#### SELWYN BYWATER v. THE UNITED STATES

[No. E-570.

Decided November 14, 1927]

*On the Proofs*

*Excess-profits tax; return of partnership profits; loss in excess of gross income.'*— By agreement among copartners each, drew out monthly fixed amounts against prospective profits and at the end of a six months’ period was charged with his share of *268losses, if any. Where a partner’s share of such losses for the taxable year was greater than the amounts so drawn out by him, he had no net income from the partnership upon which an excess-profits tax might be assessed. Compare *Edwim, N. Chapman*v. *United States, ante,*p. 247.

*The Reporter's*statement of the case:

*Mr. James A. Vaughan*for the plaintiff. *Mr. Sanford Robinson*was on the brief.

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

The court made special findings of fact, as follows:

I. The plaintiff is a subject of the Kingdom of Great Britain, which Government accord^ to citizens of the United States the right to prosecute claims against such Government in its courts, and a resident of the town of Greenwich, county of Fairfield and State of Connecticut, and has not in any way aided, abetted, or given encouragement to rebellion against the United States.

II. During the entire calendar year 1917 plaintiff was and still is a member of the copartnership of F. S. Smithers & Co., stock and bond brokers. Said partnership had no invested capital.

III. On or about March 15, 1918, plaintiff filed a joint income and profits-tax return, with his wife, for the taxable year 1917.

IV. Plaintiff’s individual income, as a member of the firm of Chisholm & Chapman, from the proceeds of the business of that firm for the calendar year 1917, amounted to $16,750, received by him as salary .under an agreement between the partners that each member of the partnership might draw out monthly certain fixed amounts against prospective profits of the firm; and further, that profits, if any, in excess of such fixed amounts .should remain in the business, and at the end of each six months’ period during said year the personal accounts of each partner should be credited or debited with his proportion of such profits or losses, as the case might be. Plaintiff received no other income from the business of the partnership for said year.

*269V. In addition to the $16,750 received by plaintiff a;s salary there was also credited to plaintiff’s personal account for the year 1917, $2,140.42, which represented interest upon plaintiff’s capital in the firm.

VI. Plaintiff’s firm sustained a net loss for the year 1917, and plaintiff’s proportionate share of said net loss amounted to $17,579.96 (reference is made to plaintiff’s Exhibit No. 6).

VII. The entire joint income of plaintiff and his wife amounted to $667.15 (reference is made to plaintiff’s Exhibit No. 6), and plaintiff received from the proceeds of the business of the firm the net amount of $1,310.46.

VIII. On the basis of the report of an internal-revenue agent dated July 26, 1922, covering the taxable year 1917, the Commissioner of Internal Revenue caused an excess-profits tax to be assessed against plaintiff in the sum of $860, representing 8 per cent óf the difference between $16,750, salary mentioned in Finding IV, and the specific excess-profits-tax exemption of $6,000 as provided for in section 209 of the revenue act of 1916 as amended by the act of 1917.

IX. Pursuant to notice and demand therefor plaintiff on or about April 30, 1923, paid under protest to the collector of internal revenue for the second district of New York excess-profits tax in the sum of $860, computed as set forth in Finding VIII.

X. On May 1, 1923, a claim for refund in the sum of $860 was filed by plaintiff, and on or about November 10, 1923, same was rejected by the Commissioner of Internal Revenue.

The court decided that plaintiff was entitled to recover $860 with interest thereon at the rate of six per cent per an-num from April 30, 1923, to date of judgment, amounting, principal and interest, to $1,094.21.

Moss, Judge,

delivered the opinion of the court:

Plaintiff, Selwyn Bywater, throughout the year 1917 was a member of the stock and bond brokerage firm of F. S. Smithers and Company. He filed for that year a joint income and profits tax for himself and wife which showed no taxable net income. The Commissioner of Internal Revenue, however, caused an excess-profits tax amounting to $860 *270to be assessed against plaintiff. It was paid under protest and this action is brought for the recovery thereof.

The excess-profits tax arises under the revenue act of 1917, 40 Stat. 302-305, the pertinent provisions of which are as follows:

Section 200 provides in part:

> “ The terms £ trade ’ and ‘ business ’ include professions and occupations.”

Section 201 in so far as applicable:

> “ That in addition to the taxes under existing law and under this act there shall be levied, assessed, collected, and paid for each taxable year upon the income of every corporation, partnership, or individual a tax (hereinafter in this title referred to as the tax) equal to the following percentages of the net income:

> *****

> “ For the purpose of this title every corporation or partnership not exempt under the provisions of this section shall be deemed to be engaged in business, and all the trades and businesses in which it is engaged shall be treated as a single trade or business, and all its. income, from whatever source derived, shall be deemed to be received from such trade or business.

> “ This title shall apply to all trades or businesses of whatever description, whether continuously carried on or not, except [certain exceptions not here applicable] * * *.”

Section 203 provides in part:

> “ That for the purposes of this title the deduction shall be as follows, except as otherwise in this title provided—

> # ;■; iji &

> *“(b)*In the case of a domestic partnership or of a citizen or resident of the United States, the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the pre-war period was of the invested capital for the pre-war period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $6,000;”

> *****

Section 206, second paragraph:

> “ The net income of a partnership or individual shall be ascertained and returned for the calendar years nineteen hun*271dred and eleven, nineteen hundred and twelve, and nineteen hundred and thirteen, and for the taxable year, upon the same basis and in the same manner as provided in Title I of such act of September eighth, nineteen hundred and sixteen, as amended by this act, except that the credits allowed by subdivision (5) of section five of such act shall be reduced * *

Section 209:

> “That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected, and paid, in addition to the taxes under existing law and under this act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deduction: In the case of a domestic corporation $8,000 and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no reduction.”

Plaintiff’s firm had no invested capital, and the deduction provided for in section 209 of said act, amounting to $6,000, is applicable to plaintiff’s case.

The amount of the excess-profits tax in this case was arrived at in the following manner: By agreement between the partners each member thereof drew as salary a certain amount monthly. In the event of profits in excess of the total of such amounts, such profits were to remain in the business, and at the expiration of each six months’ period during the year 1917, the personal accounts of each partner were to be credited or debited with his proportion of the firm’s profits or losses, as the case might be. The total sum drawn by plaintiff as salary under the above plan amounted to $16,750, and the tax paid herein was computed at 8 per cent on the difference between the specific statutory excess-profits tax exemption of $6,000 and the total amount of salary drawn for that year. Plaintiff’s firm sustained a net loss in the conduct of its business for the year 1917, and plaintiff’s proportion of said loss amounted to $17,579.96, and it is plaintiff’s contention that he was entitled to deduct from his income from the business of the firm his loss sustained as a member of said firm. The court is of the opinion that plaintiff’s theory is correct.

*272Under the terms of section 209 of the revenue act in question an excess-profits tax “ equivalent to *8*per centum of the *net income*of such trade or business in excess of the following deductions: * * * and in the case of a domestic partnership or a citizen or resident of the United States $6,000: * *

There were no profits from the business of plaintiff’s firm for the year 1917. On the contrary, said firm sustained substantial losses for that year, plaintiff’s proportion of which exceeded the amount of his salary drawn from the firm. There was therefore no *net income*upon which an excess-profits tax could be assessed.

It is inconceivable that Congress intended to impose an excess-profits tax in a case where no profits were derived from the trade or business in excess of the statutory exemption of $6,000.00.

Plaintiff is entitled to recover. And it is so ordered.

GRaham, *Judge;*Booth, *Judge;*and Campbell, *Chief*Justice, concur.

Hat, Judge, absent.