1. The Act of October 3, 1917, C. 63, Tit. II, 40 Stat. 300,
302, in providing for a deduction of a percentage of "invested
capital" before computation of the "excess profits" tax upon the
income of a domestic corporation, does not mean to include in its
definition of invested capital (§ 207) any marking up of the
valuation of assets upon the corporate books to correspond with
increase of market value or any paper transaction by which new
shares are issued in exchange for old ones in the same corporation,
but which is not, in substance and effect, a new acquisition of
capital property by it. Pp.
256 U. S. 386,
256 U. S.
389.
2. A corporation, having acquired ore lands for $190,000,
proved, by extensive explorations and developments, that their
actual cash value was over $10,105,400; thereupon, in 1912, it
increased their book valuation by adding $10,000,000, as surplus,
and, based thereon, declared a stock dividend for $9,915,400, which
was carried out by surrender and cancellation of all the common
stock, of like aggregate par value, and the issuance of one share
each of preferred and new common stock for each share of the stock
surrendered. The increased value of the ore lands persisted when an
excess profits tax was laid under the Act of 1917,
supra.
Held: that such increase of value was not included in
"invested capital " under § 207(a)(3), as "paid in or earned
surplus and undivided profits" (though an amount equal to the cost
of the exploration and development might be), pp. 386, 390; nor
under
id. (2) as "the actual cash value of tangible
property paid in other than cash, for the stock or shares" of the
corporation. Pp.
256 U. S. 386,
256 U. S.
390.
3. The Fifth Amendment having no "equal protection " clause,
the
Page 256 U. S. 378
duties, imposts, and excises is the territorial uniformity
required by Art. I, § 8. P. 391.
4. There were reasons, both theoretical and practical, including
that of convenience in administration, for basing "invested
capital" upon actual costs, to the exclusion of higher estimated
values, and resulting inequalities to corporations differently
situated do not make out an arbitrary discrimination, amounting to
confiscation and violating the due process clause of the Fifth
Amendment. P.
256 U. S.
392.
55 Ct.Clms. 462, affirmed.
Appeal from a judgment of the Court of Claims disallowing a
claim for a refund of money alleged to have been unlawfully exacted
as an excess profits tax. The facts are stated in the opinion,
post 256 U. S.
383.
Page 256 U. S. 383
MR. JUSTICE PITNEY delivered the opinion of the Court.
The Court of Claims dismissed appellant's petition, which
claimed a refund of $1,081,184.61, alleged to have been erroneously
assessed and exacted as an "excess profits tax" under Title II of
the Revenue Act of 1917 (Act of October 3, 1917, c. 63, 40 Stat.
300, 302
et seq.). The case involves the construction and
application of those provisions by which the deduction from income,
for the purposes of the tax, is measured by the "invested capital"
of the taxpayer, and a question is raised as to the
constitutionality of the act as construed and applied.
Title I of the act imposed "war income taxes" upon individuals
and corporations in addition to those imposed by Act of September
8, 1916, c. 463, 39 Stat. 756. Title II provided for the levying of
"war excess profits taxes" upon corporations, partnerships, and
individuals. As applied to domestic corporations, the scheme of
this title was that, after providing for a deduction from income (§
203, p. 304) equal to the same percentage of the invested capital
for the taxable year which the average amount of the annual net
income of the trade or business during the prewar period (the years
1911, 1912, and 1913) was of the invested capital for that period,
but not less than 7 nor more than 9 percent, plus $3,000, it
imposed (§ 201, p. 303), in addition to other taxes, a graduated
tax upon the net income beyond the deduction, commencing with 20
percentum of such net income above the deduction, but not above 15
percentum of the invested capital for the taxable year and running
as high as 60 percentum of the net income in excess of 33 percentum
of such capital. It applied to "all trades or business," with
exceptions not now material (p. 303).
Page 256 U. S. 384
What should be deemed "invested capital" was defined by § 207
(p. 306), which, so far as pertinent, is set forth in the margin.
*
The case was decided upon a demurrer to the petition, in which
the facts were stated as follows: appellant is a domestic
corporation and, prior to the year 1904, acquired ore lands for
which it paid the sum of $190,000. Between that time and the year
1912, extensive explorations and developments were carried on (the
cost of which is not stated), and it was proved that the lands
contained large bodies of ore, and had an actual cash value
Page 256 U. S. 385
not less than $10,105,400, and at all times during the years
1912 to 1917, inclusive, their actual cash value was not less than
the sum last mentioned. In the year 1912, the company increased the
valuation of said lands upon its books by adding thereto the sum of
$10,000,000, which it carried to surplus, and thereupon, in the
same year, declared a stock dividend in the sum of $9,915,400,
representing the increase in value of the ore lands. Theretofore,
appellant's capital stock and consisted of shares issued, all of
one class, having a par value of $9,915,400. The declaration of the
stock dividend was carried out by the surrender to the company of
all the outstanding stock, and its cancellation, and the exchange
of one share of new common and one share of new preferred stock for
each share of the original stock.
