#### CURTIS & CO. MFG. COMPANY v. THE UNITED STATES1

[No. D-814.

Decided April 19, 1926]

*On the Proofs*

*War income tax; revenue act of October S, 1911; deductions for part of calendar year.-*— Where the income and excess-profits tax return is for the fiscal year June 1, 1916, to May 31, 1917, the 4 per cent war income tax for said period, imposed and assessed under sections 4 and 1211 of the revenue act of October 3, 1917, is to be calculated upon the remainder of that proportion of the net income for the entire fiscal year which lies in the calendar year 1917, after deducting the excess-profits taxes paid on said proportion.

*The Reporter's*statement of the case:

*Mr. S. L. Smarts*for the plaintiff. *Mr. Charles Warren*was on the brief.

*Mr. Alexander H. MeCormicJc,*with whom was *Mr. Assistant Attorney General Herman J. Galloway,*for the defendant.

The court made special findings of fact, as follows:

I. The petitioner, Curtis & Co. Manufacturing Company, is and was at all times hereinafter mentioned, a corporation duly organized and existing under and by virtue of the laws of the State of Missouri, is, and was a citizen and resident of said State and of the United States, and has and had its domicile and principal place of business in the city of Wells-ton, county of St. Louis, State of Missouri.

II. The city of Wellston, county of St. Louis, State of Missouri, is, and was at all times herein mentioned, within the district of the office of the collector of internal revenue located in the city of St. Louis, State of Missouri.

III. Pursuant to the revenue acts of September 8, 1916, and October 3, 1911, as enacted by the Congress of the United States, the petitioner, Curtis & Co. Manufacturing Company, duly filed its income and excess-profits tax returns for the period June 1, 1916, to May 31, 1917, inclusive.

*116IY. The petitioner made its return of income and excess-profits taxes under the revenue acts on the basis of a fiscal year running from June 1st to May 31st of the succeeding year.

V. The petitioner in calculating its income and excess-profits tax returns for the period from June 1, 1916, to May 31, 1917, calculated its four per cent war income tax for said period, under sections 4 and 1211 of the revenue act of October 3, 1917, on the amount resulting from deducting from five-twelfths of its total net income for its said fiscal year the entire amount of excess and profits taxes paid by it on five-twelfths of its total net income for said fiscal year.

VI. The petitioner paid, within the time required by law, as due to the collector of internal revenue at the district of St. Louis, all of its said income and excess-profits taxes for its said fiscal year, including the said four per cent war income tax, in accordance with the method of calculation set forth in the preceding paragraph.

VTI. On the 11th day of November, 1919, the Commissioner of Internal Eevenue assessed against the petitioner, under color of authority of sections 4 and 1211 of the revenue act of October 3, 1917, in addition to the four per cent war income tax returned and paid by the petitioner for its said fiscal year, the sum of $25,042.86, which said additional four per cent war income tax was calculated by said Commissioner of Internal Eevenue upon five-twelfths of the amount resulting from deducting from the total net income of Curtis & Co. Manufacturing Company for its said fiscal year the excess-profits tax paid by Curtis *&*Co. Manufacturing Company upon five-twelfths of its said income for its said entire fiscal year.

VIII. On November 21,1919, in response to the assessment by the Commissioner of Internal Eevenue covered by the preceding paragraph, the petitioner, Curtis & Co. Manufacturing Company, paid to the collector of internal revenue at the city of St. Louis the sum of $25,042.86.

IX. On December 22, 1920, the petitioner, within the time required by law, duly filed its claim for refund of income and excess-profits taxes alleged by it to have been errone*117ously and illegally assessed and collected from it for its said fiscal year in the sum of $678,795.05, which said claim for refund was based on two claims, to wit:

*(a)*That the Commissioner of Internal Kevenue had erroneously and illegally assessed and collected from petitioner the sum of twenty-five thousand forty-two dollars and eighty-six cents ($25,042.86), resulting from the action of the Commissioner of Internal Revenue in calculating the four per cent (4%) war income tax upon five-twelfths (5/12) of the amount resulting from deducting from the total income of said entire fiscal year, the excess-profits tax upon the income of five-twelfths (5/12) of said fiscal year, whereas such tax, under a proper construction of sections 4 and 1211 of the revenue act of October 3, 1917, should have been calculated by the Commissioner of Internal Revenue by deducting from five-twelfths (5/12) of the income of said fiscal year, the excess-profits tax calculated on such five-twelfths (5/12) of said income, and applying the said four per cent (4%) war income tax to that result; and

*(h)*That the excess-profits tax, legally due and collectible from petitioner under the said revenue acts, had been unjustly, wrongfully and erroneously and illegally assessed and collected, in that the excess-profits tax of Curtis & Co. Manufacturing Company had been assessed under section 201 of the revenue act of 1917, whereas it should have been assessed under the provisions of section 210 of the revenue act of 1917.

