#### BRILLIANT COAL COMPANY v. THE UNITED STATES1

(No. C-671.

Decided March 31, 1924)

*On the Proofs*

*Income tax; interest accrued, m previous years paid in return; right to deduct from gross income in return year.*— Where interest on bonded indebtedness of a corporation has accrued in 1913, 1914, 1915, and 1916, and sneb accumulated interest has been paid in 1917, it may be properly deducted from gross income in the income tax return for the year 1917 in arriving at the net income for that year.

*The Reporter's*statement of the case :

*Mr. George W. Yancey*for the plaintiff. London, *Yancey d¡ Brower*were on the briefs.

*Mr. Edmund G.*Fletcher, with whom was *Mr. Assistant Attorney General Robert H.*Lovett, for the defendant.

The following are the facts of the case as found by the court:

I. ■ Plaintiff is a corporation of the State of Alabama, with its home office at Birmingham, Ala., and has not in any way aided, abetted, or given encouragement to rebellion against the Government of the United States, or at any time aided *482or abetted in any manner or given comfort to any sovereign or government, that is or ever has been at war with the United States.

II. At all times during the year 1912 to 1916, inclusive, the plaintiff was (and still is) engaged in mining coal in the counties of Walker and Marion in said State of Alabama.

III. Plaintiff, on or about the 4th day of March, 1918, made a return of income earned by it in the year 1917, a true copy of which, excepting signature and oath, is attached to plaintiff’s petition herein, marked Exhibit “A” and made a part hereof.

IY. Thereupon there was levied upon plaintiff upon its income for 1917, as shown by said return, a tax of $14,726.32, which plaintiff duly paid.

V. Subsequently the accounts of the plaintiff were audited by examiners of the Internal Revenue Department who suggested that the return made by plaintiff of its said income for 1917 was improper, in that plaintiff had deducted from its gross income received within said year the entire amount of interest paid within said year by plaintiff on its bonded indebtedness, although a large part of said interest, namely, $67,187.50 had accrued and become payable in the years 1913, 1914, 1915, and 1916, inclusive.

VI. Thereafter and on or about September 16, 1918, at the request of said examiners, plaintiff made, under protest, a supplementary and amended return, a true copy of which, excepting signature and oath, is attached to plaintiff’s petition herein, marked Exhibit “ B ” and made a part hereof; to such amended return, and as a part thereof, there was attached a corporation excess profits tax return for the year ending December 31st, 1917, as apears in said Exhibit “ B.”

VII. On or about July 2, 1921, the collector of internal revenue for the district of Alabama, demanded of plaintiff the sum of $40,868.72, with interest thereon for eight months at the rate of 1 per cent per month, amounting to $3,269.49, or $44,138.21 as the tax and interest due for the year 1917, in addition to the $14,726.32 which plaintiff had already paid.

VIII. Plaintiff, on or about the 29th of October, 1920, duly filed a claim for abatement and duly verified same, and *483in and by which plaintiff alleged and showed, among other things, the following: During the whole of 1917, plaintiff had capital stock outstanding of $300,000, and a bonded indebtedness of $250,000 bearing interest at six per cent per annum, evidenced by coupons payable January 1st, and July 1st of each year, secured by deed of trust executed in 1907. All coupons for interest maturing January 1, 1913, and thereafter were, on January 1, 1917, still attached to said bonds and unpaid. During the year 1917, plaintiff paid all of these past due coupons amounting, with the interest thereon from maturity, to $67,187.50, and coupons, maturing January 1 and July 1, 1917, for $14,790.00, a total of $81,977.50, which said last named sum plaintiff deducted from its gross income for 1917. The department bad disallowed the deduction of $67,187.50 because said interest had accrued prior to 1917. Plaintiff claimed that under the revenue act approved September 8, 1916 (39 Statute at Large, 756), and all subsequent acts, the entire amount of interest thus actually paid during the year 1917, was deductible from the gross income for that year, and it claimed an abatement of the tax assessed against it accordingly. It is further stipulated that none of the aforesaid interest .coupons maturing in the years 1913, 1914, 1915, and 1916, inclusive, were presented to plaintiff for payment; that all of said bonds, with said interest coupons attached, were owned, during the aforesaid years, by the plaintiff’s stockholders.

