Summary
In Daily Pantagraph v. United States, 37 F.2d 783, 68 Ct. Cl. 251, and New England Mut. Life Ins. Co. v. United States, 52 F.2d 1006, 72 Ct. Cl. 658, this court held that the claims for refund under consideration were rejected by the commissioner's letter notifying the particular taxpayers that, `Your claim will be rejected.' It did not appear in those cases that the commissioner signed an official schedule of rejection.
Summary of this case from United States v. BurnetOpinion
No. F-88.
June 10, 1929.
Suit by the Daily Pantagraph, Inc., against the United States. Judgment in accordance with opinion.
This case having been heard by the Court of Claims, the court, upon the evidence adduced and the facts as shown by the stipulation of the parties filed herein, makes the following special findings of fact:
I. Plaintiff is a corporation and duly filed income and profits tax returns for the periods of 1909 to 1921, as shown by Exhibit A attached to the stipulation of the parties filed herein and which is made part hereof by reference. Upon the income so reported, income and profits taxes were assessed and paid, as also shown by Exhibit A. On May 6, 1921, the Commissioner of Internal Revenue, after reviewing the assessments made, advised plaintiff that there had been an overassessment of $4,067.78 for the fiscal year ending October 31, 1917, an overassessment of $2,741.99 for the 2-month period of November and December, 1917, and that there was an additional tax due of $11,724.97 for the year 1918. The overassessments for the year 1917, as above stated, were credited against the additional tax assessed for 1918, and the taxes remaining for the year 1918 were assessed and paid as shown by Exhibit A.
About December 13, 1922, and February 19, 1923, plaintiff executed amended returns for the years 1909 to 1921, inclusive, as shown by Exhibit A, and filed certain claims with the Bureau of Internal Revenue with reference to the taxes for said years.
The Commissioner of Internal Revenue made an examination of the said amended returns of the plaintiff and sent the plaintiff, under date of March 14, 1925, a 60-day deficiency letter, a copy of which is attached to the stipulation marked Exhibit 1, and is made part hereof by reference. This deficiency letter expressed the final conclusion of the Commissioner, but the plaintiff does not admit that any of its claims for 1917 to 1921 have been denied or rejected within the meaning of the law.
In said 60-day letter, the Commissioner made use of what he considered the taxpayer's statutory capital (instead of sections 210 and 327 and 328 [ 40 Stat. 1062, 1093]), and that resulted in an overassessment of $2,639.18 for the year 1917, and a deficiency in tax amounting to $3,243.33 for the year 1918, the tax liability for the year 1918 being thus found by the Commissioner to be $3,243.33 in excess of the tax as previously computed by him under the relief provisions of sections 327 and 328 of the Revenue Act of 1918, set forth in said letter dated May 6, 1921, and the tax liability for the year 1917 being thus found by him to be $2,639.18 less than the tax as previously computed by him under the relief provisions of section 210 of the Revenue Act of 1917 and set forth in said letter dated May 6, 1921. Plaintiff does not admit the correctness of the Commissioner's findings or determinations.
Plaintiff made claims for refund of overpayment of income and profits taxes as set forth in Exhibit A, these claims being made with reference to income and profits taxes for the years 1917 to 1921, inclusive. The assessments of taxes shown by Exhibit A were paid by plaintiff on notice and demand to avoid penalties and interest. Defendant has failed to allow or pay the amount covered by said claims or any part thereof.
II. Plaintiff, since January 1, 1908, has been engaged in publishing in Bloomington, Ill., a newspaper called the Daily Pantagraph.
The newspaper was established in 1846. In 1868 W.O. Davis purchased it, and from that time until January 1, 1908, he published the paper and owned the same and all the property used in the publication thereof.
Immediately before the transfer of the business by Davis to the plaintiff his books showed the following assets and liabilities:
Assets | Liabilities | Cash on hand .................. $ 1,085.55 | Accounts payable: Accounts receivable ........... 35,105.20 | Trade .................. $ 9,286.00 Inventories ................... 6,137.49 | Other .................. 43.39 Land and buildings ............ 25,000.00 | __________ Plant and fixtures ............ 22,336.99 | Total ................ $ 9,329.39 Office furniture .............. 4,046.49 | Surplus ................ 84,532.33 Associated Press membership (a | bond in that association) ... 75.00 | American Newspaper Publishers | Association (an item paid on | account of membership in that | association) ................ 75.00 | __________ | __________ Total ................... $93,861.72 | Total ................ $93,861.72 Immediately after the transfer the plaintiff's books showed the same assets and liabilities, at the same figures, except that the $84,532.33 was divided into $80,000 capital stock and $4,532.33 surplus.The above-described assets were transferred at the end of December, 1907, by Davis to the plaintiff and the accounts payable items were assumed by it. The plaintiff issued to Davis $80,000 capital stock. No other capital stock was ever issued by the plaintiff.
