1. Allowance by the Commissioner of Internal Revenue of special
assessment of profits taxes under § 328 of the Revenue Act of 1918,
and his selection, for comparison, of representative corporations
engaged in a like or similar trade or business to that of the
taxpayer, are matters of administrative discretion which are not
reviewable by the courts.
Williamsport Wire Rope Co. v. United
States, 277 U. S. 551. P.
288 U. S.
507.
2. Where a taxpayer's profits taxes have been determined by the
Commissioner by special assessments under §§ 327 and 328 of the
Revenue Act of 1918, the District Court and the Circuit Court of
Appeals are without jurisdiction, in a suit for refund, to
recalculate the
Page 288 U. S. 503
taxpayer's net income and recompute the tax by applying to the
new figure found as the net income the ratios of tax used by the
Commissioner. P.
288 U. S.
507.
60 F.2d 505 reversed.
Certiorari, 287 U.S. 593, to review judgments of the Circuit
Court of Appeals in three cases involving alleged overpayment of
profits taxes. For findings of fact and conclusions of law of the
District Court in Nos. 476 and 477,
see 39 F.2d 645.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
These cases present the question whether, where the Commissioner
of Internal Revenue has granted special assessments of profits
taxes pursuant to § 328 of the Revenue Act of 1918 (40 Stat. 1093),
a court, in an action for a refund, may recalculate the taxpayer's
net income and recompute the tax by applying to the corrected net
income the rate percent used by the Commissioner in his computation
of the tax.
The Alkali Company filed returns for income and profits taxes
for 1918 and 1919 and paid the tax shown to be due. The
Commissioner proposed certain changes in income and capital as
reported, principally due to decreases in amortization and
depreciation allowances. At some date not disclosed by the record,
the company asked that its profits taxes be computed pursuant to §§
327 and
Page 288 U. S. 504
328 of the act. The request was denied, and correspondence and
conferences ensued between the Commissioner and the taxpayer in an
effort to settle the disputed items. The demand for computation of
the taxes pursuant to the special assessment sections was pressed
by the company. Twice during the period of negotiation the
Commissioner advised that, until the true net income was
ascertained, the propriety of special assessment could not be
determined. Finally, in July, 1927, as a result of audits and
investigations, he found the company's net income, and decided
that, owing to abnormal conditions affecting its capital or income,
assessment according to the usual method under § 301 would work an
exceptional hardship, and relief should be granted pursuant to §§
327 and 328. He so notified the respondent, enclosing a calculation
of the taxes made by him pursuant to § 328. The taxpayer protested
on several grounds, amongst others, that the net income as
determined under § 301 was excessive, and that the ratio of tax to
net income obtained by the Commissioner by comparison with the
taxes of other representative corporations, as provided in § 328,
was too high. It did not, however, as was its right, appeal to the
Board of Tax Appeals from the determination of new income.
In November, 1927, the Commissioner made an assessment in
accordance with his findings and demanded payment of a deficiency
thereby disclosed. The respondent paid under protest and filed
claims for refund, asserting the same objections it had previously
urged. The claims were rejected, and the respondent brought suits
to recover the alleged overpayments. The District Court found that
additional amounts should have been allowed for amortization,
reduced the net income as determined, thereupon recomputed the
taxes on the reduced income by applying the rate percent used by
the Commissioner in his computation,
Page 288 U. S. 505
and rendered judgment in favor of the respondent. Both parties
appealed. The Circuit Court of Appeals increased the amortization
allowance, made additional deductions from gross income for
depreciation, found a net income much less than that fixed by the
District Court, and held that the tax should be recomputed by
applying the rate used by the Commissioner to the new figure found
as the net income.
Section 327(d), so far as here material, enacts that,
"Where, upon application by the corporation, the Commissioner
finds and so declares of record that the tax if determined without
benefit of this section would, owing to abnormal conditions
affecting the capital or income of the corporation, work upon the
corporation an exceptional hardship evidenced by gross
disproportion between the tax computed without benefit of this
section and the tax computed by reference to the representative
corporations specified in section 328,"
the tax shall be computed as provided in the latter section.
