Opinion
No. J-289.
April 7, 1930.
Suit by the Packard Motor Car Company against the United States.
Petition dismissed.
This case having been heard by the Court of Claims upon a stipulation of facts, and the evidence, the court makes the following special findings of fact:
1. Plaintiff is, and at all times hereinafter mentioned was, a corporation duly organized and existing under and by virtue of the laws of the state of Michigan, engaged in the business of manufacturing gasoline motors, motorcars, automobile parts, etc., with its principal place of business in Detroit in the state of Michigan.
2. Plaintiff's books were kept and its returns filed for all years hereinafter mentioned on the basis of a fiscal year beginning September 1 and ending August 31.
3. During all years hereinafter mentioned plaintiff's income and profits tax returns were filed and its said taxes determined by the Commissioner of Internal Revenue in accordance with the provisions of section 240, Revenue Act of 1918 ( 40 Stat. 1081), and section 1331, Revenue Act of 1921 (26 USCA § 1067), upon the basis of a consolidated return (except for the purpose of the income taxes imposed by the Revenue Act of 1916, as amended by the Act of 1917), including the income and invested capital of plaintiff and its affiliated subsidiaries, enumerated below:
Packard Motor Car Company of New York (a New York corporation).
Packard Motor Car Company of Philadelphia (a Pennsylvania corporation).
Packard Motor Car Company of Chicago (an Illinois corporation).
Packard Motor Sales Company (a Michigan corporation).
4. Plaintiff obtained from one James J. Brady, then collector of internal revenue for the first collection district of Michigan, and from the Commissioner of Internal Revenue of the United States an extension of time within which to file its final income and profits tax return for the fiscal year ended August 31, 1918, which extension permitted it to file said return at any time prior to November 30, 1918. On November 20, 1918, under said permission, plaintiff filed, on forms furnished it by the Commissioner of Internal Revenue, an income and profits tax return for the said fiscal year ended August 31, 1918, showing a net income of $10,424,960.19, and a total income and profits tax liability of $3,114,004.65, which said amount was assessed by said Commissioner, and, on February 10, 1919, plaintiff paid said sum of $3,114,004.65 to the said James J. Brady, then collector of internal revenue for the first collection district of the state of Michigan.
5. Thereafter, on February 24, 1919, Congress enacted the Revenue Act of 1918, which required the filing of returns under said act, and on or about March 15, 1919, plaintiff filed with said James J. Brady, then federal collector of internal revenue for the first collection district of the state of Michigan, a so-called tentative income and profits tax return for the fiscal year ended August 31, 1918, reporting therein an estimated income and profits tax liability in the amount of $2,209,600, computed at the rates prescribed by the 1918 act.
6. Plaintiff, on September 15, 1919, filed a final income and profits tax return for the fiscal year ended August 31, 1918, showing a net income of $11,568,200.97, and a total income and profits tax liability in the amount of $5,656,383.51, of which the said sum of $3,114,004.65 had already been paid to said collector of internal revenue as hereinbefore stated, and the remainder of said liability was discharged by the following additional payments:
Date paid Amount paid
On March 15, 1919 ............ $552,400.00 On June 15, 1919 ............. 547,000.00 On September 14, 1919 ........ 510,000.00 On September 14, 1919 ........ 37,571.52 On December 17, 1919 ......... 544,994.69
all of which payments were made in cash except a payment of $37,571.52, which was made by allowing the then collector of internal revenue to credit under date of September 14, 1919, an overpayment of income and profits tax liability for the fiscal year ended August 31, 1917, against and in satisfaction of said $37,571.52, making in all a total payment for said year up to December 17, 1919, in the amount of $5,656,383.51.
7. Thereafter, the said Commissioner of Internal Revenue audited and reaudited plaintiff's income and profits tax return for said fiscal year ended August 31, 1918, and in the month of September, 1922, said Commissioner issued a certificate of overassessment in the amount of $313,630.86, which sum was not refunded to plaintiff but was applied by the then acting collector of internal revenue as a credit against a claimed additional income and profits tax liability for the fiscal year ended August 31, 1917.