Davis became the owner of all the stock of the plaintiff to which he had transferred his whole newspaper business and the property thereof, and continued throughout the remainder of his life to be the sole owner of all its stock, except ten shares which he sold to C.C. Marquis. Davis incorporated his business because he was getting old and was in poor health and so that he could more readily dispose of his business property in his will. He had three children, none of whom were actively engaged in the business.
C.C. Marquis had been employed by Davis since 1877, and he had been business manager of the newspaper since some time in the 80's. Shortly after the incorporation of the business, Davis sold Marquis 10 shares of stock for $2,500, a special price with no relation to the market value, to keep him in the business, with which he was thoroughly familiar. Davis refused to sell more stock to Marquis or to sell any stock to other employees, at any price, for he desired to keep the stock in his family.
The business was an old and well-established one, which steadily made substantial net profits, averaging approximately $36,000 for the 3 years prior to January 1, 1908.
At the time of the incorporation of the business, Davis instructed his bookkeeper to make a statement of the tangible assets at very low figures. This was done, and the above statement of assets and liabilities was prepared and used as a basis for the issuance of stock. The $80,000 capital stock was arrived at because it was the largest round figure, and the $4,532.33 remained as surplus. All of the business property was to be and actually was transferred to the plaintiff, including good will, circulation structure, and the Associated Press membership, but Davis did not desire to have a large number of shares of stock outstanding, for he did not intend to offer any of them for sale. His sole intention was to keep the business intact and pass the stock on to his family. The plaintiff's stock has always been closely held, at first by Davis and Marquis and later by the family of Davis and by Marquis. Davis died in 1911.
The land transferred to the plaintiff consisted of a corner lot 24 feet on Washington street, the principal street of the city, by 115 feet on Madison street, the next important street, which lot Davis purchased in 1875, and an adjoining lot, 22 feet on Washington street by 115 feet deep, which lot Davis purchased in 1887 for $3,000. The two lots had a value of $7,000 in 1887. Between 1887 and 1907 there was a steady increase in land values in the business section of the city. The population increased and business activity increased. In 1901 a hotel, the largest and most modern hotel in the city at that time, was constructed on the opposite corner from this property, and in 1906 an electric car line was constructed and operated on Madison street. In 1907 the two lots had a value of at least $12,000.
The building transferred to the plaintiff was erected by Davis in 1887. It covers both of the above-mentioned lots as to width and depth, is three stories high, and the basement extends under the entire building and out under the sidewalks to the curbing. The basement windows extend above the sidewalks, admitting daylight. The foundation and 13inch walls are constructed of substantial masonry — that is, of good brick and mortar. The joists and flooring are wooden, and the walls are plastered. The floors are partitioned off to suit the needs of the publishing business. The presses have always been placed upon concrete foundations so as to eliminate vibration of the building. The floor on which the linotype machines are located is covered with sheet metal. The building is specially adapted to the printing and publishing business, and has always been kept in good repair, so that in 1907 there was no evidence of deterioration; the mortar was sound, the walls plumb and free from cracks, except for one or two minor ones, the floors were sound, and the plaster in good condition. The plaintiff has used the building continuously since January 1, 1908, and it is still in good condition, and has an expected useful life of about 36 years from the present time. In December, 1907, the building had a value of at least $35,000. The Commissioner included the land and building in the plaintiff's invested capital at $25,000, the amount of stock issued therefor, whereas they had on December 31, 1907, a cash value of $47,000. A depreciation rate of 1¾ per cent. from January 1, 1908, is a reasonable allowance for exhaustion, wear, and tear computed on 1908 value. The cost of additions to the building since January 1, 1908, is not in dispute.
The plant and equipment transferred to the plaintiff in December, 1907, consisted of a press, linotype machines, and other machinery necessary to get out a daily paper, and of office furniture and fixtures. The press was the largest piece of machinery. There was a battery of five one style of type Mergenthaler linotype machines, which were bought in 1897. The linotype machines were traded in for improved machines, one in 1916, one in 1920, one in 1922, and the others in 1923. All of those machines were in good working order and in regular use when disposed of. The press was traded in for a new one several times between 1900 and the present time, but this was for the purpose of taking care of the increased circulation and advertising, and also to turn out more papers in the shortest possible time. All the machinery was kept in good repair, and was run for only a few hours each day. In publishing a morning paper it is essential that it go to press as late as possible so as to include the latest news items. The presses and linotype machines have a useful life of 33 years. The office furniture consisted of desks, tables, chairs, typewriters, rugs, and other office equipment. The typewriters would last for 2 or 3 years. The furniture has been used for 25 years, and is in good condition.
