Source: https://supreme.justia.com/cases/federal/us/284/552/
Timestamp: 2019-04-26 01:45:03+00:00

Document:
1. Under Treasury Regulations promulgated by authority of the Revenue Act of 1921, the net amount of premium received by a corporation from subscribers to its bonds is income. P. 284 U. S. 557.
2. The repeated reenactment of a statute without substantial change is evidence of an implied legislative approval of a construction placed upon it by executive officers. Id.
amount of the premium is income for the year in which it was received, and no part thereof may be taxed by a subsequent income tax act. P. 284 U. S. 557.
4. This conclusion is not affected by the provision of a Treasury Regulation which directs that the amount of bond premiums received by a corporation be prorated or amortized over the life of the bonds. Id.
5. The words of a statute are to be interpreted in their usual, ordinary, and everyday meaning, and this rule applies to taxing acts. P. 284 U. S. 560.
6. Under § 234 of the Revenue Act of 1921, which allows as a deduction from the gross income of a corporation "all interest . . . on its indebtedness," the word "interest" in the quoted phrase means the amount agreed to be paid, which the contract denominates "interest," and does not mean the so-called "effective rate" of interest. Pp. 284 U. S. 559-561.
7. The fact that bonds of a corporation were issued at a premium does not operate to reduce the amount deductible as interest on indebtedness under the revenue acts. Pp. 284 U. S. 559, 284 U. S. 563.
8. Where the language of a tax statute is ambiguous, the Court adopts that construction which is most favorable to the taxpayer. P. 284 U. S. 561.
9. The rules of accounting enforced upon a carrier by the Interstate Commerce Commission are not binding upon the Commissioner of Internal Revenue, nor may he resort to the rules of that body, made for other purposes, for the determination of tax liability under the revenue acts. P. 284 U. S. 562.
Certiorari to review a judgment of the circuit court of appeals reversing a decision of the Board of Tax Appeals. The Board held erroneous the Commissioner's finding of a deficiency in petitioner's return for 1921. 18 B.T.A. 267.
Commissioner v. Old Colony R. Co., supra, note 3 stating that its attention had not been called to the fact that the profit made in the years prior to 1913 was not being taxed, but was used only to determine the expense of the payment of interest on the bonds for the year 1921. We granted certiorari.
The regulations state that the net amount of premium is gain or income. Necessarily, then, the premium is gain or income of the year in which it is received. The provisions of the Revenue Acts of 1918, 1921, 1924, and 1926 are the same as respects gross income of corporations and deductions therefrom. The regulations under the relevant sections of the Acts of 1918, 1924, and 1926 employ substantially the same phraseology as that found in those issued under the 1921 Act. [Footnote 6] The repeated reenactment of a statute without substantial change may amount to an implied legislative approval of a construction placed upon it by executive officers. National Lead Co. v. United States, 252 U. S. 140; United States v. Farrar, 281 U. S. 624; Poe v. Seaborn, 282 U. S. 101, 282 U. S. 116.
received in installments instead of in a lump sum in the year of its receipt.
Nor does the fact that the regulation thus ameliorates the burden of the taxpayer authorize the use of the grant to convert income of years prior to the effective date of the Sixteenth Amendment into income assumed to have been received thereafter. The amortization requirement may properly be applied to premiums paid subsequent to March 1, 1913, but cannot operate to contradict the definition of a premium as gain or income.
interest paid on a corporation's indebtedness to the actual amount it is paying for the use of the money represented by the par of the bond -- that is, to what accountants have called the "effective rate" of interest. In this view, the government says that each time the debtor pays an installment of stipulated interest, what it in fact does is to pay interest at a lesser rate on the par of the bond and return a ratable proportion of the premium, which really constitutes a loan by the investor to the debtor. Thus, that portion of the installment paid at each interest date which is a return of the loaned capital represented by the premium must be deducted from the nominal interest in order to arrive at the "effective rate" of interest the debtor is really paying. It is said the regulation is intended to afford a method of adjusting the taxpayer's income in the light of these facts, and that it is immaterial whether, as provided, the pro rata yearly return of capital loaned in excess of the face of the bond is added to gross income or deducted from interest paid, for in either case the result in dollars will be exactly the same.
Doubtless the premium received by the corporation is acquired capital, rather than income. But, if this be admitted, the concession does not answer the question whether a premium paid prior to 1913 is taxable. Obviously therefore it is not enough for the government's purpose to disregard the regulation which designates this item as income or gain. The Commissioner must and does go farther, and contend that the receipt of such a premium reduces the item of interest paid, and renders the sum nominated as such in the bond something different from the "interest . . . on its indebtedness" mentioned in § 234 of the Revenue Act of 1921 as a permissible deduction from gross income.
denominates "interest," but of a different sum to be ascertained by a calculation which will allocate the payment between a partial and ratable return of the premium and "effective" interest on the par of the security.
"the plain, obvious and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover."
This rule is applied to taxing acts. De Ganay v. Lederer, 250 U. S. 376, 250 U. S. 381.
