#### FRANKLIN D’OLIER, BURTON ETHERINGTON, JAMES D’OLIER, SAMUEL M. D. CLAPPER, WINTHROP MINCHER, AND THOMAS P. WALKER, LATE PARTNERS DOING BUSINESS UNDER THE FIRM NAME OF FRANKLIN D’OLIER & COMPANY, v. THE UNITED STATES

[No. C-1177.

Decided March 15, 1926]

*On the Proofs*

*Excess-profits tarn; accrual basis; deduction of taco payable in following year.*— Where a partnership in 1918 makes return of its excess-profits tax for the year 1917 on an accrual basis, and during the y£ar 1917 withdraws certain amounts from its invested capital, the Commissioner of Internal Revenue is authorized, for the purpose of computing the tax, to reduce the invested capital shown in said return for 1917 by deducting, as of the dates of withdrawal, that part of the excess-profits tax for the taxable year estimated to have accrued at that date, although such tax was not assessed and did not become due and payable until a year after the withdrawal.

*The Reporter's*statement of the case:

*Mr. Thomas G. Haight*for the plaintiffs. *Messrs. J. Marvin Haynes*and *Robert H. Montgomery*were on the briefs.

*Mr. Fred K.*Dyar, with whom was *Mr. Assistant Attorney General Herman J.*Galloway, for the defendant.

The court made special findings of fact, as follows:

I. The plaintiffs, Franklin D’Olier, Burton Etherington, James D’Olier, Samuel M. D. Clapper, Winthrop Mincher, and Thomas P. Walker, all of whom are citizens of the United States, were formerly engaged in business in the city of Philadelphia, Pa., as partners under the firm name of Franklin D’Olier & Co.

*896II. From January 1, 1917, up to and including April 30 of that year, three of the plaintiffs, Franklin D’Olier, Burton Etherington, and James D’Olier, were engaged in business in the said city of Philadelphia as partners under the firm name of Franklin D’Olier & Co. On the last-mentioned date the said partnership was dissolved, and on May 1, 1917, a new partnership was formed by all of the plaintiffs above named to do business under the same firm name.

III. The plaintiffs as such partners took over the business and all of the assets and assumed all of the liabilities of the said dissolved partnership, including all Federal taxes chargeable and assessable against the old partnership from January 1, 1917, to April 30, 1917, inclusive, and thereafter continued to carry on the said business.

IV. Returns of income for the year ended December 31, 1917, covering the business of both of said partnerships were filed in due course, and excess-profits taxes were assessed thereon against the said partnerships as follows:

(a) For the period commencing Jan. 1, 1917, and ending Apr. 30, 1917_$180, 617.18

(5) For the period commencing May 1, 1917, ajyl ending Dec. 31, 1917_ 138,045.42

V. The taxes so assessed were in due course paid by plaintiffs.

VI. Subsequent to the payment of said taxes, and on or about February 18, 1921, two additional taxes were assessed for the year ending December 31, 1917, one against the old partnership amounting to $7,799.28, and the other against the new partnership amounting to $2,837.43.

VII. A claim for abatement of the said assessments was in due course filed by the plaintiffs with the Commissioner of Internal Revenue on or about February 28, 1921, for the total of the said two assessments, viz, $10,636.71.

VIII. On or about February 27, 1922, said claim for abatement was allowed to the extent of $9,600 and rejected as to the balance of $1,036.71, the commissioner having found that there was an over assessment of $1,800.72 for the first of the above-mentioned periods and for the second an additional tax due of $2,837.43. A statement showing the taxes *897due for the said periods according to the said return and as .revised by the Commissioner of Internal Revenue, and the .resulting overassessment and additional tax, respectively, is .as follows:

IX. On February 28, 1922, plaintiffs paid under protest •.to the collector of internal revenue for the first district of .Pennsylvania the said balance of tax amounting to $1,036.71 (being the difference between the said sums of $2,837.43 ..and $1,800.72), together with interest thereon to date of payment amounting to $124.41, making a total payment iof $1,161.12.

X. The old partnership as well as the new partnership kept its books of account and reported its income for Fed.eral taxation purposes on an accrual (not cash receipts and •disbursement) basis of accounting. All charges against income applicable to the year 1917 were reported and taken as a deduction within the year 1917 without regard as to whether such charges were paid within the year 1917 or -were paid in subsequent years.

XI. On May 19, 1917, plaintiffs withdrew from the said '.business $40,000, and on June 14, 1917, withdrew $50,000. The net income which had accrued at each of said dates, respectively, before deducting anything for Federal excess-profits taxes for the year 1917 was $29,039.55 and $41,946.01, respectively. In computing said accrued net income as at «each of the two respective dates plaintiffs took into account all accrued but unpaid charges against income at the time • of withdrawals with the sole exception of estimated pro-_ rated Federal excess-profits taxes for the year 1917.