As shown by Davis's books from 1890 to December 31, 1907, the plant and equipment received by the plaintiff cost $49,054.70, depreciated at 3 per cent., amounting to $10,336.27, leaving a balance of $38,718.43, and the furniture received by the plaintiff cost $7,699.37, depreciated at 4 per cent., amounting to $2,636.64, leaving a balance of $5,062.73. The plant and equipment and the furniture were included in the plaintiff's invested capital at $26,383.48, the amount of stock issued therefor. The total cash value of the two items on December 31, 1907, was $43,781.16. A depreciation rate of 3 per cent. on the machinery and equipment and a depreciation rate of 4 per cent. on furniture is reasonable, and should be used in depreciating the machinery and furniture, respectively, subsequent to January 1, 1908. The cost of additions to these two items since January 1, 1908, is not in dispute.
Davis transferred to the plaintiff the circulation structure of the Daily Pantagraph. It was property crucial to the plaintiff's business, without which it would not have made any profits. It had been built up over a period of many years, and the plaintiff could not have acquired from any one else the equivalent of this asset essential to the publication of its paper in Bloomington. Had the plaintiff attempted to build up a circulation, it would have required a large expenditure of money over a period of years. The productivity of the entire property is dependent upon the circulation, and the longer a circulation has been established the greater is its earning power. The cost of building a circulation structure is from $10 to $15 per unit or subscriber. Prior to the incorporation, Davis audited his circulation, and subsequent to January 1, 1908, the plaintiff has audited its circulation regularly just as the accounts receivable have been audited. These audits have been submitted regularly to the Auditors' Bureau of Circulation, a newspaper publishers' organization. On the basis of this audit newspaper men determine the value of circulation structures. The circulation structure is recognized as an income-producing factor separate from the building and plant used in publishing a paper, and it is sold by newspaper men for substantial sums of money. Advertising rates are dependent upon circulation. On December 31, 1907, the circulation of the Daily Pantagraph was 14,204, and had a value of $10 per unit, or $142,040.
Davis transferred to the plaintiff his Associated Press membership and news service, which gave exclusive rights to the Associated Press service for a morning paper, daily, and Sunday, in Bloomington and territory tributary thereto. The membership could not be taken away except by the act of the member surrendering it or by violating its terms. The association had a well-established and efficient news-gathering organization covering the entire world. It was essential that the Daily Pantagraph, being the only morning paper, publish news from world-wide sources. At the time the plaintiff was incorporated, this news could not have been secured from any other source, and, without such news, the plaintiff could not have maintained the large circulation which it had acquired. The Associated Press, a co-operative association, sold news only to its members, at cost. The plaintiff could not have acquired the membership from any one other than Davis. In the purchase and sale of newspaper properties such membership is regarded as having a substantial value, and in practice the value is determinable. In 1907 the Associated Press service was more valuable than it is at the present, for at that time there was no other source of supply of the news, whereas at the present time there are a number of such services. The news service which it furnishes, where it is an exclusive right, as in this case, is in this community worth $1 for every head of a family in the territory served by the paper, and in this instance it was worth $30,000.
Davis transferred to the plaintiff the good will of the Daily Pantagraph. The paper had been published for more than 50 years in a well-settled agricultural community, where there was little fluctuation of population; it had the confidence of its readers, and was influential in the community. The paper had well-established advertising connections, and advertisers had become convinced of its value as an advertising medium, because of the standing and reputation which it had achieved. It had a good will which gave the business a strong income-producing power. Newspaper men in purchases and sales give to good will a value over and above the other properties. The paper has been served to the same families for succeeding generations, and the good will had a value of $25,000 on December 31, 1907.
Summarizing the foregoing, it is found that the plaintiff's capital structure as of January 1, 1908, was as follows:
Tangible properties paid in for stock ........................... $80,000.00 Tangible properties paid in and originally entered upon the books as paid-in surplus .............. $ 4,532.33 Additional cash value of land .............. 5,000.00 Additional cash value of buildings ......... 17,000.00 Additional cash value of plant and equipment 17,397.68 Cash value of newspaper circulation structure ............ 142,000.00 Cash value of Associated Press news service .............. 30,000.00 Cash value of newspaper good will ............ 25,000.00 __________ Total paid-in surplus ......... $240,930.01 ___________ Total capitalization .......... $320,930.01
For its fiscal year ended October 31, 1916, the plaintiff filed its income tax return with the proper collector on December 30, 1916. The Commissioner's deficiency letter was issued and mailed on March 14, 1925.