8. Thereafter, under date of May 22, 1926, the Commissioner of Internal Revenue issued his final deficiency letter covering the fiscal years ended August 31, 1917, 1918, and 1919, determining an additional tax liability of $336,320.01 in respect of the fiscal year ended August 31, 1918. Said deficiency letter, in accordance with the provisions of section 274 of the Revenue Act of 1926 (26 US CA §§ 1048-1048f, 1050, 1052-1054), granted plaintiff the privilege of appealing to the United States Board of Tax Appeals, but plaintiff elected not to file, and did not file, any petition with said Board of Tax Appeals, and, after the expiration of the sixty-day period, the Commissioner of Internal Revenue assessed said additional tax liability, and plaintiff thereafter paid to Fred L. Woodworth, as collector of internal revenue for the first collection district of Michigan, said alleged additional liability for the fiscal year ended August 31, 1918, of $336,320.01, plus interest thereon in the sum of $10,974.17, total claimed liability of $347,294.18, as follows: On September 30, 1926, said collector of internal revenue applied as a credit the sum of $220,883.49 due plaintiff on a certificate of overassessment issued by the Commissioner of Internal Revenue in respect of the fiscal year ended August 31, 1917, and on October 19, 1926, plaintiff paid in cash to said collector the sum of $126,410.69, making a total payment in September and October, 1926, in the sum of $347,294.18.
9. The plaintiff and each of its several subsidiaries, referred to in finding 3 above, filed separate returns for the fiscal year 1917 under the Revenue Act of 1916 ( 39 Stat. 756), as amended by the Act of 1917 ( 40 Stat. 300). The Commissioner of Internal Revenue determined the (normal) income taxes of plaintiff and its subsidiaries for said year on the basis of said separate returns, but determined the excess profits taxes of plaintiff and its subsidiaries, under the provisions of articles 77 and 78 of Treasury Regulations 41 (approved by section 1331 of the Revenue Act of 1921 [26 USCA § 1067]), upon the basis of a consolidated return of income and invested capital.
10. During the said fiscal year 1917 plaintiff sold automobiles and parts to its subsidiaries at regular wholesale dealers' prices. Plaintiff included the profit on said sales in its separate return for said fiscal year 1917, and plaintiff's subsidiaries, in their separate returns for said fiscal year, charged the merchandise purchased of plaintiff, as aforesaid, into their cost of sales at the said wholesale dealers' prices. The total cost to each subsidiary on account of the aforesaid purchases of merchandise from plaintiff was reduced, in computing cost of sales for said fiscal year 1917, by the cost of so much of said merchandise as remained unsold and in the inventories of the subsidiaries at the end of the said fiscal year.
11. The Commissioner of Internal Revenue determined the separate net income of plaintiff for the said fiscal year 1917 in the manner set forth in finding 9 herein. Said separate net income of plaintiff, including the profits realized by plaintiff on sales of merchandise to its subsidiaries on the transactions described in finding 10 herein was, after being reduced by that part of the excess profits tax liability properly allocable to plaintiff, as shown by the consolidated return referred to in finding 9 herein, subjected to the (normal) income taxes imposed by the Revenue Act of 1916, as amended by the Act of 1917, and plaintiff duly paid such (normal) income taxes after the same were assessed against plaintiff. The Commissioner of Internal Revenue determined the several separate net incomes of plaintiff's subsidiaries, subject to the (normal) income taxes imposed by the Revenue Act of 1916, as amended by the Revenue Act of 1917, as set forth in finding 9 herein, said net incomes reflecting the cost of goods sold of said subsidiaries at regular wholesale dealers' prices as stated in finding 10 herein, and said subsidiaries duly paid the (normal) income taxes computed on said net incomes after the same were assessed against them.
12. In determining the net income of the plaintiff and its subsidiaries for the purpose of computing their excess profits tax liability on the basis of the consolidated return referred to in finding 9 herein, the profits realized by the plaintiff on sales of merchandise to its subsidiaries, as described in finding 10 herein, were eliminated, and no excess profits tax liability was asserted or collected on account of such transactions between the plaintiff and its subsidiaries.