In returning its annual net income for the year 1917, the
company stated its invested capital to be $26,322,904.14, in which
was included the sum of $10,105,400 as representing the value of
its ore lands. The Commissioner of Internal Revenue caused a
reassessment to be made, based upon a reduction of the invested
capital to $16,407,507.14; the difference ($9,915,400) being the
increase in the value of the ore lands already mentioned. The
result was an additional tax of $1,081,184.61, which, having been
paid, was made the subject of a claim for refund, and this having
been considered and rejected by
Page 256 U. S. 386
the Commissioner, there followed a suit in the Court of Claims,
with the result already mentioned.
Appellant's contentions, in brief, are: first, that the
increased value of the ore lands, placed upon the company's books
in 1912, ought to be included in invested capital under §
207(a)(3), as "paid in or earned surplus and undivided profits."
Second, that, within the meaning of clause (2), which provides that
invested capital shall include "the actual cash value of tangible
property paid in other than cash, for stock or shares in such
corporation," the stock of the company issued in 1912, consisting
of $9,915,400 of preferred stock and an equal amount of common, was
fully paid for either (a) by the tangible assets, including the ore
properties at their increased value, or (b) by the surrender of all
the certificates representing the old common stock, which, it is
said, had an actual cash value equal to double its par. And, third,
that the construction put upon the act by the Treasury Department,
based as it is said not upon value but upon the single feature of
cost, disregarding the time of acquisition, would render the act
unconstitutional as a deprivation of property without due process
under the Fifth Amendment because so arbitrary as to amount in
effect to confiscation, and hence that this construction must be
avoided.
Reading the entire language of § 207 in the light of the
circumstances that surrounded the passage of the act, we think its
meaning as to "invested capital" is entirely clear. The great war
in Europe had been in progress since the year 1914, and the
manufacture and export of war supplies and other material for the
belligerent powers had stimulated many lines of trade and business
in this country, resulting in large profits as compared with the
period before the war, and as compared with ordinary returns upon
the capital embarked. The United States had become directly
involved in the conflict in the spring
Page 256 U. S. 387
of 1917, necessitating heavy increases in taxation; at the same
time manufactures and trade of every description were rendered even
more active, and in certain lines more profitable, than before, so
that the unusual gains derived therefrom formed a natural subject
for special taxation.
On the eve of our entry, and in order to provide a "special
preparedness fund" for army, navy, and fortification purposes, Act
March 3, 1917, c. 159, 39 Stat. 1000, was passed, which, in Title
II, provided for an excess profits tax on corporations and
partnerships equal to 8 percentum of the amount by which their net
income exceeded $5,000 plus 8 percentum of the "actual capital
invested;" and, in § 202 (p. 1001), defined this term to mean
"(1) actual cash paid in; (2) the actual cash value at the time
of payment, of assets other than cash paid in, and (3) paid in or
earned surplus and undivided profits used or employed in the
business,"
but not to include money or other property borrowed.
The Revenue Act of October 3, 1917, passed after we had become
engaged in the war, took the place of the Act of March 3, and
embodied a "war excess profits tax," with higher percentages
imposed upon the income in excess of deductions and a more
particular definition of terms. A scrutiny of the particular
provisions of § 207 shows that it was the dominant purpose of
Congress to place the peculiar burden of this tax upon the income
of trades and businesses exceeding what was deemed a normally
reasonable return upon the capital actually embarked. But if such
capital were to be computed according to appreciated market values
based upon the estimates of interested parties (on whose returns
perforce the government must in great part rely), exaggerations
would be at a premium, corrections difficult, and the tax easily
evaded. Section 207 shows that Congress was fully alive to this,
and designedly adopted a term -- "invested capital"-- and a
definition of it, that would
Page 256 U. S. 388
measurably guard against inflated valuations. The word
"invested", in itself, imports a restrictive qualification. When
speaking of the capital of a business corporation or partnership,
such as the act deals with, "to invest" imports a laying out of
money, or money's worth, either by an individual in acquiring an
interest in the concern with a view to obtaining income or profit
from the conduct of its business or by the concern itself in
acquiring something of permanent use in the business, in either
case involving a conversion of wealth from one form into another
suitable for employment in the making of the hoped-for gains.