III. The parties agree that the land and depreciable capital assets of the taxpayer and the depreciation thereon in this case are to be taken as shown by Exhibit G attached to the petition herein, which exhibit is made part hereof by reference, except that the depreciation on the building is to be computed at 1.8 per cent. instead of 1.5 per cent.
IV. The parties further agree that:
Of circulation there can be, and in practice is, kept a record showing the number of units thereof which the publishing concern has from time to time, and this plaintiff kept such a record.
Circulation can be, and in practice is, and has been for many years, audited as to quantity and quality by auditors, and the circulation of this plaintiff was so audited.
Circulation can be, and in practice is sometimes, sold separately from the other property of the seller in cases wherein the seller quits the publishing of a paper or an edition thereof.
V. The parties further agree that:
(A) The Commissioner deemed the income and profits taxes, paid in a given year on the income of the preceding year, to have been paid out of January 1 surplus of the year of payment, and thus reduced that part of invested capital consisting of January 1 surplus, the reductions made by him being prorated out, as shown by said Exhibit 1, in accordance with regulations then in effect, in the following amounts for the following years:
1918 capital ................. $ 3,017.62 1919 capital ................. 8,745.90 1920 capital ................. 13,535.42 1921 capital ................. 15,420.89
The defendant does not admit that such reduction of statutory capital was illegal; but defendant does admit that if, by reason of the decision of other points, there is a reduction of the taxes as determined by the Commissioner, there will have to be made reductions in said amounts to bring them into harmony with the correct amounts of taxes.
Before it can be known what, if any, corrections will have to be made in said figures, it will be necessary to have this court's decision of the question whether or not there can be used as a part of statutory capital intangibles coming to the plaintiff as a gratuity, and the question whether or not circulation is tangible or intangible property. It is hereby stipulated that, when the various points shall have been decided by this court, the parties will agree upon and submit to the court the revised figures to be placed in the above schedule or will submit to the court for settlement any differences between them in respect to said figures.
During all the years here involved the plaintiff's books were kept and its returns made on the accrual basis. The federal income and profits taxes were not accrued on its books, and were not entered thereon until paid, and were then entered in the amounts paid.
(B) The Commissioner made reductions from the plaintiff's capital, by reason of dividends paid, by applying the following process: Accruing against the income of the year of dividend payment estimated taxes on that income which were not deductible in ascertaining that income for tax purposes; assuming the balance of the income to have come in evenly during the year; applying to a given dividend the amount of current earnings found according to this process to be on hand at the time of dividend payment, and treating the balance of the dividend to have been paid out of January 1 surplus. This process was applied also to dividends paid after the first 60 days of the year. By this process the Commissioner reduced the taxpayer's invested capital, as shown in Exhibit 1, by the following amounts:
1917 capital ................. $18,869.96 1918 capital ................. 3,649.31 1919 capital ................. 14,875.36 1920 capital ................. 29,412.48 1921 capital ................. 8,858.30
The defendant does not admit that such reduction was illegal; but defendant does admit that if, by reason of the decision of other points, there is a reduction in the taxes as ascertained by the Commissioner affecting this situation, the above figures will have to be reduced so far as necessary to bring them into harmony with the correct amounts of taxes.
Before it can be known what, if any, corrections will have to be made in said figures, it will be necessary to have the decision by this court of the questions above mentioned. The parties stipulate that, when the court has determined the various questions, they will agree upon and submit to the court the correct figures to go into the above schedule, or will submit to the court any differences between them as to such figures.
(C) The Commissioner, in determining the plaintiff's invested capital, excluded therefrom certain claimed overpayments of taxes claimed by the plaintiff to have been made, and he also excluded certain claimed under-payments of taxes which he claimed were owing by the taxpayer, the resultant exclusions being as follows:
Claimed overpayment ...................... $12,418.96 Overpayment per commissioner ............. 9,046.15 __________ Difference excluded from 1919 capital ....................... 3,372.81 ========== Claimed overpayment ...................... 6,820.84 Claimed underpayment per commissioner .... 2,120.49 __________ Total excluded from 1920 capital ............................ 8,941.33 ========== Claimed overpayment ...................... 18,959.58 Claimed underpayment per commissioner .... 2,915.63 __________ Total excluded from 1921 capital ............................ $21,875.21
The defendant does not admit that said exclusions from capital were illegal; but defendant does admit that if, by reason of the decision of the other points, the taxes are reduced, the above figures will have to be reduced to bring them into harmony with the correct taxes.
