Source: https://caselaw.findlaw.com/us-supreme-court/291/163.html
Timestamp: 2019-04-26 07:04:58+00:00

Document:
[291 U.S. 163, 164] The Attorney General andMr. H. Brian Holland, of Philadelphia, Pa., for Commissioner of Internal Revenue.
The findings of fact state that, in addition to its original capital of $1,500,000, the company had a surplus on March 1, 1913, of $4,332,684. 78. Its profits and losses in the following years-ending on February 28 in each year-were as follows: 1914, a profit of $4,594.62; 1915, a loss of $ 193,139.67; 1916, a loss of $211,707.32; 1917 to 1923, inclusive, and from February 28, 1923, to April 14, 1923, profits aggregating $2,450,688.30. Prior to the dividend here involved, and for the years 1918 to 1923, the company had paid dividends amounting to $1,290,000.
If the losses of 1915 and 1916, over the profits of 1914, are treated as reducing the surplus of March 1, 1913, there remained of that surplus, on February 28, 1916, the sum of $3,932,432.41, which was distributable exempt from the tax after the subsequent profits had been distributed. With this application of the losses of 1915 and 1916, the subsequent profits subject to tax, after deducting prior dividends, amounted to $1, 160,688.30.
The Board of Tax Appeals adopted the latter view and directed the determination of deficiencies accordingly. 24 [291 U.S. 163, 166] B.T.A. 480. That decision was overruled by the Circuit Court of Appeals for the Seventh Circuit as to the respondent Canfield in No. 158 (62 F.(2d) 751), and was sustained by the Circuit Court of Appeals for the Ninth Circuit as to the petitioner Thorsen in No. 212 (65 F.(2d) 234). The cases come here on certiorari.
In deciding between these conflicting views, the outstanding, and we think the controlling, fact is that on February 28, 1916, the surplus of March 1, 1913, had actually been diminished by losses. The company continued in business after March 1, 1913, and exposed its accumulated profits to the hazard of that business. On February 28, 1914, the company still had those profits and an additional profit of $4,594.62. But in the next two years the company lost $404,846.99, so that the surplus of March 1, 1913, was invaded. It is inaccurate to say that this was merely a matter of bookkeeping. Under the findings of fact, the losses must be deemed to have been actual losses, not mere bookkeeping entries. Hence the decrease of the pre-existing surplus was actual-as real as the pre- existing surplus itself, as real as the subsequent profits. The surplus of March 1, 1913, was the amount of net assets over liabilities including capital stock. 1 When the losses of 1915 and 1916 were suffered, the net assets of March 1, 1913, shrunk accordingly.
In the presence of that inescapable fact, the question is not whether the company could distribute, as being surplus of March 1, 1913, what no longer remained of that surplus-a manifest impossibility-but whether the statute entitled the company to treat subsequent profits as restoring what had been lost of the surplus of March 1, 1913, so that, to the extent of that replacement, the subsequent profits could be distributed to stockholders free [291 U.S. 163, 167] of tax. That the question is one of such a replacement would be strikingly evident if the whole of the surplus of March 1, 1913, had been lost and an attempt had been made to treat later profits as restoring it. The fact that only a part of the surplus was lost does not alter the question as related to that part.
The fundamental contention of the taxpayers is that the statute created two distinct periods for tax purposes; that the accumulations for each period constituted 'a [291 U.S. 163, 168] fixed and static amount, not to be changed by happenings after the end of the period.' That the statute does relate to two periods, the dividing line being March 1, 1913, and that the periods are distinct, is obvious. But it does not follow because there are two distinct periods that the accumulations for each period constitute 'a fixed and static amount' and are to remain unaffected despite the vicissitudes of business. To attribute to the accumulated profits or surplus of March 1, 1913, embarked in a continued business, such a static condition is to ignore the course of business and to impute to the Congress an intention to consider, for tax purposes, the existence of that surplus as still continued, notwithstanding its actual diminution or exhaustion. Such an intention to disregard realities so as to afford immunity from a tax is not lightly to be ascribed to the taxing authority. The 'equity of stockholders,' which we said in Lynch v. Hornby, supra, the Congress probably had in view, might reasonably require freedom from taxation on receiving a distribution of the accumulated profits of March 1, 1913, where those profits remained intact, but that equity is not apparent when those profits had been lost in whole or in part, and immunity is sought from the taxation of an equivalent amount of profits subsequently earned.
Paragraphs (2) and (b) of section 201 disclose a single purpose, and are to be construed in harmony with each other. They show that the Congress was careful to arrange its plan so that the right to receive, free of tax, a distribution of surplus accumulated prior to March 1, 1913, should not be exercised in such a fashion as to permit profits accumulated after that date to escape taxation. To that end the Congress provided that 'every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913.' Then follows the exemption which is strictly limited to a [291 U.S. 163, 169] distribution of profits accumulated prior to March 1, 1913. Nothing is said as to a restoration of those profits out of subsequent earnings if the former have been lost.
[ Footnote 1 ] Edwards v. Douglas, 269 U.S. 204, 214 , 46 S.Ct. 85; Willcuts v. Milton Dairy Co., 275 U.S. 215, 218 , 48 S.Ct. 71.
[ Footnote 2 ] Compare Hadden v. Commissioner (C.C.A.) 49 F.(2d) 709.
[ Footnote 3 ] Southern Pacific Company v. Lowe, 247 U.S. 330 , 38 S.Ct. 540; Gulf Oil Corporation v. Lewellyn, 248 U.S. 71 , 39 S.Ct. 35; Lucas v. Alexander, 279 U.S. 573 , 49 S.Ct. 426, 61 A.L.R. 906; Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 , 52 S.Ct. 211.

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