The Corporation Tax Act of August 5, 1909, c. 6, 36 Stat. 11,
112, § 38, measures the tax by income received during the tax year
without reference to when it accrued, provided it accrued after the
act became effective.
Gray v.
Darlington, 15 Wall. 63, distinguished.
A coal company bought shares of another coal company before, and
sold them at an advance after, the Corporation Tax Act became
effective.
Held: (1) that interest should not be added to
the investment as a part of the cost; (2) that so much, and only so
much, of the advance as could be deemed to have accrued since
December 31, 1908, was part of the company's "gross income" within
the act.
Dole v. Mitchell Brothers Co., ante, 247 U. S. 179.
230 F. 110, reversed.
The case is stated in the opinion.
Page 247 U. S. 190
MR. JUSTICE PITNEY delivered the opinion of the Court.
Suit by the Gauley Mountain Coal Company against the Collector
to recover taxes alleged to have been unlawfully collected under
Corporation Excise Tax Act of August 5, 1909, c. 6, 36 Stat. 11,
112, § 38. The district court gave judgment in favor of defendant,
which was reversed by the circuit court of appeals (230 F. 110),
whereupon a writ of certiorari was allowed. The case was submitted
together with several other cases decided this day arising under
the same act.
The agreed facts are in substance as follows: the Company is a
mining corporation organized under the laws of the State of West
Virginia. The business of trading in stocks is not included among
its corporate powers, nor does it appear that, with a single
exception, it ever bought or sold any. On December 9, 1902, it
purchased certain shares of another mining corporation for
$800,000, and sold them October 16, 1911, for $1,010,000, this sum
being less by $214,933.33 than the purchase price plus interest at
6 percent, but greater by $210,000 than cost ignoring interest. The
Commissioner of Internal Revenue held that a proportion of the
$210,000 represented by the ratio of the 1,019 days that elapsed
between January 1, 1909, when the Corporation Excise Tax Act became
effective, and October 16, 1911, the date of the sale, to the 3,233
days that elapsed between the date of purchase and the date of
sale, constituted income of the corporation for the year 1911
within the meaning of the act. The apportioned sum, $66,189.30,
reduced to $52,506 by certain deductions not now in question, was
made the basis of an additional assessment at 1 percent upon the
latter sum,
Page 247 U. S. 191
and this assessment, having been collected by duress, formed the
subject of the present suit.
The decision of the circuit court of appeals, and the principal
contentions made by respondent in support of it, are based upon the
decision of this Court in
Gray v.
Darlington, 15 Wall. 63. That case arose under the
act of Congress of March 2, 1867, c. 169, 14 Stat. 477, which
provided that a certain tax should be levied, collected, and paid
annually upon the amount over $1,000 of the gains, profits, and
income of every person, declaring that
"the tax herein provided for shall be assessed, collected, and
paid upon the gains, profits, and income for the year ending the
thirty-first of December next preceding the time for levying,
collecting, and paying said tax."
There was this further provision,
"That, in estimating the gains, profits, and income of any
person, there shall be included all income derived from interest
upon notes, bonds, and other securities of the United States;
profits realized within the year from sales of real estate
purchased within the year or within two years previous to the year
for which income is estimated . . . all other gains, profits, and
income derived from any source whatever,"
