ordered.

(T. D. 2632.)

Excess profits tax. A partnership desiring to make a return upon the basis of its fiscal year other than the calendar year must give notice 30 days before March 1, 1918.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C., January 21, 1918. To collectors of internal revenue:

A partnership whose fiscal year ended with the last day of any month in the year 1917 other than December may not later than 30 days before March 1, 1918, give to the collector of internal revenue of the district in which its principal place of business is located notice in writing of the date thus fixed as the closing of its fiscal year. Unless a partnership gives such notice, its incometax return for purposes of the excess profits tax shall be filed upon the basis of the calendar year 1917.

DANIEL C. Roper,

Commissioner of Internal Revenue Approved: J. II. MOYLE,

Acting Secretary of the Treasury.

(T. D. 2633.)

Income and war excess profit taxes.

Extending the provisions of T. D. 2615 of December 13, 1917, which granted an

extension oi time in which to file returns of annual net income by corporations with an established fiscal year ended on the last day of some month during the year 1917 except December 31, 1917.

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TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D. C., January 22, 1918. To collectors of internal revenue:

The provisions of T. D. 2615 of December 13, 1917, extending the time to February 1, 1918, to corporations filing returns for war income and war excess profits taxes, pursuant to the act of October 3, 1917, on the basis of a fiscal year ended on the last day of some month during the year 1917 (except Dec. 31, 1917), are hereby amended so as to extend the time of filing such returns until March 1, 1918. This extension applies also to returns of annual net income of such corporations which were due subsequent to October 16, 1917, the date of T. D. 2561 (extending the time to Jan. 1, 1918), but prior to March 1, 1918.

DANIEL C. ROPER,

Commissioner of Internal Revenue. Approved: W. G. McAdoo,

Secretary of the Treasury.

(T. D. 2634.)

Income tax-Decision of the Supreme Court.

Stock dividends declared in 1914 from profits accrued before January 1, 1913, do not

constitute taxable income to recipients under section 2 of the act of October 3, 1913.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D, C., January 21, 1918. The appended decision of the Supreme Court of the United States in the case of Henry R. Towne v. Mark Eisner, collector, is published for the information of internal-revenue officers and others concerned.

DANIEL C. ROPER, Commissioner of Internal Revenue.

SUPREME COURT OF THE UNITED States. No. 563. OCTOBER TERM, 1917. Apreal from the District Court of the United States for the Southern District of New York.

Henry R. Towne, appellant, v. Mark Eisner, collector.

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(Jan. 7, 1918.) Mr. Justice Holmes delivered the opinion of the court:

This is a suit to recover the amount of a tax paid under duress in respect of a stock dividend alleged by the Government to be income. A demurrer to the declaration was sustained by the District Court and judgment was entered for the defendant. (242 Fed., 702.)

The facts alleged are that the corporation voted on December 17, 1913, to transfer $1,500,000 surplus, being profits earned before January 1, 1913, to its capital account, and to issue 15,000 shares of stock representing the same to its stockholders of record on December 26; that the distribution took place on January 2, 1914; and that the plaintiff received as his due proportion 4,1744 shares. The defendant compelled the plaintiff to pay an income tax upon this stock as equivalent to $417,450 income in cash. The District Court held that the stock was income within the meaning of the income tax of October 3, 1913 (c. 16, sec. 2; A, subdivisions 1 and 2; and B, 38 Stat., 114, 166, 167). It also held that the act so construed was constitutional, whereas the declaration set up that so far as the act purported to confer power to make this levy it was unconstitutional and void.

The Government in the first place moves to dismiss the case for want of jurisdiction, on the ground that the only question here is the construction of the statute, not its constitutionality. It argues that if such a stock dividend is not income within the meaning of the Constitution it is not income within the intent of the statute, and hence that the meaning of the sixteenth amendment is not an immediate issue, and is important only as throwing light on the construction of the act. But it is not necessarily true that income means the same thing in the constitution and the act. A word is not a crystal, transparent and unchanged-it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. Lamar v. United States (240 U. S., 60, 65). Whatever the meaning of the Constitution, the Government had applied its force to the plaintift on the assertion that the statute authorized it to do so, before the suit was brought, and the court below has sanctioned its course. The plaintiff says that the statute as it is construed and administered is unconstitutional. He is not to be defeated by the reply that the Government does not adhere to the construction by virtue of which alone it has taken and keeps the plaintiff's money, if this court should think that the construction would make the act unconstitutional. While it keeps the money it opens the question whether the act construed as it has construed it can be maintained The motion to dismiss is overruled. Billings v. United States (232 U. S., 261, 276); B. Altman Co. v. United States (224 U. S., 583, 596, 597).

The case being properly here, however, the construction of the act is open, as well as its constitutionality, if construed as the Government has construed it by its conduct. (Billings v. United States, ubi supra.) Notwithstanding the thoughtful discussion that the case received below, we can not doubt that the dividend was capital as well for the purposes of the income-tax law as for the distribution between tenant for life and remainderman. What was said by this court upon the latter question is equally true for the former.

A stock dividend really takes nothing from the property of the corporation and adds nothing to the interest of the shareholders. Its property is not diminished and their interests are not increased.

The proportional interest of each share. holder remains the same. The only change is in the evidence which represents thians interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new

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Gibbons 1'. Mahon (136 U.S., 549, 559, 580).

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