X. On the 6th day of December, 1921, the claim of the petitioner for refund, so far as it was based on the second ground above referred to, was allowed in part by the Commissioner of Internal Revenue, but the petitioner’s claim for refund, so far as it was based on the first ground above referred to, was wholly disallowed and rejected by the Commissioner of Internal Revenue in calculating and fixing the total amount of refund due to the petitioner. As a result, however, of the allowance of the partial refund based on the petitioner’s second ground, its claim based on the first ground became reduced from the sum of $25,042.86 to the sum of $16,087.65.

XI. The Commissioner of Internal Revenue in calculating said 4 per cent tax, based upon the amount of income and excess-profits tax found on the 6th day of December, 1921, by the Commissioner of Internal Revenue to be law*118fully payable and collectible from the petitioner, Curtis & Co. Manufacturing Company, for its said fiscal year, arrived at the result, as follows:

Net income for entire fiscal year, June 1, 1916, to May 31, 1917-$4, 562,255.42

Less excess-profits tax paid_ 689, 470. 85

Remainder subject to 2 per cent tax_ 3, 872, 784. 57

Five-twelfths of said remainder subject to 4 per cent tax- 1, 613, 660.24

Amount of tax at 2 per cent on $3,872,784.57_ 77,455.69

Amount of tax at 4 per cent on $1,613,660.24_ 64,-546. 41

Total income tax for entire fiscal year_ 142,002.10

XII. Petitioner claims that said tax should have been calculated, as follows:

Net income for entire fiscal year, June 1, 1916, to May 31, 1917-$4, 562,255.42

Less excess-profits tax paid_ 689,470. 85

Remainder subject to 2 per cent tax_ 3, 872, 784. 57

Part of net income subject to excess-profits tax (five-twelfths) - 1, 900, 939. 76

Less excess-profits tax paid_ 689, 470. 85

Remainder subject to 4 per cent tax_ 1,211, 468. 91

Amount of tax at 2 per cent on $3,872,784.57_ 77, 455. 69

Amount of tax at 4 per cent on $1,211,488.91_ 48, 458. 76

Total income tax for entire fiscal year_ 125, 914.45

Petitioner’s claim is for the difference between $142,002.10 and $125,914.45, viz. $16,087.65, together with interest thereon at the rate of 6 per cent per annum from November 21, 1919.

The court decided that plaintiff was entitled to recover.

1

 Writ of certiorari denied.

DowNey, Judge,

delivered the opinion of the court:

The suit is to recover taxes alleged to have been illegally assessed and collected, the particular tax involved being the 4 per cent additional or war income tax imposed by section 4 of the revenue act of October 3, 1917, .40 Stat. 300, as affected in its assessment by section 1211, which amended the act of 1916 by adding thereto section 29.

*119The facts as found by the court are in accordance with a stipulation by the parties and the point at issue, which is as to the proper method of computing the tax, is quite clearly made to appear by Findings XI and XII, which set out an exemplification both of the method adopted and followed by the Revenue Bureau and that contended for by the plaintiff. The difficulty arises by reason of the fact that the plaintiff company is not a calendar year corporation but a fiscal year corporation, whose fiscal year began with June 1 and ended with May 31. The issue is, therefore, as to the 4 per cent tax assessed and collected for the five months of plaintiff’s fiscal year 1917 which fell within the calendar year 1917.

It seems scarcely necessary to quote in full all the provisions of the revenue acts bearing upon the question or to follow in detail the elaborate arguments on both sides. The 2 per cent income tax was in force in 1916 as well as 1917. The 4 per cent additional income tax provided by section 4 of the act of 1917 was a “ like tax ” of 4 per cent, in addition to the 2 per cent, but was specifically upon “the income received in the calendar year nineteen hundred and seventeen ” made more definite in its application by the provision following, that “ if it has fixed its own fiscal year, the tax imposed by this section for the fiscal year ending during the calendar year nineteen hundred and seventeen shall be levied, assessed, collected, and paid only on that portion of its income for such fiscal year which the period between January first, nineteen hundred and seventeen, and the end of such fiscal year bears to the whole of such fiscal year.” Section 1211 added to the act of 1916 by way of amendment six sections, including section 29, which provided that “ in assessing income tax the net income embraced in the return shall also be credited with the amount of any excess-profits tax imposed by act of Congress and assessed for the same calendar or fiscal year upon the taxpayer.”

There is no question as to the amount of excess-profits tax to be credited, there is no question as to the amount of net income for plaintiff’s fiscal year ending May 31, 1917, and parties are in agreement as to the computation of the 2 per cent tax which was of course upon the whole net income for *120the fiscal year after crediting the excess-profits tax. But in computing the 4 per cent tax for the 5 months of plaintiff’s fiscal year 1917 falling within the calendar year 1917, different methods of computation aré resorted to in this, that the Bureau of Internal Bevenue first takes plaintiff’s net income for its entire fiscal year, deducts therefrom the excess-profits tax and computes the 4 per cent tax on five-twelfths of the remainder, resulting in a tax of $64,546.41; while the plaintiff, as the basic sum of its computation, takes five-twelfths of the plaintiff’s income for the fiscal year, deducts therefrom the excess-profits tax and computes the 4 per cent tax upon this remainder, resulting in a tax of $48,458.76.