with an exception that need not be stated. It appeared that
plaintiff acquired certain United States bonds in the year 1865 and
sold them in 1869 at an advance of $20,000 over their cost, and was
taxed upon this amount as gains, profits, and income for the latter
year. This Court held that, by the true construction of the act,
except as to gains and profits from trade and commerce and sales of
real property, the statute only applied to such gains, profits, and
income as were strictly acquisitions made during the year preceding
that in which the assessment was levied and collected. We do not
regard the decision as controlling, because the language of the act
now under consideration is different in material particulars. As
pointed out in
Doyle v. Mitchell Brothers Co., ante,
247 U. S. 179,
Page 247 U. S. 192
it imposes annually a special excise tax with respect to the
carrying on or doing business by the corporation "equivalent to one
percentum upon the entire net income over and above five thousand
dollars received by it from all sources during such year," to be
ascertained by taking gross income and applying certain exceptions
and deductions. "Gains, profits, and income for the year ending the
thirty-first day of December next preceding" (Act of 1867) conveys
a different meaning from "the entire net income . . .received by it
. . . during such year" (Act of 1909). The former expression, as
this Court held (
82 U. S. 15 Wall.
65), denoted "such gains or profits as may be realized from a
business transaction begun and completed during the preceding
year," with the exceptions already mentioned. The expression
"income received during such year," employed in the Act of 1909,
looks to the time of realization, rather than to the period of
accruement, except as the taking effect of the act on a specified
date (January 1, 1909) excludes income that accrued before that
date. There are other differences upon which we need not dwell.
As we construe the latter act, it measured the tax by the income
received within the year for which the assessment was levied,
whether it accrued within that year or in some preceding year while
the act was in effect, but it excluded all income that accrued
prior to January 1, 1909, although afterwards received while the
act was in effect.
This brings us to consider whether the proceeds of the sale of
stock by respondent in October, 1911, included anything, and if so
how much, of "income" accruing on or after January 1, 1909, as the
term "income" is employed in the act.
That the sale resulted in a gain or profit to the extent of
$210,000, the difference between the buying and selling prices is
not to be doubted, for there is no merit in the
Page 247 U. S. 193
contention that interest should be added to the purchase price
in order to ascertain its cost. The money that went into the
purchase was not loaned at interest; on the contrary, by the very
fact of the purchase, it was placed where it could not earn
interest for the respondent in the ordinary sense, and the gain
represented by the increase of selling price over cost price must
be regarded as a substitute for whatever return some other form of
investment might have yielded.
It results that so much of the $210,000 of profits as may be
deemed to have accrued subsequent to December 31, 1908, must be
treated as a part of the "gross income" of respondent. For it is
the simple case of a conversion of capital assets acquired before
and turned into money after the taking effect of the act, and, as
we have shown in
Doyle v. Mitchell Brothers Co., ante,
since a conversion of capital often results in gain, the general
purpose of the Act of 1909 to measure the tax by the increase
arising from corporate activities together with the income from
invested property leads to the inference that that portion of the
gross proceeds which represents gain or increase acquired after the
taking effect of the act must be regarded as "gross income," and to
this end it must be distinguished from that portion which
represents a return of the capital value existing before. In order
to do this, it is necessary to ascertain what was the value of the
capital assets on December 31, 1908. Whether this should be done by
taking an inventory upon the basis of market values then existing,
or whether the entire increment accruing between the time of
acquiring and the time of disposing of the assets should be
prorated as if it had arisen through a series of gradual and
imperceptible augmentations, is a matter of detail, to be settled
according to the best evidence obtainable and in accordance with
valid departmental regulations. Treasury Regulations No. 31,
December 3, 1909, provided
Page 247 U. S. 194
for inventories at the beginning and end of each year with
respect to manufacturing and mercantile companies, and with regard
to a sale of capital assets acquired prior to January 1, 1909, and
sold thereafter, required that the amount of increment or
depreciation representing the difference between the selling and
buying prices should be adjusted so as fairly to determine the
proportion of the loss or gain arising subsequent to the date
mentioned; but without prescribing any particular method of doing
this. Subsequent rulings required that sales of stocks and bonds
should be regarded as sales of capital assets and accounted for
accordingly under Regulations No. 31, and while still requiring
inventories, resorted to the prorating method with respect to real
estate, apparently on the ground that increases and decreases in
the value of this class of property during particular periods could
not be accurately determined. T.D. 1106, March 29, 1910, paragraphs
37, 50, 71; T.D. 1675, February 14, 1911, paragraphs 36, 48, 55,
69; T.D. 1742, December 15, 1911, paragraphs 42, 55, 62, 86.
The present case was heard upon an agreed statement of facts
which contains nothing from which the value of the stock at the
time the act took effect may be deduced otherwise than by the
prorating method that was adopted, nor is any objection made by the
respondent to the application of that method. Hence, there is no
lawful ground for overthrowing the tax, and the district court did
not err in rendering judgment in favor of the Collector.
Judgment of the circuit court of appeals reversed, and that
of the district court affirmed.