13. The Commissioner of Internal Revenue in his final determination of May 22. 1926, referred to in finding 8 herein, determined the final tax liability of the plaintiff and its several affiliated subsidiaries, referred to in finding 3 herein, for the fiscal year ended August 31, 1918, in accordance with the provisions of section 205(a)(1) and (2) of the Revenue Act of 1918 ( 40 Stat. 1061). In determining the proportion of such tax liability under the provisions of said section 205(a)(1), the Commissioner computed the separate (normal) income taxes and the consolidated excess profits taxes in the manner outlined in findings 9, 11, and 12 herein. In determining the proportion of such tax liability under the provisions of section 205(a)(2), the consolidated net income subject to the tax rates in effect for the calendar year 1918 was determined for the purpose of the (normal) income tax in the manner outlined in S.M. 1530, C.B. III — 1, page 307, as applied to the results of the transactions between the plaintiff and its affiliated subsidiaries in the preceding fiscal year ended August 31, 1917, as described in finding 10 herein.
14. In his final determination of the tax liability of the plaintiff and its affiliated subsidiaries for the fiscal year ended August 31, 1918, referred to in finding 8 above, the said Commissioner, in determining the consolidated taxable net income subject to the excess profits and war profits taxes under section 205(a)(1) and (2), respectively, deducted from the opening inventories of the plaintiff's subsidiary corporations an amount of $384,426.45, representing plaintiff's profits on so much of the merchandise sold to its affiliated subsidiaries in the preceding fiscal year ended August 31, 1917, as remained in the inventories of said subsidiaries at the beginning of the fiscal year 1918. In said final determination the Commissioner of Internal Revenue determined a consolidated net income under section 205(a)(2), subject to the (normal) income taxes imposed by the Revenue Act of 1918, in the amount of $11,246,167.79, and a consolidated net income subject to the excess and war profits taxes imposed by the Revenue Act of 1918 in the amount of $11,630,594.24.
15. On March 5, 1928, within four years of the payment of the additional tax for the fiscal year ended August 31, 1918, referred to in finding 8 herein, plaintiff filed a claim for refund with the Commissioner of Internal Revenue for the fiscal year ended August 31, 1918, in the amount of $280,914.84. One of the grounds of said claim was that the Commissioner of Internal Revenue had overstated plaintiff's income (for excess and war profits tax purposes) for the said fiscal year in the amount of $384,426.45, by reducing the opening inventories of plaintiff's subsidiaries in the above amount. On May 18, 1928, within two years of the filing of the petition in this cause, the Commissioner rejected said claim. A copy of said claim is made Appendix A to these findings, and is made a part hereof by reference.
16. No other action has been had on said claim in Congress or in any of the departments; no person other than the plaintiff and its affiliated subsidiaries is the owner thereof or interested therein; no assignment or transfer of this claim or of any part thereof or interest therein has been made; and the plaintiff and its affiliated subsidiaries have at all times borne true allegiance to the government of the United States, and have not in any way voluntarily aided and abetted or given encouragement to rebelling against the government. The plaintiff and its affiliated subsidiaries are citizens of the United States, and the plaintiff claims $180,424.15 with interest thereon, as provided by section 615, Revenue Act of 1928 (28 USCA §§ 284, 284 note).
17. If the court holds that the Commissioner of Internal Revenue overstated plaintiff's net income (subject to the excess and war profits taxes imposed by the Revenue Act of 1918) for the fiscal year ended August 31, 1918, by the amount of $384,426.45, plaintiff is entitled to recover from the United States the sum of $180,424.15, with interest thereon at the rate of one-half of 1 per cent. per month from October 15, 1926, to a date thirty days preceding the refund check, as provided by section 615, Revenue Act of 1928.
Miller Chevalier, of Washington, D.C. (Robert N. Miller, J. Robert Sherrod, and George M. Wolcott, all of Washington, D.C., on the brief), for plaintiff.
Charles R. Pollard, of Washington, D.C. (Herman J. Galloway, Asst. Atty. Gen., and R.P. Hertzog, of Washington, D.C., on the brief), for defendant.
Before BOOTH, Chief Justice, and LITTLETON, GREEN, GRAHAM, and WILLIAMS, Judges.
The question in this case is the proper method of determining the consolidated net income of the plaintiff and its affiliated corporations for the fiscal year ended August 31, 1918 ( 40 Stat. 1058-1096), for income and profits tax purposes under titles 2 and 3 of the Revenue Act of 1918.
