#### AUBURN & ALTON COAL CO. v. THE UNITED STATES

[No. D-242.

Decided January 18, 1926]

*On the Proofs*

*Income tax; deductions; sec. 204, revenue act of 1918.-*— Losses in the year 1919, due! to the sale of all of plaintiff’s property used in the operation of its business, do not result from operation, and are not the net losses referred to in section 204 of the revenue act of 1918 as deductible from the income-tax return for the preceding year.

*The Reporter’s*statement of the case:

*Mr. Haines H. Hargrett*for the plaintiff. *Messrs. Robert N. Miller, Stuart Chevalier,*and *Harry Friedman*were on the briefs.

*Mr. Ralph C. Williamson,*with whom was *Mr. Assistant Attorney General Herman J. Galloway,*for the defendant.

The court made special findings of fact, as follows:

I. The plaintiff is an Illinois corporation, organized on August 21, 1900. Its articles of incorporation provide that “ the object for which it is formed is mining and selling coal and other minerals and the manufacture of brick and tile.” From the date of organization until September 30, *4391919, it was actively engaged in the business of mining and selling coal.

II. Upon organization and from time to time thereafter the plaintiff purchased coal mines, mining rights, mine equipment, and other property and property rights needed and used by it in the operation of its business, its investments therefor aggregating the sum of $227,399.02. No part of same was acquired for the production of articles contributing to the prosecution of the World War.

III. On September 30, 1919, the plaintiff sold the aforesaid assets, less depreciation (together with mine supplies and stores, etc., of the net value of $6,144.07), to L. J. Pulliam, of Springfield, Ill., for the sum of $100,000.00. It did not, however, sell its other assets, such as bonds, notes, and accounts receivable, and choses in action, amounting in value to not less than $40,000.00. The purchaser was not connected in any way with the plaintiff or with its stock- • holders. The parties dealt at arms’ length, and the purchase price represented the utmost that the plaintiff could obtain for the property at that time.

IV. Upon said sale, and as a result thereof, the plaintiff suffered a loss of $75,789.50, which was a loss deductible from its 1919 income, under the provisions of section 234 (a-4) of the revenue act of 1918.

V. During the year 1919 the plaintiff realized from other transactions a profit of $12,288.11, so that the actual loss sustained by the plaintiff during that year amounted to $63,501.39.

VI. In the previous year, 1918, the plaintiff’s net income, as defined in section 232 of the revenue act of 1918, was $141,999.84. Its invested capital for the year, as defined in section (a) of the revenue act of 1918, was $177,511.22. Its “ war profits credit ” for the year, as defined in section 311 (a) of the revenue act of 1918, was $20,751.12.

VII. The plaintiff filed with the collector of internal revenue at Springfield, Ill., on May 16, 1919, a return of its income for the year 1918, and upon the same there were assessed income and profits taxes in the sum of $96,729.01, which amount the plaintiff paid to the said collector as follows: On March 15, 1919, $24,180.66; .on May 16, 1919, *440$1.60; on June 15, 1919, $25,000.00; on September 15, 1919, $23,364.52; on December 15, 1919, $24,182.23.

VIII. On March 10, 1920, the plaintiff filed with the said collector of internal revenue the following documents, made out upon forms supplied by the Commissioner of Internal Eevenue and in all respects conforming to and complying as to form with the requirements of the law and the rules of the Treasury Department, to wit:

*(a)*A return of income for the year 1919, showing, according to the facts alleged therein, that the plaintiff had realized no profit during that year, but had suffered a net loss of $74,269.15.

(5) An amended return of income for the year 1918, deducting from its income for that year the amount of its loss in 1919, and recomputing its 1918 taxes, to the end that the said amended return indicated that if deduction for the 1919 loss, referred to in paragraph 4 above, should be allowed, the amount of income and profits taxes due by the plaintiff for the year 1918 should be $35,529.86, or $61,199-.15 less than plaintiff actually paid.

*(c)*A claim for refund, made out on Form 46, revised, in full compliance with the law and the regulations of the Treasury Department, asking that the aforesaid sum of $61,199.15 be refunded to the plaintiff.

These figures differ from those stipulated in paragraphs IV, V, and VI above, because the latter were based upon the plaintiff’s books, whereas the former are based upon the audit made by the Bureau of Internal Eevenue.

IX. Thereafter the plaintiff submitted proof of the foregoing facts to the Commissioner of Internal Eevenue, but on March 11, 1924, the said commissioner rejected and disallowed the aforesaid claim for refund, not because of any insufficiency of proof or unsatisfactory showing of fact, but because of his conclusion of law that under section 204 of the revenue act of 1918 a net loss attributable to the sale of capital assets of a corporation, other than assets described in subdivision a-2 of that section, is not a “ net loss ” which the act defines and permits to be deducted from the income of the previous year.

*441X. If, under a correct interpretation of section 204 of the revenue act of 1918, the loss sustained by the plaintiff upon the sale of its capital assets in the year 1919 was a “net loss ” or part of a “ net loss ” as defined in section 204 of the act, the-plaintiff is entitled to judgment in the principal sum of $46,901.10 together with interest thereon at the rate of one-half of 1 per centum per month from March 10, 1920. Otherwise judgment should be entered for the defendant.

XI. The plaintiff has filed, and there is now pending before the Commissioner of Internal Revenue, an application for special assessment of its 1918 war-profits and excess-profits taxes under the provisions of sections 327 and 328 of the revenue act of 1918. If such application should be granted the amount specified in paragraph 10 above must be recomputed.