Before it can be known what, if any, corrections will have to be made in said figures, it will be necessary to have the decision by this court of the questions above mentioned. The parties stipulate that, when the court has determined the various questions, they will agree upon and submit to the court the correct figures to go into the above schedule or will submit to the court any differences between them as to such figures.
Arnold L. Guesmer, of Minneapolis, Minn., for plaintiff.
J.H. Sheppard, of Washington, D.C., and Herman J. Galloway, Asst. Atty. Gen., for the United States.
Argued before BOOTH, Chief Justice, and GRAHAM, SINNOTT, and GREEN, Judges.
The defendant sets up objections to the jurisdiction of the court in this case, both as to the whole thereof and especially to some specific portions. It will be necessary to first consider these objections.
It is urged on behalf of the defendant that taxes paid for the years 1917 and 1918 may not be recovered because plaintiff was granted a special assessment for those years, and it is also asserted in argument that plaintiff was accorded and accepted the benefits of the application of the special assessment provisions of the Revenue Acts of 1917 and 1918. We do not think this contention is well founded.
Plaintiff was granted a special assessment for the years 1917 and 1918, and this resulted in an overassessment of $4,067.78 for the fiscal year ending October 31, 1917, an overassessment of $2,741.99 for the 2-month period of November and December, 1917, and a deficiency of $11,724.97 for the calendar year 1918. The overassessments for the 14-month period ending December, 1917, were credited against the deficiency for the calendar year 1918, and the balance of $4,915.20 was paid by the plaintiff on July 26, 1921. If this were all on this point, the decision in the case of Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 48 S. Ct. 587, 72 L. Ed. 985, might possibly be conclusive as against the plaintiff; but subsequently the Commissioner sent plaintiff a 60-day letter dated March 14, 1925, giving his final determination of tax liability of the plaintiff, which was based on the taxpayer's statutory capital instead of the special assessment hereinabove referred to and which resulted in an overassessment of $2,639.18 for the year 1917 and a deficiency tax amounting to $3,243.33 for the year 1918 instead of the amounts which had heretofore been determined by him under the provisions for special assessment. There is nothing in the evidence to show that the defendant attempted to collect the deficiency so assessed for the year 1918, nor is there anything to show that the plaintiff ever asked for the special assessment. The mere fact that plaintiff paid the amount which was demanded by defendant after the special assessment and before the deficiency letters were sent does not show an acceptance by the plaintiff of the rulings of the Commissioner under the special assessment provisions. In fact, neither party seems to have rested its case on these proceedings, and we think there was nothing in connection therewith which would prevent the plaintiff from maintaining this suit with reference to the alleged overpayment for the years 1917 and 1918.
Counsel for defendant contend that the statute of limitations has run against the claims for refund of taxes paid for the years 1917 and 1919 and a portion of the year 1918, for the reason that plaintiff's claims for refund thereof have not been rejected. With reference to these refunds, the Commissioner of Internal Revenue wrote certain letters to plaintiff, in each of which he said: "Your claims will be rejected." Counsel for defendant argue that this expression referred to the future and not to the time of sending the letters, but we think this language would be understood to mean that the Commissioner had definitely rejected the claim for refund referred to respectively in the letters.
It is also contended on behalf of the defendant that this court has no jurisdiction to entertain this suit, because at the time that the plaintiff's petition was filed an action involving some or all of the same matters was pending before the Board of Tax Appeals. The evidence shows that the plaintiff filed a petition appealing from certain deficiencies for 1919, 1920, and 1921, asserted by the Commissioner of Internal Revenue in a letter of March 14, 1925. The case was tried by the board on November 16, 1925, and the 1926 Revenue Act therefore has no application. It may be that, while plaintiff's petition and action were pending before the Board of Tax Appeals, it had no right to bring a suit in this court, including any of the matters involved therein, but the proceedings before the Board of Tax Appeals have reached a final determination. We do not find it necessary to determine whether, when plaintiff's petition was filed in this case, defendant might have successfully demurred thereto on the ground of the pendency of the proceedings before the Board of Tax Appeals. It is sufficient to say that we think that, the proceedings before the Board having ended, the plaintiff is now in a position to maintain this suit, and should not be required to go through the useless proceedings of filing a new petition. The objections of defendant to the jurisdiction of the court are therefore overruled.
Coming now to the merits of the action, it will be found that the facts in the case are not in dispute, and are clearly set forth in the findings. The parties have agreed that, when the court decides the issues of law, they will present to the court an appropriate finding containing proper tax computations based on the court's construction of the law. This renders it unnecessary that we should state anything more of the facts in the opinion than such as are necessary to an understanding of the questions of law which are to be decided.