It seems to us that for at least one very apparent reason the computation of the Bureau of Internal Bevenue is upon an erroneous basis. When it took the entire income of the plaintiff for its fiscal year 1917 and deducted therefrom the excess-profits tax and computed the 4 per cent tax on five-twelfths of the remainder, it carried into its computation in its basic figures seven-twelfths of plaintiff’s net income for its fiscal year in question which had fallen within the calendar year 1916, and as to which year the 4 per cent tax was not applicable. This apparent result from this method of computation is disputed, but it seems to us quite clear that the ultimate effect of the method adopted is to tax a portion of plaintiff’s net income which was not in fact taxable.

Defendant’s counsel, if we understand correctly, contends that there is no provision for assessing the 2 per cent tax by one method and the 4 per cent tax by another method, and that the language of section 29, in its reference to “ the net income embraced in the return ” requires the use of the same basic figures in both computations. The theory apparently is that since the taxpayer returned its net income for the full fiscal year upon which, after the proper credit, the 2 per cent tax was assessed, the language quoted requires the use of the same “ income ” as the basis of computation in determining the 4 per cent tax. We see no force in the argument or basis for the contention as to the effect of the words quoted from section 29. The taxpayer presumably would not make two returns of income for its fiscal year *1211917, one for the purposes of the 2 per cent tax and another for the purposes of the 4 per cent tax, but it made a return of its income for that fiscal year, upon which income there was to be assessed the tax to which under the law it was subject. This whole income, after deducting the proper credit, was subject to the 2 per cent tax, but by specific pro* vision of the act of 1917 levying the 4 per cent additional tax, but five-twelfths of that income was subject to the 4 per cent tax, and in so far as the language of section 29 is concerned in its relation to the 4 per cent tax it must be construed as referring to the portion of the net income embraced in the return which under the law is subject to that tax; in other words, by a substitution, the net *taxable*income embraced in the return.

But let us assume that there is no basis for the construction based upon the reason stated, or any similar conclusion, and that the case presents itself as one requiring the construction of a statute and the adoption of one of two conflicting theories where the statutes themselves do not furnish the basis for a conclusion. We then have, with reference to these two methods, a situation, exemplified by illustrations in plaintiff’s brief and which we understand are not in dispute, involving radically different results in this, that the method adopted by the Bureau of Internal Revenue results in inequalities, while the method contended for by plaintiff eliminates these inequalities. It is demonstrated by illustrative calculations that the bureau’s method not only results in inequality as between calendar year and fiscal year corporations but necessarily results in inequality as between fiscal year corporations dependent upon the number of months in the fiscal year which are included in the calendar year. We need not quote the examples given. They demonstrate this result beyond peradventure of doubt. Because of this situation the conclusion necessarily to be reached has been determined for us by the Supreme Court.

In the case of *Knowlton*v. Moore, 178 U. S. 41, in which the then Chief Justice wrote an elaborate and able opinion frequently referred to, the condition of inequality here apparent as between two different methods was also present. *122In discussing that feature of the case the writer of the opinion illustrated by his own method this condition. He refers to the fact that there, as here, tables are found in counsel’s brief, “ Which show how inevitable and profound are the inequalities which the construction must produce,” to which he adds that “ Clear as is the demonstration which they make they only serve to multiply instances afforded by the one example we have just given,” and he than says “We are, therefore, bound to give heed to the rule, that where a particular construction of a statute will occasion great inconvenience or produce inequality or injustice, that view is to be avoided if another and more reasonable interpretation is present in the statute.”

In *Semple & Company*v. *Lewellyn,*1 Fed. (2d series) 145, the same question was before the District Court of the Western District of Pennsylvania, and in a rather elaborate opinion it was held that the method of computation used by the Bureau of Internal Revenue was erroneous and that the method here contended for by the plaintiff was the correct method. We do not attempt to quote from the opinion because brief quotations would not properly present its full scope, but refer rather to the opinion itself. It is to be added that upon appeal the Circuit Court of Appeals for Third Circuit, at its October term, 1925, affirmed the judgment of the district court. It quoted from the opinion of the district judge, and concluded by saying:

“ Narrowing, as the case does, to following one of the alternative computations, nothing further need be said but that we are in accord with the calculation adopted by the court below and therefore affirm its judgment.”

For the reasons stated we must conclude that the method adopted by the Bureau of Internal Revenue in the assessing of the 4 per cent tax here involved was erroneous and that therefore the plaintiff is entitled to recover $16,087.65, with interest thereon from November 21, 1919, to this date, amounting to $6,188.37, in all the sum of $22,276.02, and we have so ordered.

Geaham, *Judge;*Hat, *Judge;*Booth, *Judge;*and Campbell, *Chief*Justice, concur.