Source: https://supreme.justia.com/cases/federal/us/301/190/
Timestamp: 2019-04-22 20:46:18+00:00

Document:
Justia › US Law › US Case Law › US Supreme Court › Volume 301 › Welch v. Obispo Oil Co.
Where a taxpayer's profits tax has been determined by the Commissioner under §§ 327 and 328 of the Revenue Act of 1918, the District Court and the Circuit Court of Appeals are without jurisdiction to entertain an action for a refund of part of the accompanying income tax on the ground that the income was erroneously determined. P. 301 U. S. 194.
Certiorari, 300 U.S. 647, to review a judgment sustaining jurisdiction over a suit to recover money exacted as income tax, and increasing the amount allowed by the District Court.
The Revenue Act of 1918, c. 18, 40 Stat. 1057, laid upon corporations, in addition to the income tax, a war profits and excess profits tax at very high rates. Because the profits tax might prove unduly burdensome, Congress provided by §§ 327 and 328 for a special assessment of the profits tax by the Commissioner of Internal Revenue under certain circumstances. The question for decision in this case is whether, when a special assessment has been made of the profits tax, a court may entertain an action for refund of an amount paid on the accompanying income tax on the ground that the income was erroneously determined.
"the tax shall be the amount which bears the same ratio to the net income of the taxpayer . . . for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income . . . for such year."
The Commissioner fixed that ratio as 9.67 percent and, applying it to the Obispo Company's net income of $1,476,330.52, computed the profits tax at $142,765.73. When this and other allowable sums were deducted, the taxable net income was found to be $1,245,430.63.
"no jurisdiction of the subject matter of this action, the tax sought to be recovered having been assessed under the special assessment provisions of §§ 327 and 328 of the Revenue Acts of 1918 and 1921."
"the tax sought to be recovered having been determined and assessed by the Commissioner . . . under the special assessment provisions of Sections 327 and 328 of the Revenue Acts of 1918 and 1921."
profits tax thereunder and of the regular income tax are reviewable by the Board of Tax Appeals. When no special assessment has been made of the profits tax, an action will lie to recover an amount erroneously exacted either for income or for profits taxes. But no court has power to review the grant or denial of a special assessment or the correctness of the computation made thereon. Williamsport Wire Rope Co. v. United States, 277 U. S. 551; Heiner v. Diamond Alkali Co., 288 U. S. 502. The Company concedes that the amount of the profits taxes, being the subject of a special assessment under §§ 327 and 328, could not be reviewed by the court, but it insists that recovery may be had of the sum alleged to have been erroneously exacted for income tax.
In Heiner v. Diamond Alkali Co., 288 U. S. 502, 288 U. S. 503, where a special assessment had been made of profits taxes under §§ 327 and 328, the taxpayer sued to recover a part of the profits tax, alleging error in the determination of the net income on which it was based. The Circuit Court of Appeals allowed recovery. 60 F.2d 505, 513-514. We reversed its judgment, holding that the court may not, in an action for a refund of profits tax, recalculate the taxpayer's net income, and recompute the profits tax by applying to the corrected net income the ratio fixed by the Commissioner for the computation of the tax. We did not pass upon the question whether the same rule should be applied if the taxpayer seeks a refund of the income tax because of an alleged error in the computation of the net income. But the reasoning of the opinion leads to that conclusion.
provision should deprive the courts of jurisdiction to correct errors in determining the amount of the income from which the income tax is computed; that Congress intended to benefit the taxpayer when it directed that, before computing the 10 percent income tax, the net income found should be reduced by deducting the profits tax therefrom, and that therefore it is unreasonable to adopt a construction of the law under which the allowance of the profits tax credit would be considered as so essential an element in the computation of the tax that the taxpayer would be deprived of all other adjustments in the event there is uncertainty as to the particular items.
By the statute, the amount of the income tax payable is dependent upon the amount of the profits tax, and the amount of the profits tax is dependent upon the amount of the income. In order to determine the corporate income tax payable at the statutory rate of 10 percent of the taxable net income, there must first be deducted from the net income the amount of the profits tax. Section 236(b). Thus, to compute the income tax in the case at bar, it was necessary first to deduct from the net income, ascertained as being $1,476,330.52, the profits tax which, by applying, under § 328(a), the ratio of 9.67 percent to the net income, was determined to be $142,765.73.
true in the present situation than, in Heiner v. Diamond Alkali Co., supra, 288 U. S. 506, that the taxpayer's true net income is an essential factor in the determination of his liability under §§ 327 and 328, and it follows that the making of the special assessment precludes review by a court of the income tax determined.
The amended complaint alleged that §§ 327 and 328 were applied "due to the abnormality resulting from the inclusion in plaintiff's income for that year  of said impounded funds."
The question was present in United States v. Supplee-Biddle Hardware Co., 265 U. S. 189, and in Heiner v. Diamond Alkali Co., 288 U. S. 502, but was not submitted to the Court for decision.

References: v. 
 v. 
 v. 
 v. 
 § 328
 v. 
 v. 
 v.