Plaintiff asks judgment for $180,424.15 with interest at the rate of one-half of 1 per cent. per month from October 15, 1926, and it is stipulated that if plaintiff is correct in its contention as to the method of determining consolidated net income for excess profits tax purposes it is entitled to judgment for the amount stated.
Plaintiff and certain other corporations were affiliated during the taxable years ending August 31, 1917, and August 31, 1918. During the fiscal year ending in 1917, plaintiff sold automobiles and parts to its subsidiaries at regular wholesale dealers' prices. The corporations which were affiliated during the taxable year 1917 were required to make a consolidated return only for the purpose of the excess profits tax, and made separate returns of income for the normal income tax. The plaintiff and its affiliated corporations made such returns for the fiscal year ended August 31, 1917. In the separate income tax return of plaintiff for the fiscal year 1917 it included as income, subject to the normal income tax, whatever profit had accrued on sales of automobiles and parts to its affiliated corporations, and paid the income tax accordingly. Plaintiff's subsidiaries, to which it sold automobiles and parts, in their separate income tax returns for said fiscal year charged such merchandise purchased from plaintiff into their cost of sales at said wholesale dealers' prices. The total cost to each subsidiary on account of the aforesaid purchases of merchandise from the plaintiff was reduced in computing the cost of sales for said fiscal year 1917 by the cost of so much of said merchandise as remained unsold and in the inventories of the subsidiaries at the end of said fiscal year.
In determining the consolidated net income of plaintiff and its affiliated corporations for the fiscal year 1917 for the purpose of computing the excess profits tax, all profits resulting to the plaintiff on sales of merchandise by it to its affiliated corporations were eliminated, and no excess profits tax was assessed or collected on account of such transactions.
For the fiscal year ending August 31, 1918, the Revenue Act of 1918, § 240 ( 40 Stat. 1081), required that corporations which were affiliated make one consolidated return of net income for both income and excess profits tax purposes. Plaintiff and its affiliated corporations made such a return.
The Commissioner in determining the consolidated net income for the fiscal year ending August 31, 1918, subject to the excess profits and war profits tax, under section 205(a)(1) and (2) of the Revenue Act of 1918 ( 40 Stat. 1061), deducted from the opening inventories of plaintiff's subsidiary corporations the amount of $384,426.45, representing the profit to the plaintiff on so much of the merchandise sold by it to its affiliated corporations in the preceding fiscal year ending August 31, 1917, as remained in the inventory of such subsidiary at the beginning of the fiscal year 1918. In so doing, the Commissioner determined a consolidated net income under section 205(a)(2) for the purpose of the excess and war profits tax imposed by the Revenue Act of 1918 in the amount of $11,630,594.24. In determining the consolidated net income for the purpose of the normal income tax imposed by the Revenue Act of 1918, the Commissioner made no elimination from the inventories of the subsidiary corporations on account of merchandise purchased by them from the plaintiff during the fiscal year 1917, which remained on hand at the beginning of the fiscal year 1918, thus determining a consolidated net income subject to the normal income tax of $11,246,167.79.
The plaintiff contends (1) that the Commissioner's determination of the two taxable net incomes in this case, one for excess and war profits tax purposes, and the other for income tax purposes, violates the express provision of section 320 of the Revenue Act of 1918; (2) that there are no provisions in title 2 of the Revenue Act of 1918 which, specifically, or by implication, authorizes the Commissioner to make the adjustment of $384,426.45 in determining the consolidated net income subject to the income tax imposed by title 2 of the Revenue Act of 1918; (3) that there are no provisions of the Revenue Act of 1918 which authorize the Commissioner to tax, as 1918 net income, profits which were lawfully determined by him to be 1917 net income and were taxed in that year; and (4) that the Sixteenth Amendment to the Constitution would be violated if Congress or the Commissioner attempted again to tax the 1918 net income previously realized and taxed in 1917.