See Webster's New Internat. Dict. "Invest," 8; Century
Dict. "Invest," 7; Standard Dict. "Invest," 1.
In order to adhere to this restricted meaning and avoid
exaggerated valuations, the draftsman of the act resorted to the
test of including nothing but money, or money's worth, actually
contributed or converted in exchange for shares of the capital
stock, or actually acquired through the business activities of the
corporation or partnership (involving again a conversion) and
coming in
ab extra by way of increase over the original
capital stock. How consistently this was carried out becomes
evident as the section is examined in detail. Cash paid in, and
tangible property paid in other than cash, are confined to such as
were contributed for stock or shares in the corporation or
partnership, and the property is to be taken at its actual cash
value "at the time of such payment" -- distinctly negativing any
allowance for appreciation in value. There is but a single
exception: tangible property paid in prior to January 1, 1914, may
be taken at its actual cash value on that date, but in no case
exceeding the par value of the original stock or shares
specifically issued for it -- a restriction, in itself, requiring
the valuation to be taken as of a date prior to the war period, and
in no case to exceed the stock valuation placed upon it at the
Page 256 U. S. 389
time it was contributed. The provision of clause (3) that
includes "paid in or earned surplus and undivided profits used or
employed in the business" recognizes that, in some cases,
contributions are received from stockholders in money or its
equivalent for the specific purpose of creating an actual excess
capital over and above the par value of the stock, and, in view of
the context, surplus "earned" as well as that "paid in" excludes
the idea of capitalizing (for the purposes of this tax) a mere
appreciation of values over cost.
The same controlling thought is carried into the proviso, which
relates to the valuation of patents, copyrights, trademarks,
goodwill, franchises, and similar intangible property. Every line
shows evidence of a legislative purpose to confine the account to
such items as were paid in for stock or shares, and to their values
"at the time of such payment;" but, with regard to those
bona
fide purchased prior to March 3, 1917, there is a special
provision limiting the effect of any adjustments that might have
been made in view of the provisions of the act of that date.
It is clear that clauses (1) and (2) refer to actual
contributions of cash or of tangible property at its cash value
contributed in exchange for stock or shares specifically issued for
it, and that neither these clauses nor clause (3), which relates to
surplus, can be construed as including within the definition of
invested capital any marking up of the valuation of assets upon the
books to correspond with increase in market value, or any paper
transaction by which new shares are issued in exchange for old ones
in the same corporation, but which is not in substance and effect a
new acquisition of capital property by the company.
It is clear enough that Congress adopted the basis of "invested
capital" measured according to actual contributions made for stock
or shares and actual accessions
Page 256 U. S. 390
in the way of surplus, valuing them according to actual and
bona fide transactions and by valuations obtaining at the
time of acquisition, not only in order to confine the capital, the
income from which was to be in part exempted from the burden of
this special tax, to something approximately representative of the
risks accepted by the investors in embarking their means in the
enterprise, but also in order to adopt tests that would enable
returns to be more easily checked by examination of records, and
make them less liable to inflation than if a more liberal meaning
of "capital and surplus" had been adopted, thus avoiding the
necessity of employing a special corps of valuation experts to
grapple with the many difficult problems that would have ensued had
general market values been adopted as the criteria.
In view of the special language employed in § 207, obviously for
the purpose of avoiding appreciated valuations of assets over and
above cost, the argument that such value is as real as cost value,
and that, in the terminology of corporation and partnership
accounting, "capital and surplus" mean merely the excess of all
assets at actual values over outstanding liabilities, and "surplus"
means the intrinsic value of all assets over and above outstanding
liabilities plus par of the stock, is beside the mark. Nor has the
distinction between capital and income, discussed in
Doyle v.
Mitchell Bros. Co., 247 U. S. 179,
247 U. S. 187,
Hays v. Gauley Mtn. Coal Co., 247 U.
S. 189,
247 U. S. 193,
and
Southern Pacific Co. v. Lowe, 247 U.
S. 330,
247 U. S.
334-335, any proper bearing upon the questions here
presented.