IX. Plaintiff duly protested against the additional assessment of $40,868.72, on its income for 1917, upon the ground that it was entitled to such deduction under the provisions of section 12 of the revenue act of 1916, approved September 8th, 1916, which, in part, provides:

“Deductions. Sec. 12. (a) In case of a corporation * * * organized in the United States, such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources * * *. Third. The amount of interest paid within the year on its indebtedness to an amount of such indebtedness not in excess of the sum of (a) the entire amount of the paid-up capital stock outstanding at the end of the year and (b) one-half of its interest-bearing indebtedness then outstanding.”

*484X. The Treasury Department, by or through the Commissioner of Internal Bevenue, took under consideration plaintiff’s said claim for abatement and protest, and refused to allow said deduction claimed, writing the plaintiff under date of June 28, 1921, the following letter, viz:

Treasury Department,

*Washington, June B8, 1981.*

Office of Commissioner of Internal Bevenue.

Address reply to Commissioner of Internal Bevenue and refer to IT: SA: NB; A BDH: 61,150,953.

Brilliant Coal Company,

*1815 American Trust*Building, Birmingham, *Alabama.*

Sirs : Tour claim for the abatement of $40,868.12, corporation income and excess profits taxes for the year 1917, has been examined.

The claim is filed as a result of an examination of your books and records by a revenue agent, whose report shows that coupons, representing the interest on the bonded indebtedness of your company, due in the years 1913 to 1917, inclusive, were paid and charged as interest during the year 1917.

You are advised that the interest accrued and paid during the year 1917 is the only portion of the above-mentioned deduction that is allowable as an expense for income tax purposes.

Your claim is accordingly rejected.

Bespectfully,

(Sgd.) D. II. Blair,

*O ommissioner.*

XI. On, to wit, July 13, 1921, the internal revenue collector in Birmingham, Ala., made a second demand on plaintiff for the payment of said additional tax of $40,868.72, with interest thereon, amounting in the aggregate to $44,138.61, with intimation that if payment was not .made summary action would be taken to enforce payment thereof with penalty and interest by the distraint and sale of plaintiff’s property, and plaintiff, solely to avoid the imposition of the penalties and interest, and the threatened dis-traint and sale, and under compulsion, duress, coercion, and protest, paid to said collector of internal revenue, on or about the 13th of July, 1921, the said sum of $44,138.21, taking his formal receipt therefor, and, at the same time, delivered to him a formal protest in writing.

*485XII. Said formal protest is in words and figures, as follows:

To John D. McNeel, Esquire,

*Golleetor of Internal Revenue of the*

*District of Alabama,*Birmingham, *Alabama:*

Brilliant Coal Company, a corporation of the State of Alabama, having its principal office in the city of Birmingham, Alabama, has received a notice from you dated the 2d day of July, 1921, advising that a tax under the internal revenue laws of the United States, amounting to $44,138.21 for the year ending December 31, 1917, has been assessed against it by the Commissioner of Internal Bevenue, which tax is payable to you. The notice, among other things, contains a demand for the payment of this tax on or before the 13th day of July, 1921, and specifies that in order to avoid the penalty and interest the above amount must be paid not later than the last-mentioned date. The Brilliant Coal Company also understands that if it fails to pay said tax on said date, in addition £8 imposing the aforesaid penalties you threaten and intend to seize and sell its property under warrant of distraint and impose other pains and penalties for the nonpayment thereof. The Brilliant Coal Company understands, that this is a tax claimed to be imposed under the provisions of title 1 of the act of Congress approved September 8, 1916, entitled an act to increase the revenue and for other purposes, commonly known as the income-tax law, and that it is in addition to the $14,726.32 tax for the period ending December 31, 1917, which was heretofore assessed by you and which the Brilliant Coal Company has already paid you.