XII. The Commissioner of Internal Revenue, for the purpose of computing invested capital of the said partner*898ship for the year 1917, reduced the said actual accrued income at those dates respectively to the extent of the prorated amount of Federal excess-profits taxes for 1917 which he estimated had accrued up to those dates respectively on the said income, and thus brought about a reduction in the invested capital of the said partnership for the said year of $13,458.73. A statement of the computation of the Commissioner of Internal Revenue by which he effected said reduction in invested capital is as follows:

A computation of the reduction in invested capital without deducting the said estimated prorated Federal excess-profits taxes which it is alleged had accrued up to those dates, respectively, is as follows:

XIII. Adjustments to invested capital on dates of withdrawals as made by the commissioner other than the one made for estimated prorated Federal excess-profits taxes are not disputed by plaintiffs.

XIV. The said taxes for 1917, to the extent of which the said commissioner reduced the said actual accrued income, *899did not become due and payable until the 15th of June, 1918, or thereafter.

XV. The above-mentioned reduction in invested capital of the difference between $24,642.65 and $11,183.92, or $13,458.73, led to the assessment of the said additional excess-profits tax of $1,036.71'.

XVI. On or about February 28, 1923, plaintiffs filed with the collector of internal revenue for the first district of Pennsylvania a claim for refund of the said sum of $1,036.71, together with the sum of $39.97, claimed to have been erroneously paid at the time the taxes shown on plaintiffs’ original return were first paid. Said claim was, on or about September 1, 1923, entirely disallowed by the commissioner, and the whole of said sum of $1,036.71, together with interest amounting to $124.41, is now retained and held by the United States Government.

The tax return of the old partnership from January 1 to April 30, 1917, is made a part of these findings by reference.

The tax return of the new partnership from May 1, 1917, to December 31, 1917, inclusive, is made a part of these findings by reference.

The court decided that plaintiffs were not entitled to recover.

Booth, Judge,

delivered the opinion of the court:

The plaintiffs herein are partners doing business under the firm name of Franklin D’Olier & Co. The present firm is the successor of a firm of similar name. Upon the dissolution of the old firm the present partnership was organized composed of all the members of the preceding partnership and three additional ones. The plaintiffs took over all the assets of the old firm and assumed all its liabilities, including payment of Federal taxes. The only change involved was the admission of three new members to the firm. This change occurred May 1, 1917. The contested issue herein focuses upon the following state of facts: The new partnership, on May 19, 1917, 18 days after its formation, withdrew from the business $40,000 and again on June 14, 1917, withdrew $50,000. The accrued net income, free from a *900charge of accrued Federal taxes, on May 19, 1917, was $29,039.55. On June 14, 1917, it was $26,972.72. The partnership, with the approval of the commissioner, kept its books of accounts on an accrual basis. Section 13 (d) of the revenue act of 1916 (39 Stat. 771). The commissioner in auditing the tax return of the partnership for 1916 for the purpose of computing the invested capital of the firm reduced the accrued net income applicable to the payment of the forty and fifty thousand dollar dividends declared by the amount of Federal taxes accrued to the dates when the same were paid, resulting in the assessment of an additional excess-profits tax after the adjustment of an overassessment of $1,036.71. No jurisdictional question is raised.

This suit is for the recovery of the additional excess-profits tax paid under protest. As a matter of mathematical computation, the plaintiffs insist that within the limits of the revenue law they were entitled to a reduction of invested capital to the extent of a simple subtraction of the accrued net profits, viz, $20,532.90, on May, 19, 1917, from the $40,-000 dividend distributed that day, i. e., $19,467.10, whereas the Government .insists that from the net income thus accrued there must be taken 7£f of the amount of excess-profits tax accrued on the date of the withdrawal, thereby reducing by the transaction the invested capital of the firm to the extent only of $12,041.69. Applying the same formula, viz, a proportionate reduction of the net income applicable to the payment of the $50,000 dividend, i. e., 6-J-& part of accrued excess-profits taxes, to the June 14, 1917, transaction, the commissioner determined that invested capital of the firm was reduced to the extent of $12,600.96 only. See Finding XII.

The plaintiffs’ contention is precisely stated in the brief: “ Whether the commissioner could legally reduce plaintiffs’ invested capital for 1917 by deducting, as of the dates of the withdrawals, a sum estimated to be that part of the excess-profits tax for that year which had accrued at those dates, respectively, although such tax was not assessed and did not become due and payable until a year after the withdrawals.”

*901We think the contention has been decided by the Supreme Court in the cases of *United States*v. *P. Chauncey Anderson et al.*and *United States*v. *Yale da Towne Manufacturing Co.,*269 U. S. 422. The principle involved in the disposition of the above cases is applicable here; and it would serve no useful purpose to repeat the arguments advanced. The petition must be dismissed. It is so ordered.

Geaham, *Judge;*Hay, *Judge;*HowNey, *Judge;*and Camp-, bell, *Ghief*Justice, concur.