The defendant states the issue to be whether in the determination of the consolidated net taxable income of the affiliated corporations for profits tax purposes under the Revenue Acts of 1917 and 1918 the profits resulting from intercompany transactions between the various affiliated corporations should be eliminated from the accounts, and contends that, in doing this, adjustment should be made to the accounts of the various companies at the beginning and at the end of the year. The defendant further contends that, if in the determination of consolidated net income the inventories of certain of the affiliated companies at the beginning of the year included merchandise purchased from other affiliated companies within the affiliated group at prices in excess of the cost to the producing or original owner corporation, the correct result of the operations of such a business as one unit would not be properly reflected unless such increase were eliminated therefrom; that such elimination is just as necessary to a correct determination of consolidated net income in the year following the sale as the elimination of profit therefrom in the year in which the intercompany sales occurred.
We think that section 320(a) of the Revenue Act of 1918 ( 40 Stat. 1091), which provides that the net income to be used in the computation of the excess and war profits tax is to be determined "upon the same basis and in the same manner" as that to be used for income tax purposes, can only mean that the same income is to be ascertained for both purposes. In other words, when we proceed to determine the consolidated income upon the same basis and in the same manner, we arrive at the same result. This is the major contention advanced by the plaintiff, and it nowhere appears to be denied by the defendant; in fact, in Treasury Regulations, article 801, regulations 45, it is provided that "the net income of a corporation for the purpose of the imposition of the war-profits and excess-profits tax is the same net income as determined for the purpose of the income tax." It seems significant that the defendant makes no reference to section 320 and does not attempt to controvert the proposition that the same income shall be used for both income and excess profits tax purposes. But the conclusion that the same income shall be used for both purposes does not dispose of the case. This is merely the starting point and raises the real issue in the case, namely, What is the one income which is to be used for both purposes? The plaintiff relies largely on the proposition that, since the Commissioner has determined a certain net income for income tax purposes which it accepts as the correct net income, therefore, this is the one correct net income to be used for both purposes. Plaintiff's argument, in so far as the income to be used is concerned, consists largely of quotations from the rulings of the Commissioner on which his determination of the net income for income tax purposes is based. S.M. 1530; L.O. 1108, and S.M. 3384. The explanation of the failure of the defendant to make a direct reply to plaintiff's argument for one income would appear to be that it could not very well repudiate all that has been said in the foregoing rulings about the income to be used. The mere fact, however, that the Commissioner has determined a net income which he has used in the computation of income tax is no proof of its correctness, even though the plaintiff is willing to accept it for that purpose.
We are here concerned with the Revenue Act of 1918, which not only requires that one income be determined for both purposes, but also provides how we are to arrive at this net income. It is immaterial whether we say that an inventory item is a deduction coming under section 234 ( 40 Stat. 1077), which enters into a determination of the cost of goods sold, or whether it is a cost such as is considered in any case in determining the profit on a sale under section 202; in any event, section 240 of the Revenue Act of 1918, which requires consolidated returns, is a limitation on both of these sections and forms the authority for the elimination of intercompany transactions. And the Revenue Act of 1918, section 203, further provides for the use of inventories in determining the net income, which section is also limited by section 240. Inventories may be taken either at cost, or cost or market, whichever is lower. While it is not stated specifically that plaintiff used a cost basis, the whole basis of the argument shows that both parties are seeking to establish a cost for the inventories as at the beginning of the fiscal year ending August 31, 1918, and we may, therefore, proceed upon the theory that the plaintiff's inventories were on a cost basis. We may, therefore, say that the question to be determined is the cost of the goods or materials which the consolidated group had on hand at the beginning of the year, or, to state the question another way, is the cost of goods to the group, which were on hand at the beginning of the year, affected by transactions within the group prior to the beginning of the taxable year here involved? Due to the fact that it is sometimes difficult to see how inventories affect income, the question can be made simple by the use of an example similar to that stated by the plaintiff. Company A (the plaintiff) manufactures an automobile in 1917 at a cost of $3,600. In 1917 it transfers this automobile to Company B (subsidiary) at a price of $4,000. The automobile had not been sold by January 1, 1918, but was sold during 1918 to a person outside the affiliated group for $4,500. The question is the cost which should be deducted from the sales price in determining the profit on this transaction. Notwithstanding the various rulings of the Commissioner of Internal Revenue referred to above, about the effect of recognizing the first transaction (transfer from Company A to Company B) for income tax purposes, we think the cost to the consolidated group is $3,600 and that the profit to the group upon the sale in 1918 is $900 ($4,500 less $3,600). What the correct answer might have been had the first transaction occurred in 1916 when the corporations occupied the same stock relationship or affiliated status, but when affiliated returns were not recognized or required for any purpose, would be only academic to discuss, and we express no opinion as to the correctness of the method pursued by the Commissioner in not eliminating intercompany transactions in determining the opening inventory for 1917. Here, however, we have a situation where the transaction occurs within a year when affiliated returns were recognized for excess profits tax purposes, but not for income tax purposes, and we see no reason why the same test should not apply as if the transfer from the plaintiff to one of its affiliated corporations had taken place during the year 1918. Nothing went out or came into the affiliated group as a result of the sale by plaintiff to its subsidiary, hence the cost is not affected thereby. The cost of manufacturing the automobiles, presumably for labor and materials, was made prior to the sale by the plaintiff to its subsidiary, and this cost went outside the affiliated group; when sold in 1918 for more than it cost, the income came to the affiliated group. Under the 1918 Act, the consolidated net income is the net income of the entire group of affiliated corporations, and in determining such consolidated net income we must look at the cost to the affiliated group as well as the sales price to the group.