For the purpose of. avoiding the imposition of the threatened seizure and sale of property under warrant of distraint and other pains and penalties for nonpayment thereof, the Brilliant Coal Company herewith makes payment of the tax assessed, to wit, the sum of $44,138.21, under protest, on the ground that the requirement of the payment of such tax and the imposition of the said penalty and interest prescribed for failure to make said payment are illegal, for the following reason:

The Brilliant Coal Company, during the year 1917, had outstanding capital stock amounting to $300,000, and a bonded indebtedness created in 1907 of $250,000 drawing interest at six per cent per annum, payable semiannually; the net income of the Brilliant Coal Company for the year 1917 as corrected by the collector of internal reve*486nue was $158,696.23, from which sum the Brilliant Coal Company deducted the sum of $81,977.50, the interest actually paid by it during 1917, upon its said bonded indebtedness, leaving a balance of $76,718.73, upon which a tax of $14,726.32 was assessed and duly paid. Because in said sum of $81,977.50 interest actually paid during the year 1917 there was included the sum of $67,187.50 interest on said bonded indebtedness due in the years 1913 to 1916, inclusive, the said deduction of $67,187.50 was disallowed and the said additional tax was assessed as if the said sum of $67,187.50 had not been paid during the year 1917, and the Brilliant Coal Company maintains that the said additional tax and each and every part thereof is invalid, wrongful, and excessive, and contrary to its right under the Constitution and laws of the United States.

The Brilliant Coal Company reserves all other and further grounds of objection to the said additional tax, and each and every part thereof, to which it may be entitled, together with the right to assign any and all other such grounds of objection thereto, and all rights for the return, cancellation, and modification thereof in the event that said law or the regulation or decisions of the Department or any part of said law or said regulations or decisions shall be declared to be invalid, void, or inoperative, or in the event that any ruling or decision heretofore or hereafter made affecting said assessment, demand, and payment shall be determined to have been incorrect, or, in the event that said amount assessed, demanded, and paid shall be determined to be excessive.

The Brilliant Coal Company further avers that the payment herewith made is made under compulsion and duress, and without prejudice to its rights. In order to prevent any inference that the Brilliant Coal Company waives any question as to the validity of tlie said tax or any part thereof, it hereby makes demand for the return of said additional tax herewith paid, and the collector of internal revenue is hereby notified “that in the event of his failure to return said amount, suit will be entered against him for the recovery of same.

In witness whereof, the Brilliant Coal Company has hereunto set its corporate seal, duly attested this the 13th day of July, 1921. '

BrillxaNt Coal Company,

[seal.] (Sgd) By David Roberts, Jr.,

*President.*

Attest:

(Sgd) Millie Beall, *Secretary.*

*487NIII. On or about July 21, 1921, plaintiff duly filed with the Treasury Department, through the said Collector of Internal Revenue, an application on Form 46, duly verified in the form prescribed by the Department, for the refund of all of said additional tax so paid. Said application follows:

Claim for refund. — Taxes erroneously or illegally collected — Also amounts paid for stamps used in error or excess.

State op Alabama,

*County of*Jefferson, *ss:*

Brilliant Coal Company, 1815 American Trust Bldg., Birmingham, Alabama.

This deponent being duly sworn according to law deposes and says that this claim is made on behalf of the claimant named above, and that the facts stated below with reference to the claim are true and complete:

Business engaged in by claimant: Coal mining.

Character of assessment or tax: Income and excess profit tax.

Amount of assessment or stamps.

Amount now asked to be refunded (or such greater amount as is legally refundable) : $44,138.21.

Date of payment of assessment or purchase of stamps: July 13, 1921.

Deponent verily believes that the amount stated in Item 4 should be refunded, and claimant now asks and demands refund of said amount for the following reasons:

Claimant in 1917 , had outstanding capital stock of $300,000.00, and bonded indebtedness of $250,000.00, secured by deed of trust on its property. This indebtedness bore interest at six per cent per annum, payable semiannually and was evidenced by coupons. Because of lack of funds the coupons for interest maturing in 1913, 1914, 1915, and 1916 were not paid or presented for payment, and no entries in respect thereto were made during those years; they all remained unpaid on January 1st, 1917, and with interest thereon until paid amounted to $67,187.50, this past-due interest was paid in 1917 and claimed as a deduction from the net income of claimant for that year, under the terms of the income tax law then in force, and the income and excess profit tax was paid on the balance thus obtained. Claimant’s income for 1917 was subsequently reassessed, the deduction of $67,187.50 for interest accruing prior to 1917 *488altho paid during tbat year was disallowed and claimant was required to pay and on July 13th, 1921, did pay to Honorable Jno. D. McNeel, collector of internal revenue of Alabama, the sum of $44,138.21, accompanying the payment with a formal written protest and demand for its return and notice that if not refunded suit would be brought for the recovery of same.

