1. The term "capital stock" has no fixed meaning in taxing
statutes, and must be interpreted in each case by reference to the
context, the nature, purpose, and history of the statute, and by
other aids to construction. P.
268 U. S.
376.
2. The Revenue Act of 1918 provides:
"Every domestic corporation shall pay annually a special excise
tax with respect to carrying on or doing business, equivalent to $1
for each $1000 of so much of the fair average value of its capital
stock for the preceding year ending June 30 as is in excess of
$5000. In estimating the value
Page 268 U. S. 374
of the capital stock, the surplus and undivided profits shall be
included."
Held:
(a) That "capital stock" here means the entire potentiality of
the corporation to profit by the exercise of its corporate
franchise, and the method for ascertaining the value, not being
prescribed, is left to the sound discretion of the Commissioner of
Internal Revenue subject only to the obligation to consider every
relevant fact. P.
268 U. S.
377.
(b) The net fair value of the corporate assets is clearly
relevant, and adoption of this, rather than the value of the
outstanding shares of stock as evidenced by the average prices at
which the shares were sold on the stock exchange was not arbitrary
nor an abuse of discretion.
Id.
59 Ct.Cls. 686 affirmed.
Appeal from a judgment of the Court of Claims; denying a claim
for recovery of the amount of an additional special corporation
excise tax, paid under protest.
MR. JUSTICE BRANDEIS, delivered the opinion of the Court.
The Revenue Act of 1918, February 24, 1919, c. 18, title 10, §
1000a(1), 40 Stat. 1057, 1126, provides:
The Revenue Act of 1918, February 24, 1919, c. 18, Title X, §
1000a(1), 40 Stat. 1057, 1126, provides:
"Every domestic corporation shall pay annually a special excise
tax with respect to carrying on or doing business equivalent to $1
for each $1,000 of so much of the fair average value of its capital
stock for the preceding year ending June 30 as is in excess of
$5,000. In estimating the value of the capital stock, the surplus
and undivided
Page 268 U. S. 375
profits shall be included."
How the value shall be determined is the main question for
decision.
Ray Consolidated Copper Company, a domestic corporation engaged
in the business of mining and smelting, has a capital stock of
$15,771,790, divided into 1,577,179 shares of common stock of the
par value of $10 each. Under the above provision, the company
filed, on July 30, 1920, with the appropriate collector of internal
revenue a return for the special tax for the year ending June 30,
1921, in which it reported that the fair average value of its
capital stock for the preceding year was $34,803,608.99. The value
so reported was arrived at by finding the average selling price of
the stock on the New York Stock Exchange during the calendar year
1919 and multiplying the price so found -- about $22 a share -- by
the number of shares outstanding. The stock is listed on the New
York Stock Exchange, was traded in almost daily, and the aggregate
number of shares so sold during the year equalled nearly one-third
of the total stock outstanding. The Commissioner of Internal
Revenue refused to accept the company's valuation; took into
consideration for the purpose of estimating the value of the
capital stock, among other things, the value of the mining property
theretofore established in connection with other federal taxes;
concluded that the fair value of the capital stock considered as a
whole was not materially less than the net fair value of the
assets; fixed the value of the capital stock higher than the
company had reported, and exacted an additional tax. Refund being
denied, this suit was brought in the Court of Claims to recover the
additional amount paid. Before the trial, the Commissioner refunded
a part of the additional tax. As to the balance, that court upheld
the assessment. 59 Ct.Cls. 686. The case is here on appeal under §
242 of the Judicial Code.
The company insists that the term "fair average value of its
capital stock" means fair average value of the aggregate
Page 268 U. S. 376
shares of its stock and not the value of the corporate assets;
that the fair average value of the shares, based upon
bona
fide sales of the stock in reasonable volume, was correctly
stated in its return; that the aggregate value of the shares so
determined by the fair average selling price of the individual
shares must be adopted as the single standard for determining the
value of the capital stock; that such determination cannot lawfully
be modified by any consideration of the value of the corporation's
assets; that the Commissioner based his determination upon the net
fair value of the assets, and that the additional tax was therefore
illegally assessed.
The tax is a special excise imposed on the privilege of carrying
on business in the form of a corporation. Congress might have
measured the value of the privilege by the net income of the year,
as in the corporation tax,
Flint v. Stone-Tracy Co.,
220 U. S. 107,
220 U. S. 174;
by the annual gross receipts, as in the sugar refiners' tax,
Spreckels Sugar Refining Co. v. McClain, 192 U.
S. 397; by the amount of capital employed, as in the
bankers' tax,
Fidelity Title & Trust Co. v. United
States, 259 U. S. 304,
259 U. S. 308;
or by the fixed capitalization, as in the taxing acts of many
states. It might have taken, as the measure, the aggregate value of
all of the outstanding shares of stock and have directed that their
value be computed by multiplying the average selling price, during
the year, of a single share by the total number of shares
outstanding.
Compare 85 U. S. 18
Wall. 206,
85 U. S. 209,
85 U. S. 231.
But Congress did none of these things. It declared that the tax
should be measured by the "fair average value of its [the
corporation's] capital stock." In so doing, it used a term which
has no fixed meaning in taxing statutes, and it gave no directions
for ascertaining such value except that, in "estimating" value,
"the surplus and undivided profits shall be included."
As the term "capital stock" has no fixed significance, it must
be construed in a particular statute by reference to
Page 268 U. S. 377
the context, the nature and purpose of the statute, its history,
and other aids to construction. We think that, as here used, it
means the entire potentiality of the corporation to profit by the
exercise of its corporate franchise.
Central Union Trust Co. v.
Edwards, 287 F. 324, 328. As the method to be pursued in
ascertaining the value is not prescribed, we think that it was left
to the sound judgment and discretion of the Commissioner, subject
only to the obligation to take into consideration every relevant
fact.
Compare Louisville & Nashville R. Co. v. Greene,
244 U. S. 522,
244 U. S.
540.
The capital stock of a corporation, its net assets, and its
shares of stock are entirely different things.
Compare
Farrington v. Tennessee, 95 U. S. 679,
95 U. S. 686;
Tennessee v. Whitworth, 117 U. S. 129,
117 U. S.
136-137;
Wright v. Georgia R. Co. & Banking
Co., 216 U. S. 420,
216 U. S. 425;
Des Moines National Bank v. Fairweather, 263 U.
S. 103,
263 U. S. 111.
The value of one bears no fixed or necessary relation to the value
of the other. The net fair value of the assets was clearly a
relevant fact bearing upon the value of the capital stock. It does
not appear that the Commissioner refused to consider the selling
price of the shares or other factors. He may have given much
consideration to the selling price of the shares, and have
concluded that, under the conditions prevailing in the year 1920,
the average price at which relatively small lots were sold on the
Stock Exchange was not a fair indication of the value of the
capital stock. We cannot say that he acted arbitrarily or abused
his discretion in concluding that "the fair value of the capital
stock considered as a whole is not materially less than the net
fair value of the assets."
Illinois Central R. Co. v.
Greene, 244 U. S. 555,
244 U. S. 562.
In
Hecht v. Malley, 265 U. S. 144,
265 U. S.
162-163, where the provision here in question was upheld
as applied to a voluntary association without a fixed or designated
share capital, the collector had assessed the tax by "taking
the
Page 268 U. S. 378
fair value of the assets of the Association over its liabilities
and calling the difference its capital stock."
Affirmed.
MR. JUSTICE SUTHERLAND dissents.