#### LA BELLE IRON WORKS v. THE UNITED STATES.1

[No. 34603.

Decided June 28, 1920.]

*On Defendants’’ Demurrer.*

*Refund, of taxes; mcrease of value by appreciation; statutory construction.*— Increase in the value of property by appreciation, first added to surplus on the books of the company and then declared as a stock dividend, is not undivided profits, paid-in surplus, earned surplus, nor invested capital within the meaning of section 207 of the act of October 3, 1917, 40 Stat., 306.

*Same; where tax imposed is unequal.*— Where the application of a valid taxing act bears more heavily on some persons than on others the court has no jurisdiction to correct its inequalities.

*The Reporter's*statement of the case:

*Messrs. T. K. Sehmueh*and *A. L.*Bout/ware, with whom was *Mr. Assistant Attorney General Frank*Danis, jr., for the demurrer.

*463*Messrs. Charles McCamic*and *E. B. Burling*opposed. *Covington ds Burling*and *McCamio <& Clarhe*were on the briefs.

The allegations of the petition to which defendants’ demur are in substance as follows:

The petitioner is a corporation organized under the laws of the State of West Virginia in the year 18T5, having its principal office at Wheeling in said State.

The provisions of law under which the petitioner claims the refund of the amount paid the collector of internal revenue at Cleveland, Ohio, as an additional income and excess-profits tax assessed and wrongfully collected by said commission for the year 1917 and paid by petitioner under duress and written protest are the act of October 3, 1917, section 10(a), section 4, section 201, of Title II, section 203 of Title II, and Section 207 of Title II.

That pursuant to the provisions of the law hereinbefore mentioned petitioner made return of its annual net income for the year 1917, and thereupon an income and excess-profits tax was assessed against it in the sum of $5,139,109.84, which tax the petitioner paid.

Under the provisions of the law hereinbefore mentioned, before computing an excess-profits tax to be assessed against the company, the company was entitled to certain deductions from its income, among others, to wit, a deduction of 7 per cent upon its invested capital, as defined in said act. In said return filed by the company it stated its-invested capital to be $26,322,904.14, and before computing its excess-profits tax deducted 7 per cent of said sum, said deduction on account thereof being $1,842,603.50. The said invested capital included the sum of $10,105,400 as representing that part of its capital invested in ore lands which were acquired prior to the year 1904, the petitioner paying therefor the sum of $190,000. After said ore lands were acquired, extensive explorations and development work were carried on and it was proved that said lands contained large bodies of ore, and between the date of said 'purchase and the year 1912 the said ore lands greatly increased in value. In the year 1912 the actual cash value of said ore lands was not less than *464said sum of $10,105,400, and at all times during the years 1912 to 1917, inclusive, the actual cash value of said lands was not less than said last-mentioned sum. In 1912 the company increased the valuation of said lands on its books by adding thereto the sum of $10,000,000 and carried said sum to surplus, and thereupon in the year 1912 declared a stock dividend in the sum of $9,915,400, representing the said increase in value of said ore lands. At all times thereafter said sum last mentioned was treated by petitioner as a part of its invested capital and was included in the invested capital of petitioner in its excess-profits tax return for the year 1917.

Said declaration of stock dividend was accomplished in the following manner: Prior to said stock dividend the petitioner’s capital stock consisted of stock issued, all of one class, having a par value of $9,915,400. Thereupon the charter of petitioner was amended in accordance with the laws of West Virginia, so that petitioner’s stock issue was fixed at $10,000,000 par value of common stock, and $10,000,» 000 par value of preferred stock. Thereupon all outstanding stock, to wit, $9,915,400 par value, was surrendered by the stockholders to the company and canceled. In exchange therefor one share of the new common stock and one share of the new preferred stock was issued in place of each share of the original stock outstanding.

Thereafter the Commissioner of Internal Revenue caused to be made a reassessment of said tax for said year 1917 and assessed an additional tax of $1,081,184.61 against petitioner, and payment thereof was demanded of petitioner of or before February 24, 1920.

In assessing the said additional tax the commissioner struck out of the return of the petitioner the said sum of $9,915,400, being the increase in value of said ore lands, thus reducing the invested capital from $26,322,907.14 (which is the amount stated in the return filed by petitioner) to $16,-407,507.14. Said additional tax of $1,081,184.61 assessed against the petitioner and paid under duress and protest was due entirely to the reduction in the invested capital of petitioner as aforesaid.

*465On February 24, 1920, said petitioner paid said sum oí $1,081,184.61 additional tax for the year 1911 to the collector of internal revenue, Cleveland, Ohio, under threat of execution and levy on its property for failing to do so. At the time of said protest petitioner filed written protest with the collector. The whole of said sum was duly turned over to the United States by said collector in the usual course of his business as such collector.

Thereafter, on March 17, 1920, the petitioner filed in the office of the Commissioner of Internal Revenue a claim for refund. Afterwards, on April 8, 1920, said claim was considered and rejected by said commissioner and the whole of said sum of $1,081,184.61 is now retained and held by the United States.

That petitioner has at all times borne true allegiance to the Government of the United States; has not in any way voluntarily aided, abetted, or given encouragement to rebellion against said Government; that it is the sole and absolute owner of the claim presented; that it has made no transfer or assignment of said claim or any part thereof, and that petitioner is justly entitled to the amount claimed from the United States, after allowing all just credits and set-offs. •

The court announced the following

1

 Appealed.

• ORDER.

'This cause coming on to be heard was submitted to the court — three judges sitting — upon the defendant’s demurrer to the plaintiff’s petition, as amended, and was argued by counsel. On consideration whereof, the court is of opinion that the demurrer is well taken. It is therefore adjudged and ordered that the defendant’s demurrer to the petition as amended in this cause be, and the same is hereby, sustained and the petition as amended is dismissed.

memorandum bt the court.

The court’s conclusions are:

(1) That the act in question (October 3,1917,40 Stat.,'306), undertakes to define “ invested capital ” and the averments of *466the petition can not be said to bring the plaintiff’s case within the definition of section 207.

(2) That the increase in value of plaintiff’s ore lands, which was first declared'to be surplus, and afterwards treated as the basis of a stock dividend, did not thereby become earned surplus or undivided profits or invested capital within the meaning of the act of 1917. The stock dividend added nothing to, and took nothing from,, the corporation’s invested capital.

(3) That the inequalities, which can arise in the application of the statute to particular cases, can not be corrected by judicial construction, where the enactment is otherwise valid.

(4 That where the act is ambiguous or uncertain, the construction of it by the administrative officers charged with its execution is entitled to great respect.