And this deponent further alleges that the said claimant is not indebted to the United States in any amount whatever, and that no claim has heretofore been presented, except as stated herein, for the refunding of the whole or any part of the amount stated in Item 3.

(Signed) BrilliaNt Coal Co.

By David Boberts, Jr. *Pres.*

Sworn to and subscribed before me this 21st day of July, 1921.

FraNCis H. FaisoN, D. C.

XIV. During the years 1913, 1914, 1915, and 1916, no • entries were made on the books of plaintiff in respect of or in relation to the interest accrued or accruing on the bonded indebtedness of plaintiff, or at any other time, until said interest was paid in 1917, when an entry was made upon said books showing said payment of interest for the years 1913 to 1917, both inclusive.

XV. The books of the plaintiff correctly show: That on the 31st day of December, 1913, 1914, 1915, and 1916, the plaintiff’s first-mortgage bonds outstanding amounted to the sum of $250,000; that on December 31, 1917, the plaintiff’s first-mortgage bonds outstanding amounted to the sum of $229,000; and that the plaintiff’s stock outstanding in each of the aforesaid years was $300,000.

XVI. No decision by the Treasury Department or any other department or bureau of the United States either allowing or disallowing plaintiff’s claim for refund was made within six months after the filing of said claim with the Commissioner of Internal Bevenue or has been made or rendered at any time since.

XVII. No action upon this claim has been taken before Congress or any of the departments of the Government, or in any court other than the petition filed in this court.

XVIII. No part of said sum of $44,138.21 has been repaid, except $7,141.46, which was repaid to plaintiff on *489July 17, 1922, as an admitted overcharge in the assessment of the income tax for 1917, against the plaintiff, and being a deduction of the interest paid in 1917, by plaintiff on the accrued bond interest; that plaintiff in acknowledging receipt of said payment on July 18, 1922, stated to said commissioner that it claimed that the entire amount of bond interest paid in 1917 was deductible, and reserved the right to bring suit for the additional amount claimed.

1

 Appealed.

Downey, Judge,

delivered the opinion of the court.

The facts are found as stipulated and need not be repeated in detail. It is sufficient here to say that the plaintiff is a corporation engaged in mining and selling coal, having during the times here involved, a paid-up stock of $300,000 and a 6% bonded indebtedness of $250,000, on December 31, 1913, 1914, 1915, and 1916, and of $229,000 on December 31, 1917. Due to poor business it was not able to pay the interest on its bonds during 1913, 1914, 1915, .and 1916, but was prosperous during 1917, and paid not only the interest for that year but the accrued interest for the four preceding years. In making its tax return for 1917, which it did in March, 1918, it claimed a deduction, for the purpose of arriving at net profits, of all the interest so paid in that year, and on that basis there was levied on its income a- tax of $14,726.32, which it paid. Subsequently, upon an audit of its accounts by examiners of the Internal Revenue Bureau, it ivas concluded that its return for 1917 was erroneous, and it was required to make- an amended return eliminating credit claimed for interest to the amount of $67,187.50, paid in 1917, but accrued in the four preceding years, which it did under protest, and it was assessed an additional tax of $40,868.72 with interest. It made application for an abatement which was refused, and on July 13, 1921, under protest, set out in the findings, and under threat of summary proceedings for its collection, it paid said additional amount with interest, amounting in the aggregate to $44,138.61. It filed on July 21, 1921, an application for refund, set out in the findings, and that application not having been acted on by the Commissioner of Internal Revenue, so far as this claim is concerned, it commenced *490this suit on May 21, 1923. A refund in July, 1922, on account of erroneous assessment does not affect the question for consideration.

