Opinion
No. M-390.
May 29, 1933.
James Craig Peacock, of Washington, D.C. (John W. Townsend, of Washington, D.C., on the brief), for plaintiff.
Lisle A. Smith and E.H. Horton, both of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by the Philadelphia Fire Marine Insurance Company against the United States.
Judgment for the defendant.
This suit was instituted to recover $2,641.53, income tax and interest thereon, alleged to have been illegally collected for 1927. Plaintiff sustained a net loss in the operation of its business for 1926. In that year it also received $33,250 interest on federal and state bonds, and $568 dividends on stock of domestic corporations, totaling $33,818, which was exempt from tax and was not included in the taxable income for the year 1926. Plaintiff had a large net income for 1927.
In determining what portion of the plaintiff's statutory net loss of $93,015.31 for 1926 should be carried forward and deducted from its net income for 1927, under section 206 of the Revenue Act of 1926 ( 26 USCA § 937), the Commissioner of Internal Revenue, in accordance with subdivision (a)(5) of section 206 ( 26 USCA § 937(a)(5), included in computing gross income for 1926 the interest on federal and state bonds and dividends on stock of a domestic corporation totaling $33,818, thereby arriving at $59,197.31 as the amount of the statutory net loss for 1926 which was deductible under section 206 from net income for 1927.
Plaintiff contends that section 206 of the Revenue Act of 1926, so far as it requires the inclusion in gross income of such exempt interest in computing the amount of a net loss which may be carried forward and deducted from income for a subsequent year, is unconstitutional and void and that the entire net loss of $93,015.31 for 1926 was deductible from income for 1927.
Special Findings of Fact.
1. March 9, 1928, the plaintiff, a fire and marine insurance company, filed its income tax return for the calendar year 1927, showing no taxable net income and no tax due, but claimed a net loss for the year of $98,253.60. In making this return plaintiff claimed as a deduction from gross income, as a net loss for the calendar year 1926, an item of $113,476.36, which sum, by adjustments not material here and as to which plaintiff does not complain, was later reduced to $93,015.31, being the amount by which the deductions allowed in computing taxable net income for 1926 exceeded plaintiff's gross income for that year under sections 246 and 247 of the Revenue Act of 1926 (26 USCA §§ 1006 note, 1007).
2. During the calendar year 1926 plaintiff received interest of $12,875 from state, county, and municipal bonds; $8,500 from United States Fourth Liberty bonds; $11,875 interest on United States Treasury notes, series B 1927; dividends of $568 on the stock of a domestic corporation; and $166.33 profit on sale of securities. The interest received on federal, state, county, and municipal bonds totaled $33,250, and such interest plus the dividends and profit on sale of securities totaled $33,984.33. The interest and dividends totaled $33,818.
3. The Commissioner of Internal Revenue audited and reviewed plaintiff's books of account and its returns for 1926 and 1927 and, in accordance with the provisions of section 206 of the Revenue Act of 1926 and Treasury Decision 4308, determined and found plaintiff's statutory net loss for 1926 to be $59,197.31 which he allowed as a deduction from income for 1927, thereby determining plaintiff's taxable net income for the calendar year 1927 to be $21,294.60 and its tax liability thereon to be $2,391.03. This tax, together with interest of $250.50, totaling $2,641.53, was duly assessed and paid by plaintiff April 22, 1930.
In computing plaintiff's statutory net loss of $59,197.31 for 1926, the commissioner in accordance with the provisions of section 206(a) of the 1926 act and said treasury decision excluded from the statutory net loss of $93,015.31, claimed by plaintiff for 1926, the amounts of $33,250 interest on federal, state, county, and municipal bonds and $568, dividends on stock of a domestic corporation, aggregating $33,818.
The computation of the amount of the net loss for 1926 which was allowed by the defendant as a deduction from plaintiff's income for 1927 was in accordance with the provisions of section 206 of the Revenue Act of 1926 ( 26 USCA § 937), and this is not questioned, but plaintiff contends that the entire loss for 1926 of $92,447.31, representing the excess of allowable deductions over its taxable gross income, was deductible from net income for 1927 and that the provisions of section 206(a)(5) of the 1926 act ( 26 USCA § 937(a)(5), which requires that such loss be reduced by the amount of interest received free from tax, is unconstitutional and void under the rule laid down in National Life Insurance Co. v. United States, 277 U.S. 508, 48 S. Ct. 591, 72 L. Ed. 968, and in Denman v. Slayton, 282 U.S. 514, 51 S. Ct. 269, 75 L. Ed. 500. It is insisted that the tax of $2,391.03 collected for 1927 results alone from the fact that plaintiff received $33,250 from tax-free securities and that it was subjected to greater burdens on its taxable income for 1927 solely because it owned certain income that was exempt from tax. We think section 206(a)(5) is constitutional. We fail to see the parallel between the question presented in this case and that decided in National Life Insurance Co. v. United States, supra, and in Denman v. Slayton, supra. The tax-exempt interest received in 1926 by plaintiff in this case has never been subjected to tax. Had Congress been so minded, it could have required plaintiff to pay a tax upon its entire net income of $80,491.91 for 1927 and, had it done so, the plaintiff could not complain.
Under our system of taxation each taxable year stands alone and the deduction of the whole or any part of a loss of one taxable year from the net income of another taxable year is wholly within the discretion of Congress and it may constitutionally place any limitation it desires upon such deduction. In providing for the deduction allowable under section 206(a) it was within the constitutional power of Congress to classify according to the fact and to limit the deduction therein provided to those taxpayers who actually sustained operating losses, notwithstanding that in the determination of the fact income exempt from taxation is to be considered. This rule has been followed by the board in a number of cases upholding the constitutionality of section 206(a)(5). In Warren Steam Pump Company, 23 B.T.A. 585, the board said: "Taxable income as defined in the several revenue acts is determined on a basis of a twelve-month period, except in particular circumstances not necessary to discuss here. A departure from this rule was inaugurated by the so-called net loss provision of the Revenue Act of 1918, and continued in subsequent revenue acts. This provision of the several acts is not open to all taxpayers, but only those who come within its terms, and the loss to be carried forward must be measured by the terms of the statute, and not otherwise. A glance at the provisions of section 206(a) of the Revenue Act of 1926 [ 26 USCA § 937(a)], with which we are concerned here discloses a very detailed plan of determining a loss that may be carried forward into another year. We see no reason why Congress in granting this particular boon may not limit it so that the loss to be carried forward is an actual and true loss, and not an artificial one which arises from the exclusion of certain non-taxable income."
Plaintiff is not entitled to recover and the petition is dismissed. It is so ordered.
BOOTH, Chief Justice, did not hear this case on account of illness and took no part in its decision.