The court is therefore of the opinion that the correct consolidated net income under the statute, both for the income and excess profits tax, is $11,630,594.24. Section 320 of the Revenue Act of 1918 ( 40 Stat. 1091) does not provide that the net income for profits tax purposes shall be the same net income as is determined for income tax purposes under title 2 of that act, but provides that the net income for the purpose of the profits tax shall be ascertained upon the same basis and in the same manner as provided for income tax purposes. Of course, where there is only one corporation involved, the net income of such corporation for the purposes of the excess profits tax might be the same as the income determined for income tax purposes under the provisions of title 2 because, in such case, there would be no provisions in title 3 that limit any of the provisions of title 2 of the act.
The argument against the position which we have taken above is double taxation, but there is no statutory and, we think, no constitutional inhibition against this. Double taxation may and often does result. Hellmich v. Hellman, 276 U.S. 233, 48 S. Ct. 244, 72 L. Ed. 544, 56 A.L.R. 379; Tennessee v. Whitworth, 117 U.S. 129, 6 S. Ct. 645, 29 L. Ed. 830; sections 212 and 1208 of the Revenue Act of 1926 ( 26 USCA §§ 953, 953a), and Blum's, Inc., 7 B.T.A. 737. It is true that a double tax cannot be imposed upon the basis of a presumption, but, in our opinion, it is not necessary to indulge in presumptions to show that in the enactment of the profits tax laws it was the intent of Congress to tax profits of a corporation realized in 1918 for excess profits tax purposes. The committee reports of Congress and many decisions of the courts and of the Board of Tax Appeals support this view. The plaintiff's contention would exempt this income from the imposition of the profits tax. When we consider the mandatory requirement for one income, the provisions of the same act with respect as to how this income shall be determined, and the purpose of the enactment of the profits tax provisions of the act, we are not indulging in any presumption when we determine the one income to be used, as indicated above, even though a portion of this income may be twice taxed for income tax purposes. The strict interpretation of section 320 of the Revenue Act of 1918, standing alone, contended for by the plaintiff, is not justified when a different result, equally justified, follows from a consideration and application of all the provisions of the act in the light of the purpose which the statute sought to accomplish.
It is a well-established principle in the exposition of the statutes, that every part is to be considered, and the intention of the Legislature to be extracted from the whole. United States v. Fisher, 2 Cranch, 358, 2 L. Ed. 304; Kohlsaat v. Murphy, 96 U.S. 153, 24 L. Ed. 844; Hellmich v. Hellman, 276 U.S. 233, 48 S. Ct. 244, 72 L. Ed. 544, 56 A.L.R. 379.
In any event, plaintiff is not entitled to recover, for, in our opinion, section 320 was not intended to require the use of an income for excess profits and war profits tax purposes that would give exemption from such tax imposed by title 3 of the act, of which section 320 is a part, and section 240 of title 2 was enacted to prevent avoidance of tax by affiliated corporations through intercompany transactions.
Plaintiff is not entitled to recover. The petition must, therefore, be dismissed, and it is so ordered.