That question is apparent. Did the plaintiff have a right, in making its tax return for 1917, to deduct from its gross income interest on its bonded indebtedness, accrued in each of the years 1913, 1914, 1915, and 1916, but paid in 1917. in arriving at its taxable net income ?

The question does not seem to us to present much of difficulty but there is strong contention adverse to plaintiff’s claimed right.

By reason of the fact that this suit was brought because the Commissioner of Internal Revenue had not acted on plaintiff’s claim for refund within the statutory period and not because he specifically rejected it, we have no statement from that bureau, in connection with the claim for refund, indicating its theory as to .plaintiff’s claimed rights and must go back, for an expression on the subject, to the rejection of plaintiff’s claim for an abatement, involving necessarily the same question, and, doing so, we find one theory announced by the Bureau of Internal Revenue and another and different one presented by the defense in this court, neither suggesting even the theory of the other.

In rejecting the claim for abatement the commissioner advised the plaintiff that “the interest *accrued and paid*[italics ours] during the year 1917 is the only portion,” etc., and the use of this language as applicable to the year 1917 suggests that consideration and comparison of other statutes with the one applicable to the year in question may be enlightening. It may be entirely true that the act with which we necessarily deal is not ambiguous and that therefore rules of construction need not be invoked, but the italicized phraseology of the commissioner becomes significant when we consider where, in the law, it is found and where not found, and we are hardly justified in determining the case solely on the theory here presented if the Bureau of Internal Revenue acts on another.

The revenue act of October 3, 1913, 38 Stat. 114 at 17.3, provides for the deduction, in the ascertaining of net income of corporations, of

> *491“The amount of interest *accrued and paid*[italics ours] within the year on its indebtedness to an amount of such indebtedness not exceeding one-half of the stun of its interest bearing indebtedness and its paid up capital stock outstanding at the close of the year.”

There can be no doubt that under this act there could be no interest deduction unless it *both*accrued and was paid during the year. It can not be conceived that Congress meant any thing else, or that it did not use both words advisedly.

But in the act of September 8, 1916, 39 Stat. 156 at 768, it is provided that the net income shall be ascertained by deducting from the gross income, among other things,

> “The amount of interest paid within the year on its indebtedness to an amount of such indebtedness not in excess of the sum of *(a)*the entire amount of the paid up capital stock outstanding at the close of the year * * * and (b) one-half of the interest bearing indebtedness then outstanding.”

The phraseology used in dealing generalty with the subject indicates that the usual practice was followed in writing the latter act of using the former as a guide which serves simply to strengthen the conclusion that Congress deliberately and intentionally dropped out the words “accrued and ” and retained in the latter act the word “ paid ” only. The conclusion to be drawn from this modification is too apparent to require discussion.

The act of March 3, 1917, 39 Stat. 1000, made no change in the respect under consideration and the act of October 3, 1917, 40 Stat. 300 at 334, repeating the provision of the act of 1916 as to deductions, with some modifications, again used only the word “ paid ” and repeated the same limitation as to the amount of the indebtedness the interest on which might be deducted.

We have no interest, for the purpose of this case, in legislation further than that cited, but the disposition of Congress to consider and liberalize this matter of deductions, as it had done by the change above indicated, is further shown by the revenue act of 1918 (act of February 24, 1919, 40 Stat. 1057 at 1077), wherein deduction is authorized of *492interest on indebtedness *paid or accrued*[italics ours] and the former limitation as to amount is omitted. The tendency is further indicated in the next succeeding act.

There seems room for no other conclusion than that under the revenue acts of 1916 and 1917 deduction was authorized of interest on indebtedness “ paid ” during the year whether accrued during that or preceeding years.

There remains the other contention, presented in this court, based on the limitation as to the amount of indebtedness, the interest on which may be deducted in arriving at net income. It was a provision which accomplished a purpose in that it imposed a limitation on corporations having a small capital stock but reaping excessive profits from the employment of borrowed capital in large and disproportionate amounts.

