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DIGEST OF DECISIONS OF UNITED STATES COURTS.

CONSTRUING INTERNAL REVENUE LAWS, 1909-1918.

[This part contains a digest of the decisions of the United States courts under the internal revenue acts from 1909 to 1918, inclusive. The West Publishing Co. and the Bank Law Publishing Co. authorized such use of their syllabi in the preparation of this compilation as the Treasury Department deemed proper. The department desires in this way to acknowledge the valuable assistance rendered by these companies.]

CORPORATION EXCISE TAX.

ACT OF AUGUST 5, 1909, SECTION 38.

Appropriation for collection of tax, June 17, 1910. Provision for refund of penalty tax, March 3, 1913. Repealed by act of October 3, 1913 (Sec. IV, S), containing provision for months of January and February, 1913, and for rights and liabilities accrued under act of August 5, 1909.

DECISIONS UNDER THE CORPORATION EXCISE TAX ACT,
AUGUST 5, 1909.

CONSTITUTIONALITY AND CONSTRUCTION IN GENERAL.

Application.

The corporation tax law applies to mining corporations. (Stratton's Independence v. Howbert, 231 U. S. 399, 1913.)

Constitutionality.

Corporation tax act is not unconstitutional as imposing a direct tax not apportioned according to population, though with reference to mining companies the net income of the corporation is determined by ascertaining the value of ore extracted after deducting the cost of extraction and treatment and the cost of administering the corporation, with a reasonable reservation for contingencies, since such method of determination does not make the tax a tax on the corpus. of the estate. (Stratton's Independence v. Howbert, 207 Fed. 419, 1912, 231 U. S. 399, 400, 1913.)

The fact that a statute operates retroactively does not necessarily cause it to be unconstitutional. (Flint v. Stone-Tracy Co., 220 U. S. 107, 1911.)

The tax imposed by section 38, act August 5, 1909, is valid as an excise on the privilege of doing business in a corporate capacity. (Flint v. Stone-Tracy & Co., 220 U. S. 107, 1911, and Blalock v. Georgia Ry. & Elec. Co., 228 Fed. 296, 1916. Also United States v. Whitridge, and United States v. Joline & Robinson, 231 U. S. 144, 1913.) (McCoach v. Minehill Ry. Co., 228 U. S. 295; Anderson v. Forty-two Broadway Co., 239 U. S. 69.)

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"We have noticed such objections as are made to the constitutionality of this law as it is deemed necessary to consider. Finding the statute to be within the constitutional power of the Congress, it follows * * *." (Flint v. Stone-Tracy Co., 220 U. S. 107, 177.) It was not an arbitrary classification for Congress to draw the line regarding deduction of interest on bonded indebtedness or other indebtedness at the precise point where the pecuniary interest of creditors overbalanced that of stockholders. (Anderson v. FortyTwo Broadway, 239 U. S. 69, 1915.)

Excise.

The tax imposed by section 38, act August 5, 1909, having been enacted before the ratification of the Sixteenth Amendment was not in any proper sense an income tax law; but was an excise tax upon the conduct of business in a corporate capacity, measured by the income, with certain qualifications prescribed by the act itself. (Stratton's Independence v. Howbert, 231 U. S. 399, 1913; Anderson v. Morris & Essex R. Co., 216 Fed. 83, 1914, National Bank of Commerce in St. Louis v. Allen, 223 Fed. 472, 1915; Anderson v. Forty-Two Broadway Co., 239 U. S. 69, 1915.)

Limitations of Congress.

The only limitation of the power of Congress in the imposition of excise taxes, such as those imposed on corporations, is that they be uniform throughout the United States, and by that is meant a geographical uniformity. (Camp Bird Ltd. v. Howbert, 249 Fed. 27, 1918, C. C. A. affirming the decision of the district court; case taken to the Supreme Court and reversed in 248 U. S., 590.)

Measurement of the tax.

The measurement of the corporation tax by net income is not beyond the power of Congress as arbitrary and baseless. (Flint v. Stone-Tracy Co., 220 U. S., 107, 1911.)

Statutory construction.

Tax laws should be given the same construction by all courts throughout the territorial limits within which the tax is levied. (Northern Tr. Co. v. McCoach, 215 Fed. 991, 1914.)

The excise-tax law of August 5, 1909, must be construed in favor of taxation. (United States v. Guggenheim Exploration Co., 238 Fed. 231, 1917.)

Purpose of the act.

The purpose of the act is not to tax property as such, or the mere conversion of property, but to tax the conduct of the business of corporations organized for profit by a measure based upon the gainful returns from their business operations and property from the time the act took effect. (Doyle v. Mitchell Bros. Co., 247 U. S. 179, 1918.)

Repealing provisions of the act of October 3, 1913.

Corporation excise-tax act August 5, 1909, which embraced no tax upon dividends received by corporations from stock of other corporations subject to the tax, was repealed by income-tax act October 3, 1913, section 4-S, which contained a proviso that the repeal of existing laws or modifications thereof embraced in the act should not affect any act done or right accruing, or any suit or proceeding had or commenced in any civil case before such repeal or modification, but all rights and liabilities under such laws should continue and might be enforced in the same manner as if such repeal or modification had not been made. Held, that such saving clause was intended to relate only to rights and liabilities in respect to taxes which had accrued under the act of 1909, and was not intended to cover excise taxes upon corporations for the months of January and February, 1913, which were imposed by the income-tax act, as the constitutional amendment of March 1, 1913, designed to permit taxation of incomes without apportionment, was not adopted until March 1, this being apparent from the provision in that act that excise taxes for two months shall be ascertained in accordance with the provisions of section 2-G. Consequently exemptions in the corporation excisetax act are not applicable to taxes imposed for those two months. (Butterick Co. v. United States and Federal Pub. Co. v. same, 240 Fed. 539, 1917.) Dismissed on motion of U. S. (248 U. S. 587.)