Upon the strength of an administrative interpretation contained
in a Treasury Regulation pertaining to the Revenue Act of 1917,
under which "stocks" were to be regarded as tangible property when
paid in for stock or shares of a corporation, it is insisted that
appellant's stock dividend distribution of 1912 ought to be
treated
Page 256 U. S. 391
as paid for in tangible property, the old stock surrendered
being regarded as tangible for the purpose. But that distribution,
in substance and effect, was an internal transaction, in which the
company received nothing from the stockholders any more than they
received anything from it (
see Eisner v. Macomber,
252 U. S. 189,
252 U. S.
210-211), and the old shares cannot be regarded as
having been "paid in for" the new ones within the meaning of §
207(a)(2), even were they "stocks" within the meaning of that
regulation, which is doubtful.
It is said that the admitted increase in the value of
appellant's ore lands is properly to be characterized as earned
surplus, because it was the result of extensive exploration and
development work. We assume that a proper sum, not exceeding the
cost of the work, might have been added to earned surplus on that
account; but none such was stated in appellant's petition, nor, so
far as appears, in its return of income. In the absence of such a
showing, it was not improper to attribute the entire $9,915,400,
added to the book value of the ore property in the year 1912, to a
mere appreciation in the value of the property -- in short, to what
is commonly known as the "unearned increment," not properly "earned
surplus" within the meaning of the statute.
The foregoing considerations dispose of the contention that
either the increased value of appellant's ore lands or the
surrender of the old stock in exchange for the new issues based
upon that value can be regarded as "tangible property paid in other
than cash, for stock or shares in such corporation" within the
meaning of § 207(a)(2), and of the further contention that such
increased value can properly be regarded as "paid in or earned
surplus and undivided profits" under § 207(a)(3).
It is urged that this construction, defining invested capital
according to the original cost of the property, instead of its
present value, has the effect of rendering the
Page 256 U. S. 392
act "glaringly unequal" and of doubtful constitutionality, the
insistence being that, so construed, it operates to produce
baseless and arbitrary discriminations, to the extent of rendering
the tax invalid under the due process of law clause of the Fifth
Amendment. Reference is made to cases decided under the equal
protection clause of the Fourteenth Amendment (
Southern Ry. Co.
v. Greene, 216 U. S. 400,
216 U. S. 418;
Gast Realty Co. v. Schneider Granite Co., 240 U. S.
55), but clearly they are not in point. The Fifth
Amendment has no equal protection clause, and the only rule of
uniformity prescribed with respect to duties, imposts, and excises
laid by Congress is the territorial uniformity required by Article
I, § 8.
Pollock v. Farmers' Loan & Trust Co.,
157 U. S. 429,
157 U. S. 557;
Knowlton v. Moore, 178 U. S. 41,
178 U. S. 98,
220 U. S. 106;
Flint v. Stone Tracy Co., 220 U.
S. 107,
220 U. S. 150;
Billings v. United States, 232 U.
S. 261,
232 U. S. 282;
Brushaber v. Union Pacific R. Co., 240 U. S.
1,
240 U. S. 24.
That the statute under consideration operates with territorial
uniformity is obvious, and not questioned.
Appellant cites
Looney v. Crane Co., 245 U.
S. 178,
245 U. S. 188,
and
International Paper Co. v. Massachusetts, 246 U.
S. 135,
246 U. S. 145,
but these cases also are inapplicable, being based upon the due
process clause of the Fourteenth Amendment, with which state taxing
laws were held in conflict because they had the effect of imposing
taxes on the property of foreign corporations located and used
beyond the jurisdiction of the taxing state. There is no such
infirmity here.
Nor can we regard the act, in basing "invested capital" upon
actual costs to the exclusion of higher estimated values, as
productive of arbitrary discriminations raising a doubt about its
constitutionality under the due process clause of the Fifth
Amendment. The difficulty of adjusting any system of taxation so as
to render it precisely equal in its bearing is proverbial, and such
nicety is not even required of the states under the equal
protection
Page 256 U. S. 393
clause, much less of Congress under the more general requirement
of due process of law in taxation. Of course, it will be understood
that Congress has very ample authority to adjust its income taxes
according to its discretion, within the bounds of geographical
uniformity. Courts have no authority to pass upon the propriety of
its measures, and we deal with the present criticism only for the
purpose of refuting the contention, strongly urged, that the tax is
so wholly arbitrary as to amount to confiscation.
The act treats all corporations and partnerships alike, so far
as they are similarly circumstanced. As to one and all, Congress
adjusted this tax, generally speaking, on the basis of excluding
from its operation income to the extent of a specified percentage
(7 to 9 percent) of the capital employed, but upon condition that
such capital be valued according to what actually was embarked at
the outset or added thereafter, disregarding any appreciation in
values. If, in its application, the tax in particular instances may
seem to bear upon one corporation more than upon another, this is
due to differences in their circumstances, not to any uncertainty
or want of generality in the tests applied.