Section 328 declares that the tax shall be "the amount which bears
the same ratio to the net income of the taxpayer" as the average
tax of representative corporations engaged in a like or similar
trade or business bears to their average net income, and directs
that, in computing the tax, the Commissioner shall compare the
taxpayer only with representative corporations whose invested
capital can be satisfactorily determined in accordance with § 326,
which are as nearly as may be
"similarly circumstanced with respect to gross income, net
income, profits per unit of business transacted and capital
employed, the amount and rate of war profits or excess profits, and
all other relevant facts and circumstances."
In
Williamsport Wire Rope Co. v. United States,
277 U. S. 551, it
was decided that the allowance of special assessment is a matter of
administrative discretion, and it
Page 288 U. S. 506
was further said that the selection for comparison of
representative corporations engaged in a like or similar trade or
business is also a question of discretion. The Commissioner cannot
make an administrative finding upon the question for decision under
§ 327(d) or that under 328 until he has determined the net income
of the taxpayer.
See United States v. Henry Prentiss & Co.,
Inc., ante, p.
288 U. S. 73. He
must compare the income of the taxpayer with that of corporations
he deems representative in order to determine abnormality or gross
disproportion between capital and income. When he comes to compute
the ratio or rate of tax to be applied to the taxpayer's net
income, as prescribed in § 328, he obviously will consider as a
factor the ratio of tax to net income of the same representative
corporations he examined for the purpose of deciding whether he
should grant special assessment under § 327(d).
The parties are in agreement that the
Williamsport Wire Rope
Co. case,
supra, precludes revision, correction, or
abrogation of the Commissioner's administrative discretionary
findings where, as here, there is no allegation of fraud. On the
one hand, the petitioners claim that the decisions below amount to
such abrogation and the making of a new finding as to the right of
special assessment and a fresh computation of the tax upon revised
net income; on the other, the respondent says that the courts
recognized the binding character of the Commissioner's findings,
enforced, rather than set aside his allowance of relief, and,
adopting the rate found by him, applied it to the true statutory
net income as judicially determined in accordance with law.
We think the petitioners' position is correct. The taxpayer's
true net income was an essential factor in the problem. Until that
was known, the Commissioner could make no proper or satisfactory
comparison with conditions prevailing in other corporations
similarly circumstanced.
Page 288 U. S. 507
We cannot say that, if the income had been substantially less
than the figure he used, he would have granted special assessment
under § 327(d). Moreover, with a different net income, he might
well have had to compare the relevant conditions in respondent's
business with the operating results of corporations other than
those he selected on the basis of respondent's net income as found,
and might have concluded that a different ratio of tax to net
income was applicable in respondent's case.
The grant of special assessment and the ascertainment of the
rate or ratio of tax to be applied to the net income of the
taxpayer are indissolubly connected by the terms of the statute.
The exercise of the discretion in both aspects is committed to the
Commissioner, and to the Board of Tax Appeals upon review of his
action. That discretion cannot be reviewed by the courts, nor
exercised by them in place of the administrative officer designated
by law. It is beyond the power of a court to usurp the
Commissioner's function of finding that special assessment should
be accorded, and equally so to substitute its discretion for his as
to the factors to be used in computing the tax. The courts below
were in error in adopting the rate chosen by the Commissioner and
applying it to a net income other than that which he used in making
his comparisons and arriving at the rate. The respondent's tax
could only be computed in accordance with § 301 or under § 328. The
former prescribes the elements to be considered, and error in the
computation remains subject to judicial correction; the latter
grants the taxpayer the benefit of discretionary action by the
Commissioner, and precludes judicial revision or alteration of the
computation of the tax.
The judgments must be reversed, and the cases remanded for
further proceedings in conformity with this opinion.
Reversed.
* Together with No. 478,
Lewellyn, Formerly Collector of
Internal Revenue v. Diamond Alkali Co.