I. The first question arises over the action of the Commissioner in refusing to allow the plaintiff to include in its invested capital the value of its circulation. It appeared that, when the plaintiff was organized as a corporation and took over the business of publishing a newspaper, nothing was paid the former owners for the circulation, which was actually worth $142,000. The question is whether plaintiff had the right to include in its invested capital the value of this circulation thus gratuitously received.
Section 326, both of the 1918 ( 40 Stat. 1092) and 1921 Revenue Acts ( 42 Stat. 274), defines and limits the words "invested capital," as used in the law, and, as a distinction is made therein between tangible and intangible property, it becomes necessary to determine whether circulation or circulation structure is tangible or intangible property.
We have no doubt that it is intangible property. It is something that goes with every newspaper or periodical, and yet it cannot be touched or perceived, although it may be described and to a certain extent specified. The contention on the part of plaintiff is that, because its value can be ascertained, it is in fact a tangible asset, but this feature pertains to most intangible property. Section 325 of the acts of 1918 ( 40 Stat. 1091) and 1921 ( 42 Stat. 273) provides that "intangible property" "as used in this title" (invested capital) means, among other things, "good will * * * and other like property." Circulation is very much in the nature of good will. Its amount and value depend entirely on how attractive a publication is to the public, and whether they have such an opinion in regard to it that they are likely to continue their subscriptions and their advertising. Unlike tangible property, it cannot be parted or divided. It has all the characteristics that belong to other intangible property.
The section of the Revenue Acts of 1918 and 1921 before referred to (section 326) provides in substance that "intangible property bona fide paid in for stock or shares" may be included in invested capital under certain limitations and to a certain extent. Under well-known rules of construction, the inclusion of intangible property paid in for stock or shares would exclude that which was not paid in for such purpose, unless there was something in the context to indicate a different construction. An examination of the section tends rather to support the application of the rule. Strict limitations are placed by the statute upon the extent to which intangible property "paid in for stock or shares" may be included in invested capital. In no event can it be more than "(a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding, * * * whichever is lowest." The plaintiff contends that, as subdivision 3 of the section under consideration provides for the inclusion of "paid-in or earned surplus and undivided profits," this provision would include circulation value as a part thereof. Possibly by itself and alone this language might be so construed, but, if the contention of the plaintiff should be sustained, the effect is to hold that Congress carefully limited the extent to which intangible property actually paid for stock could be included in invested capital, but placed no limitations whatever on intangible property gratuitously received, which would under this contention have to be included in invested capital at its full value, while the amount of intangible property which was actually used as a payment could not exceed 25 per centum of the par value of the total amount of stock of the corporation. We do not believe that Congress so intended, and, in arriving at this conclusion, we are guided not simply by the fact that this result would be absurd. When Congress provided that intangible property paid in for stock might be included in invested capital, and went on further to specify the extent and limitation thereof, if it had intended that property gratuitously received might also be included, it would not merely have so specified, but it would have gone on to fix the limit and extent to which it could be so included in the same manner as it did with intangible property actually paid in for stock. This would be the natural, ordinary, and usual course. We conclude that the maxim expressio unius est exclusio alterius applies, and subdivision 3 was not intended to include in invested capital intangible property gratuitously received. The Board of Tax Appeals has in a number of cases consistently adhered to this construction of the law, and, in accordance with the views above expressed, we hold that plaintiff is not entitled to include in its invested capital the value of its circulation. It is true that in this particular case the application of this rule produces an inequitable result as compared with a similar case, where the value of the circulation had been treated as a payment for stock, but it should be always borne in mind that it is utterly impossible for Congress to adjust taxes so as to equalize all of the myriads of different cases which may arise. Some inequalities will always exist, and, in the taxes which are most commonly and universally applied, they are very numerous, and in some instances gross. The case presented by plaintiff is a very unusual one. Possibly, if it had been considered by Congress that such a case could ever occur, it would have provided for it; but it did not, and we can only administer the law as we find it.
II. During the years involved, the plaintiff's books were kept and its returns made on an accrual basis. The federal income and profits taxes were not accrued on its books, and were not entered thereon until paid, and were then entered in the amounts paid. The Commissioner, in computing invested capital for a given year, deducted from the amount of the invested capital at the close of the preceding year the amount of income and profits taxes for such preceding year. The question is whether this action was in accordance with law.
We have already passed on this question in American Bronze Powder Manufacturing Co. v. United States, 67 Ct. Cl. 564, and held that the action of the Commissioner was proper. This decision was made on the authority of United States v. Anderson, 269 U.S. 422, 46 S. Ct. 131, 70 L. Ed. 347, and we would not consider it necessary to again consider it if a contention was not made in argument that a rule is laid down in United States v. Woodward, 256 U.S. 632, 41 S. Ct. 615, 65 L. Ed. 1131, which is contrary to the opinion expressed in the American Bronze Powder Manufacturing Co. Case, supra.