It is not contended that the deduction claimed by the plaintiff of interest accrued as well as paid during the year 1917 was not well within the limitation. It is' the theory, as we understand it, that the amount of interest paid by the plaintiff during 1917 and for which deduction was claimed, being the aggregate of the interest accrued during the years from 1913 to 1917, inclusive, was in excess of the limitation, and that is true if, under the circumstances, the deduction on account of interest paid during 1917, although largely accrued during preceding years, is to be limited by one computation at 6 per cent on one-half the indebtedness and the entire capital stock, although that theory is not so clearly expressed in defendant’s brief that we may feel sure of it.

Having recited the limitation provided in the applicable act it is said that as $229,000, the amount of plaintiff’s bonded indebtedness on December 31, 1917, was not in excess of the limitation, that is the amount upon which its interest deduction is to be computed, which, it is said, results in a sum which “is somewhat less than $81,977.50,” the latter sum at the prescribed rate of interest indicating “ an indebtedness of about $1,366,291.66, and such the plaintiff did not have.” Referring then to the acts of 1916 and 1917, it is said that “ it is thus seen that Congress has placed a *limit upon the amount of indebtedness*upon which the plaintiff corporation may be allowed an interest deduction from the *493gross amount of its income for the taxable year 1917. Such being the law, the plaintiff’s contention that it was entitled to deduct from such income for the year 1917 the sum of $67,187.50 as interest accruing for the years 1913 to 1916, inclusive, is not well founded.” We have thus stated the defendant’s contention as set out in its brief that we may not, through misapprehension, summarize it wrongly.

The defendant, as stated, has not here suggested the question first discussed, but if we comprehend the effect of the contention above quoted, it is but ai-riving at the same conclusion by the traveling of a different route for it apparently, by virtue of the limitation provision, bars any claim in excess of 6 per cent, once computed, on the amount of the indebtedness, the equivalent m effect to a holding that there could be no deduction in excess of the interest accrued and paid that year'. But if the bar is to be erected, not upon the theory that paid during the year means accrued and paid but upon the theory of the limitation in the act, which is a limitation on the principal sum upon which interest may be computed as a measure of allowable deduction, the limitation is not determined by the amount of the indebtedness but by one-half of the indebtedness and the entire paid up capital stock, the sum of which is $414,500.00, and 6 per cent of which is $24,870.00, and plaintiff, being entitled to deduct interest paid up to that amount, would be entitled to a deduction of a part of the interest accrued previous to the year of payment but not all, a situation which could hardly have been contemplated.

If that is not the operation of the act by reason of the limitation and the conclusion we have reached as to the effect of the use of the word “ paid ” only, instead of “ accrued and paid” is correct, it must follow that plaintiff is entitled to deduction of the accruals of the years 1913 to 1916, inclusive, paid in 1917.

The whole trend of the legislation cited seems explainable only on the theory of such an intention on the part of Congress and it is to be worked out, within the provisions of the act, by the application of the limitation separately to the deduction claimed for each year', and, indicating the justice and fairness of this construction, it is to be said that it but pre*494serves a right in the taxpayer without materially diminishing the revenue the Government would have received had circumstances permitted the exercise of the right each year, although it is, of course, to be added that whatever, if any, effect it may have on Government revenues can not impair any right the plaintiff had under the law.

The policy on the part of Congress to extend the time within which taxpayers might reclaim taxes paid has been frequently manifest and rights in that respect, once lost, have been restored by 'subsequent legislation. The policy later adopted, while not applicable as matter of law, is significant in that under it the plaintiff during its years of stress, would have been allowed each year to claim deduction on account of interest accrued although not then paid."

The more liberal and equitable policy, operating to put the less prosperous corporations on substantially the same basis as the more prosperous ones and first manifest in the Revenue Act of 1916 by the elimination of the words “ accrued and,” would be wholly nullified if this plaintiff were not permitted to deduct theretofore accrued interest paid in 1917. We have concluded that such is its right and have directed judgment accordingly.

Judgment for plaintiff in the sum of $36,996.75.

Graham, *Judge;*Hay, *Judge;*Booth, *Judge;*and Campbell, *Ghief*Justice, concur.