SUBDIVISION I, SECTION 38.

SEC. 38. That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any State or Territory of the United States or under the acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States or in Alaska or in the District of Columbia, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation. joint stock company or association, or insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed; or if organized under the laws of any foreign country, upon the amount of net income over and above five thousand dollars received by it from business transacted and capital invested within the United States and its Territories. Alaska, and the District of Columbia during such year, exclusive of amounts so received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed: Provided, however, That nothing in this section contained shall apply to labor, agricultural or horticultural organizations, or to fraternal beneficiary societies, orders, or associations operating under the lodge system, and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders or associations, and dependents of such members, nor to domestic building and loan associations, organized and operated exclusively for the mutual benefit of their members, nor to any cor

poration or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.

Corporations liable to the tax.

(See also cases under Dissolved corporations, Excepted corporations, Foreign corporations, Receivers, and under "Doing business.")

Buying and selling real estate incidental to the business carried on by the lessee being exceptional and "trifling in amount" does not make the company liable. (Traction Companies v. Collectors, 223 Fed. 984, 1915. Reversing Dayton & Western Traction Co. v. Gilligan, etc., T. D. 2000.)

A corporation subjects itself to the tax by exercising the privilege of carrying on or doing business for any part of the year for which the tax is imposed. (228 Fed. 296-Blalock, Collector of Internal Revenue v. Georgia Ry. & Electric Co., 1916. Reversed on another point in 246 Fed. 387, 1917.)

Corporations organized under the laws of Minnesota, not for charitable or eleemosynary purposes, but for the pecuniary advantage of their shareholders, held "organized for profit" within the meaning of the corporation tax law of August 5, 1909. (Von Baumbach v. Sargent Land Co., 242 U. S. 503, 1917.)

A terminal railway company, organized for the purpose of performing terminal service for four railroad companies which were its stockholders, having been legally organized as a corporation capable of earning and paying dividends, is subject to corporation excise tax act, August 5, 1909, though the companies owning its stock organized the terminal company merely to provide a convenient joint agency for the performance of certain of their duties as carriers without any idea of deriving a profit. (Houston Belt & Terminal Ry. Co. v. United States, 250 Fed. 1, 1918.) (C. C. A. affirming decision of the district court.)

Where a railroad corporation leased its property and franchises for the whole term of its charter, the fact that the les see paid the rent, not to the lessor entity, but rather to its stockholders and bond holders, could not prevent the rent so paid being subject to taxation under corporation tax act 1909, section 38, if the act was otherwise applicable. (Anderson . Morris & E. R. Co., 216 Fed. 83, 1914.)

The Houston Belt & Terminal Co. was the terminal agent for four Texas railway companies, called tenant lines. The fact that the lessees paid an income in the form of rental to the Central Trust Co. does not exempt the said lessor from taxation as such rent was properly treated as having been paid to the terminal company and by it paid to the Central Trust Co. Judgment of district court affirmed. (Houston Belt & Terminal Co. e. U. S., 250 Fed. 1, 1918.)

The above act must be construed as imposing an excise tax upon the right to do business in corporate form; so, if the persons choose the corporate form of business, the corporate income may be estimated upon the assumption that the form is to be regarded as the reality. (United States v. Oregon-Washington R. & Nav. Co., 251 Fed. 211., U. S. C. C. A. N. Y., 1919.)

Massachusetts trusts.

*

It was the intention of Congress to embrace within the corporation tax provisions of the tariff act of August 5, 1909 ** only such corporations and joint-stock associations as are organized under some statute, or derive from that source some quality or benefit not existing at common law.

A trust formed in a State, where statutory joint stock companies are unknown, for the purpose of purchasing, improving, holding and selling land, and which does not have perpetual succession but ends with lives in being and 20 years thereafter, is not within the provisions of the corporation tax law. (Elliot v. Freeman, 220 U. S. 178, Mar. 13, 1911.)

Mining companies.

The act applies to mining companies.

It is not unconstitutional as imposing a direct tax not apportioned according to population, though with reference to mining companies the net income of the corporation is determined by ascertaining the value of ore extracted after deducting the cost of extraction and treatment and the cost of administering the corporation, with a reasonable reservation for contingencies since such method of determination does not make the tax on the corpus of the estate. (Stratton's Independence v. Howbert, 207 Fed. 419, 1912; 231 U. S. 399, 1913.)

New York joint-stock associations.

Under the New York Joint-Stock Association Law (Consol. Laws, c. 29), authorizing joint-stock companies to sue and be sued in the name of the president or treasurer, and providing that suits against a joint-stock company shall be prosecuted in the first instance against the president or treasurer, and under Constitution of New York, article 8, section 3, providing that the term "corporation" shall be construed to include all associations and joint-stock companies having any of the powers or privileges of corporations not possessed by individuals or partnerships, and that all corporations shall have the right to sue, and shall be subject to be sued, in all cases as natural persons, an unincorporated joint-stock company, operating an express business, its shares being transferable, and its property being vested in trust for the association in five directors, enjoyed such privileges under the statutes of New York as to be taxable as a joint-stock

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