In the Anderson Case, supra, it is said:
"In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee's books. In the economic and bookkeeping sense with which the statute and Treasury decision were concerned, the taxes had accrued." (Italics ours.)
It is true that in the Woodward Case, supra, where the estate tax was being considered, language was used which seems to have been understood by some as meaning that a tax accrued in the year in which it was paid, but this language was explained and qualified in the case of United States v. Mitchell, 271 U.S. 9, 46 S. Ct. 418, 70 L. Ed. 799, and also in the Anderson Case. In both of these cases it was shown that the question of when a tax accrued was not before the court in the Woodward Case, and that the opinion rendered therein did not pass upon that question. Counsel for plaintiff is a little unfortunate, to say the least, in quoting from the Anderson Case what the court says with reference to the Woodward Case.
The court said: "It did not appear whether, as here, the taxpayer kept his books on the accrual basis. * * *"
In quoting from the Anderson Case the sentence in which this language appears, counsel omits it, although it is controlling on the question to be decided herein as the books in the case at bar were kept on the accrual basis.
It is argued on behalf of plaintiff that in the Anderson Case and the Yale Towne Mfg. Co. Case, which were decided together, the munitions tax and not the income and profits tax was involved; and that the munitions tax could be computed and ascertained in the year for which it was levied, while the income and profits tax cannot. There are two reasons why this argument is not tenable: First, that the munitions tax could not be exactly computed until the taxable year was completed and over; and the other and perhaps more conclusive reason is that the Supreme Court did not base its decision upon any such premise, but stated, as above recited, that "the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee's books," which accrued expenses, where books were kept on the accrual basis, as in the instant case, would be charged at the different times in the year when they arose.
In the case of Nichols, Collector, v. Sylvester Co. (C.C.A.) 16 F.2d 98, it was held, following the doctrine of the Anderson Case, that, where the corporation kept its books on an accrual basis, the munitions tax for the year 1916, paid in 1917, was a proper deduction for the year 1916; and in Bowers, Collector, v. Max Kaufmann Co. (C.C.A.) 18 F.2d 69, the rule of the Anderson Case was applied to the taxes for 1917, due and payable in 1918. The Bowers Case involved the excess-profits tax.
It should be carefully kept in mind that the point here discussed is exactly the same as that involved in the Anderson Case, namely, whether, when a corporation keeps its books on the accrual basis, in computing the taxes for a given year, the taxes of the previous year should be deducted in ascertaining the amount of invested capital, and the Supreme Court held that such a deduction should be made. The nature of the facts also is exactly the same, with one exception. In the Anderson Case the taxpayer "deducted from gross income all the items appearing on its books as losses sustained and obligations and expenses incurred during the year," and likewise carried on its books as an obligation or expense a "reserve for munitions taxes" for 1916, being the year for which such taxes were imposed, but in making up its return for 1916 the taxpayer omitted to return the item of the munitions tax. In the case at bar the plaintiff keeping its books on the accrual basis followed the same plan, except that the federal income and profits taxes were not accrued on its books, and were not entered until they were paid. The argument of plaintiff seems to be based on the theory that plaintiff's income for taxing purposes should be computed on the cash receipts and disbursements basis. This argument seems strange in view of the fact that the plaintiff not only kept its books on an accrual basis, but made its returns on an accrual basis. It took credit on its books, not only for items actually received, but also for credits which had accrued, although they were payable in the future. Having thus received the benefit of credits which had accrued, the plaintiff should also deduct the amount of obligations which had been incurred. In our opinion, the plaintiff could not keep its books as to everything except taxes on the accrual basis and then refuse to have its taxes adjusted on that basis because it omitted to enter them on the books until paid, nor could it make a return on an accrual basis as it undertook to do without including its accrued taxes. We think it clear under the holding made in the Anderson Case that the Commissioner was right in deducting the income and profits taxes of the previous year in order to ascertain invested capital of any given year; the plaintiff having kept its books on an accrual basis.
III. In determining the amount of income available for the payment of dividends paid after the first 60 days of a given year, the Commissioner reduced the net available income earned from January 1st of the given year to the extent of the pro rata amount of federal income and profits taxes for that year which he held had accrued up to the date of dividend payment. The question is whether this action of the Commissioner was correct.