Applying the accepted tests to the language of the statute, we are of opinion that the construction contended for by the Commissioner is inadmissible. In common parlance, the bonded indebtedness of a corporation imports the total face of its outstanding bonds, the amount which must be paid at their maturity. The phrase is not generally used to connote par plus an unreturned proportion of premium.
or considers that the periodic payment universally called "interest" is in part something wholly distinct -- that is, a return of borrowed capital. It has remained for the theory of accounting to point out this refinement. We cannot believe that Congress used the word having in mind any concept other than the usual, ordinary, and everyday meaning of the term, or that it was acquainted with the accountants' phrase "effective rate" of interest, and intended that as the measure of the permitted deduction.
In the present case, as with corporate obligations generally, the bond has a par value, and each coupon stipulates that, on a date therein mentioned the company will pay a named sum as interest on the bond. Until the present contention was put forward, no one supposed that the taxpayer was not entitled to deduct the entire amount specified in the coupon and actually paid during the taxable year as interest. The person who receives this sum certainly considers it interest, and so, apparently, does the government, which requires him to return it all as such, and does not permit him, if he or his predecessor holder paid more than par for the bond, to treat part of the sum received as a return of capital loaned, and the remainder as interest received.
In short, we think that, in the common understanding, "interest" means what is usually called interest by those who pay and those who receive the amount so denominated in bond and coupon, and that the words of the statute permit the deduction of that sum, and do not refer to some esoteric concept derived from subtle and theoretic analysis.
If there were doubt as to connotation of the term, and another meaning might be adopted, the fact of its use in a tax statute would incline the scale to the construction most favorable to the taxpayer. Gould v. Gould, 245 U. S. 151; United States v. Merriam, 263 U.S.
179; Bowers v. Lighterage Co., 273 U. S. 346; United States v. Updike, 281 U. S. 489; Burnet v. Niagara Falls Brewing Co., 282 U. S. 648.
A further contention is advanced that, inasmuch as, by the ruling of the Interstate Commerce Commission, the company was compelled to designate the annual amount of premium amortization as income, and under protest did so treat it in reporting to the Commission, the ruling of the Commissioner of Internal Revenue is in conformity with the method of bookkeeping adopted by the petitioner, and hence is justified by § 212(b) of the Revenue Act of 1921, [Footnote 7] which provides that the net income of a corporation shall be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, and by § 213(a) of the same act, which authorizes the accrual method of reporting income. This position is inconsistent with the other arguments advanced. If the amortized premium is to be deducted from interest paid by the taxpayer, it is not income. If it is income, then, by hypothesis, it is income received prior to the date of the Sixteenth Amendment, and not income which accrues to the taxpayer from year to year. Moreover, the rules of accounting enforced upon a carrier by the Interstate Commerce Commission are not binding upon the Commissioner, nor may he resort to the rules of that body, made for other purposes, for the determination of tax liability under the revenue acts. Kansas City Southern Ry. Co. v. Commissioner, 52 F.2d 372; cert. denied, post, p. 676. Compare Chicago, R.I. & P. Ry. Co. v. Commissioner, 13 B.T.A. 988, 1027; Fall River Electric Light Co. v. Commissioner, 23 B.T.A. 168.
it is applicable, and that, so far as the deduction of interest on indebtedness is concerned, the fact that a premium was paid does not operate to reduce interest paid on bonded indebtedness within the meaning of the revenue acts.
Act of November 23, 1921, c. 136, §§ 213, 234, 42 Stat. 227, 237, 254. Treasury Regulations 62, Art. 545.
By lease dated February 15, 1893, still in force, petitioner leased all its property to the New York, New Haven & Hartford Railroad Company; the lessee agreeing to operate and maintain petitioner's railroad, to assume the payment of the principal of and interest upon its bonded indebtedness and other obligations, and to pay a certain additional sum as rental. Although the bonds in question were issued after the effective date of the lease, they were the direct obligation of petitioner, and it remained liable for the payment of interest. Petitioner bases certain arguments upon the fact that, in the tax year under review, it charged itself with bond interest received from the lessee and took credit for the same amount as interest paid to bondholders. These facts are unimportant in the view we take of the case. We shall treat it as if the lease were nonexistent, and the bonds had been issued by a company operating its own property.
18 B.T.A. 267. In reaching this conclusion, the Board followed its earlier decision in Old Colony Railroad Co. v. Commissioner, 6 B.T.A. 1025, wherein it had held that, under similar provisions of the Revenue Act of 1918 and a like treasury regulation, the premiums were income in the year in which they were received, thus becoming a part of the company's capital prior to the adoption of the Sixteenth Amendment, and not taxable. See Doyle v. Mitchell Bros. Co., 247 U. S. 179; Lynch v. Turrish, 247 U. S. 221; Southern Pacific Co. v. Lowe, 247 U. S. 330; Goodrich v. Edwards, 255 U. S. 527. The Board's holding was affirmed in Commissioner v. Old Colony R. Co., 26 F.2d 408. See also Chicago, R.I. & P. R. Co. v. Commissioner, 47 F.2d 990.
Regulations 45, Art. 544; Regulations 62, Art. 545; Regulations 69, Art. 545; Regulations 74, Art. 68.

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 § 234
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 § 212
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 Art. 545
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 Art. 544
 Art. 545
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 Art. 68