Minor distinctions -- such as those turning upon the particular
dates of January 1, 1914, and March 3, 1917 -- are easily
explained, as we have seen. The principal line of demarcation --
that based upon actual costs, excluding estimated appreciation --
finds reasonable support upon grounds of both theory and practice,
in addition to the important consideration of convenience in
administration already adverted to. There is a logical incongruity
in entering upon the books of a corporation as the capital value of
property acquired for permanent employment in its business and
still retained for that purpose, a sum corresponding not to its
cost, but to what probably might be realized by sale in the market.
It is not merely that
Page 256 U. S. 394
the market value has not been realized or tested by sale made,
but that sale cannot be made without abandoning the very purpose
for which the property is held, involving a withdrawal from
business so far as that particular property is concerned. Whether
in a given case property should be carried in the capital account
at market value, rather than at cost, may be a matter of judgment,
depending upon special circumstances and the local law. But
certainly Congress, in seeking a general rule, reasonably might
adopt the cost basis, resting upon experience, rather than
anticipation.
In organizing corporations, it is not unusual to issue different
classes of securities, with various priorities as between
themselves, to represent different kinds of contribution to
capital. In exchange for cash, bonds may be issued; for fixed
properties, like plant and equipment, preferred stock may be given;
while more speculative values like goodwill or patent rights may be
represented by common stock. In the present case, for instance,
when appellant took the estimated increase in value of its ore
lands as a basis for increased capitalization, it issued preferred
stock to the amount of the former total, carrying those lands at
cost, and issued a like amount of common stock to represent the
appreciation in their market value. It does not appear that, in
form, the new issues were thus allocated, but at least there was a
recognition of a higher claim in favor of one part of the book
capital than of the other. Upon like grounds, it was not
unreasonable for Congress, in adjusting the "excess profits tax,"
to accord preferential treatment to capital representing actual
investments, as compared with capital representing higher
valuations based upon estimates, however confident and reliable, of
what probably could be realized were the property sold instead of
retained.
From every point of view, the tax in question must be sustained.
We intimate no opinion upon the effect of
Page 256 U. S. 395
the act with respect to deductions from cost values of capital
assets because of depreciation or the like; no question of that
kind being here involved.
Judgment affirmed.
MR. JUSTICE McREYNOLDS concurs in the result.
*
"Sec. 207. That, as used in this title, the term 'invested
capital' for any year means the average invested capital for the
year, as defined and limited in this title, averaged monthly."
"As used in this title, 'invested capital' does not include
stocks, bonds (other than obligations of the United States), or
other assets, the income from which is not subject to the tax
imposed by this title, nor money or other property borrowed, and
means, subject to the above limitations:"
"(a) In the case of a corporation or partnership: (1) actual
cash paid in; (2) the actual cash value of tangible property paid
in other than cash, for stock or shares in such corporation of
partnership at the time of such payment (but in case such tangible
property was paid in prior to January first, nineteen hundred and
fourteen, the actual cash value of such property as of January
first, nineteen hundred and fourteen, but in no case to exceed the
par value of the original stock or shares specifically issued
therefor), and (3) paid in or earned surplus and undivided profits
used or employed in the business, exclusive of undivided profits
earned during the taxable year:
Provided, that (a) the
actual cash value of patents and copyrights paid in for stock or
shares in such corporation or partnership at the time of such
payment shall be included as invested capital, but not to exceed
the par value of such stock or shares at the time of such payment,
and (b) the goodwill, trademarks, trade brands, the franchise of a
corporation or partnership, or other intangible property, shall be
included as invested capital if the corporation or partnership made
payment
bona fide therefor specifically as such in cash or
tangible property, the value of such goodwill, trademark, trade
brand, franchise, or intangible property, not to exceed the actual
cash or actual cash value of the tangible property paid therefor at
the time of such payment, but goodwill, trademarks, trade brands,
franchise of a corporation or partnership, or other intangible
property,
bona fide purchased, prior to March third,
nineteen hundred and seventeen, for and with interests or shares in
a partnership or for and with shares in the capital stock of a
corporation (issued prior to March third, nineteen hundred and
seventeen), in an amount not to exceed, on March third, nineteen
hundred and seventeen, twenty percentum of the total interests or
shares in the partnership or of the total shares of the capital
stock of the corporation, shall be included in invested capital at
a value not to exceed the actual cash value at the time of such
purchase, and in case of issue of stock therefor not to exceed the
par value of such stock. . . ."