This identical question has now been passed upon by this court in three cases, and in all of them the conclusion was adverse to the contention of plaintiff. These cases are Franklin D'Olier et al. v. United States, 61 Ct. Cl. 895; Child and Fullerton v. United States, 63 Ct. Cl. 356; and American Bronze Powder Mfg. Co. v. United States, 67 Ct. Cl. 564.
The D'Olier Case, supra, was decided on the authority of United States v. Anderson, supra, and the opinion therein expressly so stated. The plaintiff applied for a certiorari, and his application was denied. The Child and Fullerton Case was abandoned on the denial of certiorari in the D'Olier Case. We are aware that there are decisions to the contrary by other courts, and that the Board of Tax Appeals has also held consistently to the contrary, but only by reversing the decisions of this court in the three cases named above and holding contrary to a doctrine which we consider has been approved by the Supreme Court could we reach a conclusion that the action of the Commissioner was erroneous and wrongful. It is true that the opinion in the D'Olier Case merely stated that it was made on the authority of the Anderson Case, but the statement of facts and the point involved were made so clear that it was hardly possible that the issue be misunderstood. In the American Bronze Powder Mfg. Co. Case, supra, we have set out at length our reasons for holding that, where the books were kept on an accrual basis, the Commissioner was authorized to deduct the amount of the tentative tax for the year in which the tax was imposed in order to ascertain the amount available for dividends, and in the last-named case we quoted as determinative of the question before the court a statement made in the Anderson Case, as follows:
"The appellee's true income for the year 1916 could not have been determined without deducting from its gross income for the year the total cost and expenses attributable to the production of that income during the year."
It appears to us there can be no question but that the taxes imposed for any given year are a part of the cost and expenses attributable to the production of income during the year. In fact, no one would dispute but that every going concern includes taxes as a part of its cost and expenses. The question here is as to when the taxes should be deducted, and, following the Anderson Case, we hold that the only way to find the plaintiff's true income for a given year was to deduct the estimated amount of the tax.
In the Anderson Case also a treasury decision was approved under which it was permissible for "corporations which accrue on their books monthly or at other stated periods amounts sufficient to meet fixed annual or other charges to deduct from their gross income the amounts so accrued, provided such accruals approximate as nearly as possible the actual liabilities for which the accruals are made, and provided that in cases wherein deductions are made on the accrual basis as hereinbefore indicated, income from fixed and determinable sources accruing to the corporations must be returned, for the purpose of the tax, on the same basis." (Italics ours.)
Objections have been made to the method adopted by the Commissioner on the ground that it was complicated, and it has been compared with an "algebraic formula." We have had occasion to apply the method in several cases. It has its complications, but no more we think than those caused by some other provisions of the law with reference to the excess-profits tax which has been repealed for several years. Regardless of the complications, if it is in accordance with law, we should apply it. In this connection it ought to be said that Edwards v. Slocum, 264 U.S. 61, 44 S. Ct. 293, 68 L. Ed. 564, has no application. In that case the government was seeking to apply the estate tax by a very complicated method to what the Supreme Court held was not the net estate, and which the court held included a portion of the estate not subject to the tax. No such question arises in the instant case.
It is also said that the method is unfair to the taxpayer who happens to keep his books on the accrual basis, but, when the taxpayer has been receiving benefits in the way of including accrued credits and earnings out of which dividends might be paid, we are unable to see why taxes which have accrued, should not be deducted pro rata and think this is only fair to the government.
The parties having agreed that they will present to the court a computation of the amount to which plaintiff is entitled under the conclusions of law expressed in the opinion of the court and the undisputed facts in the case, an opportunity will be given to present to the court such a computation for the purpose of having judgment entered herein in accordance with the opinion.
Conclusion of Law.
Upon the special findings of fact which accompanied the opinion heretofore rendered in this case, which findings of fact are made part of the judgment herein, and in accordance with the said opinion, the court decides, as a conclusion of law, that the plaintiff is entitled to recover the sum of $3,697.04, with interest as provided by law.
It is therefore ordered and adjudged that the plaintiff recover of and from the United States the sum of $3,697.04, with interest at the rate of 6 per cent. per annum computed as follows:
On $3,460.18 of the amount so recoverable from June 15, 1918; on $236.86, being the balance recoverable, from August 19, 1922; and on both of said sums up to such date as the Commissioner of Internal Revenue may determine, in accordance with the provisions of subsection (b), section 177, of the Judicial Code ( 45 Stat. 877, § 615; 28 USCA § 284[b]), being a part of the Revenue Act of May, 1928.
BOOTH, Chief Justice, and SINNOTT, Judge, concur.
GRAHAM, Judge, took no part in the decision of this case; and MOSS, Judge, took no part on account of illness.