XII. The plaintiff is the owner of the claim here sued upon. There has been no assignment or transfer of the same, or of any part thereof, or of any interest therein.

XIII. Nothing herein contained shall prevent either party from introducing evidence of other facts not inconsistent herewith.

The court decided that plaintiff was not entitled to recover.

Geaham, Judge,

delivered the opinion of the court:

This suit grows out of a question as to the meaning of section 204 of the revenue act of 1918, 40 Stat. 1067. Paragraph (b) of the section provides:

> “ If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this-title and by Title III for such preceding taxable year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. If such net loss is in excess of the net income *442for such preceding taxable year, the amount of such excess shall under regulations prescribed by the commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year.”

The allowable deduction provided for in the foregoing paragraph must be “ a net loss,” and to ascertain the scope of these words it is necessary to refer to paragraph (a), which is as follows:

> “ That as used in this section the term *‘*net loss ’ refers only to net losses resulting from either (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment, or other facilities constructed, installed, or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) of subdivision (a) of section 234) over the sum .of the gross income plus any interest received free from taxation both under this title and under Title III.”

The facts present but one question, whether the loss for which the plaintiff claims a deduction was a net loss within the meaning of said paragraph (a). If the loss claimed as deductible was not a net loss within the meaning of that paragraph, the plaintiff is not entitled to recover; if it was, it is entitled to recover the sum of $46,901.10.

The plaintiff is a corporation organized under the laws of the State of Illinois on August 21, 1900. As stated in its charter, “ The object for which it is formed is mining and selling coal and other minerals and the manufacture of brick and tile.”

The plaintiff paid income and profit taxes in 1919 for the taxable year 1918. It suffered losses in the year 1919, due to the sale of all its coal mines, mining rights, mining equipment, and other property and property rights used in its business, including mine supplies and stores. No part of the foregoing property was “ acquired for the production of articles contributing to the prosecution of the war.”

The question presented is whether the loss on the sale of the property is to be taken as a “ net loss ” within the mean*443ing of said paragraph (a), which entitles plaintiff to its benefit, i. e., a deduction of the loss sustained in 1919 from its net income for 1918.

-Paragraph (a) defines “net loss” as loss resulting from “ (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant * * * constructed, installed, or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war.”

The court has found, as stipulated by the parties, that no part of said property was acquired for the production of articles contributing to the prosecution of the war, which disposes of the claim of plaintiff to a deduction under (2) of paragraph (a).

The language of the statute is not ambiguous nor would it seem that its meaning can be properly said to be doubtful. It was the evident intention of Congress, where property had been acquired for the production of articles contributing to the prosecution of the war, to allow a deduction for loss growing out of the sale of such property. The necessary inference is that a deduction was not intended to be allowed for property not so acquired, as is the case of the property sold by plaintiff on which it is claiming a loss. Had Congress intended to allow deductions for loss sustained on the sale of all property, whether acquired for the production of articles to be used in the prosecution of the war or not, the act would have so stated.

We therefore come to consider (1) of paragraph (a). Without at present discussing the question whether a loss from a sale of his entire “ plant, buildings, machinery, equipment, or other facilities,” by a person is a loss resulting from the operation of his business “ regularly carried on,” it is plain from the language of paragraph (a), being, as it is, in the alternative, that a loss from the sale of a “ plant, buildings, machinery, equipment, or other facilities,” was not intended to be covered by the expression “ net loss * * * resulting from the operation of any business regularly carried on.” The fact that Congress did specially provide for a deduction on account of a loss by sale of a “ plant, build*444ings, machinery, equipment, or other ¡facilities * ** **acquired for the .production of articles contributing to the prosecution of the * * * war,” precludes the contention that the sale of a plant, buildings, machinery, and other equipment not so acquired is covered by the expression “ net loss.”

But, assuming that “ net loss ” can be held to cover the sale of a plant, buildings, machinery, equipment, or other facilities, it can only be reasonably held to include the sale of property acquired for the production of articles for the prosecution of the war, and the property involved here was not acquired, as stated, for any such purpose. This is sufficient to dispose of the question and to prevent recovery by the plaintiff.

If anything further were needed to sustain this conclusion, it is found in the language of (1) of paragraph (a), which is confined to net losses resulting from the “operation of any business regularly carried on.” It would at least be somewhat straining the regularly accepted meaning of this language to say that a loss resulting from the sale of all of its plant, buildings, machinery, equipment, or other facilities, which meant a suspension of business, was a loss sustained in the regular conduct of the business. It was a part in fact of an operation ending business, at least temporarily, and certainly as to this plant, etc. This, however, is strengthened by the provision of (2) of paragraph (a), which alternatively provides for a deduction growing out of the sale of a plant, etc., acquired for the production of articles for the prosecution of the war.

There is some discussion in the briefs as to the effect of section 204 of the revenue act of 1921, which reads as follows:

> “(a) That as used in this section the term ‘net loss’ means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets used in the conduct of such trade or business).”

*445This act is not to .control the construction of the act of 1918. The question before us is the meaning of the latter act. ' But the act of 1921 is really explanatory of the conclusion reached. It shows one of two things, either that' Congress had changed its purpose so as to include in net losses loss sustained from the sale of capital assets; that it found that under the act of 1918 such losses were not included in the language “ net losses,” in the operation of the business as regularly carried on, and it was to so include them that the change was made; or to allow a deduction for losses sustained in the sale of property, machinery, etc., even though such property was not acquired for the production of articles for the prosecution of the war.

The petition should be dismissed, and it is so ordered.

Hat, *Judge;*Downet, *Judge;*and Campbell, *Chief Jus*tice, concur.