Source: https://supreme.justia.com/cases/federal/us/256/377/case.html
Timestamp: 2017-04-24 05:35:37
Document Index: 23362003

Matched Legal Cases: ['§ 8', '§ 203', '§ 201', '§ 207', '§ 207', '§ 207', '§ 8']

LaBelle Iron Works v. United States (full text) :: 256 U.S. 377 (1921) :: Justia U.S. Supreme Court Center Log In
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LaBelle Iron Works v. United States 256 U.S. 377 (1921)
U.S. Supreme CourtLaBelle Iron Works v. United States, 256 U.S. 377 (1921)LaBelle Iron Works v. United StatesNo. 463Argued January 6, 7, 1921Decided May 16, 1921256 U.S. 377APPEAL FROM THE COURT OF CLAIMS
3. The Fifth Amendment having no "equal protection " clause, the Page 256 U. S. 378 duties, imposts, and excises is the territorial uniformity required by Art. I, § 8. P. 391.
Appeal from a judgment of the Court of Claims disallowing a claim for a refund of money alleged to have been unlawfully exacted as an excess profits tax. The facts are stated in the opinion, post 256 U. S. 383. Page 256 U. S. 383
Title I of the act imposed "war income taxes" upon individuals and corporations in addition to those imposed by Act of September 8, 1916, c. 463, 39 Stat. 756. Title II provided for the levying of "war excess profits taxes" upon corporations, partnerships, and individuals. As applied to domestic corporations, the scheme of this title was that, after providing for a deduction from income (§ 203, p. 304) 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 prewar period (the years 1911, 1912, and 1913) was of the invested capital for that period, but not less than 7 nor more than 9 percent, plus $3,000, it imposed (§ 201, p. 303), in addition to other taxes, a graduated tax upon the net income beyond the deduction, commencing with 20 percentum of such net income above the deduction, but not above 15 percentum of the invested capital for the taxable year and running as high as 60 percentum of the net income in excess of 33 percentum of such capital. It applied to "all trades or business," with exceptions not now material (p. 303). Page 256 U. S. 384
The case was decided upon a demurrer to the petition, in which the facts were stated as follows: appellant is a domestic corporation and, prior to the year 1904, acquired ore lands for which it paid the sum of $190,000. Between that time and the year 1912, extensive explorations and developments were carried on (the cost of which is not stated), and it was proved that the lands contained large bodies of ore, and had an actual cash value Page 256 U. S. 385 not less than $10,105,400, and at all times during the years 1912 to 1917, inclusive, their actual cash value was not less than the sum last mentioned. In the year 1912, the company increased the valuation of said lands upon its books by adding thereto the sum of $10,000,000, which it carried to surplus, and thereupon, in the same year, declared a stock dividend in the sum of $9,915,400, representing the increase in value of the ore lands. Theretofore, appellant's capital stock and consisted of shares issued, all of one class, having a par value of $9,915,400. The declaration of the stock dividend was carried out by the surrender to the company of all the outstanding stock, and its cancellation, and the exchange of one share of new common and one share of new preferred stock for each share of the original stock.
In returning its annual net income for the year 1917, the company stated its invested capital to be $26,322,904.14, in which was included the sum of $10,105,400 as representing the value of its ore lands. The Commissioner of Internal Revenue caused a reassessment to be made, based upon a reduction of the invested capital to $16,407,507.14; the difference ($9,915,400) being the increase in the value of the ore lands already mentioned. The result was an additional tax of $1,081,184.61, which, having been paid, was made the subject of a claim for refund, and this having been considered and rejected by Page 256 U. S. 386 the Commissioner, there followed a suit in the Court of Claims, with the result already mentioned.
Reading the entire language of § 207 in the light of the circumstances that surrounded the passage of the act, we think its meaning as to "invested capital" is entirely clear. The great war in Europe had been in progress since the year 1914, and the manufacture and export of war supplies and other material for the belligerent powers had stimulated many lines of trade and business in this country, resulting in large profits as compared with the period before the war, and as compared with ordinary returns upon the capital embarked. The United States had become directly involved in the conflict in the spring Page 256 U. S. 387 of 1917, necessitating heavy increases in taxation; at the same time manufactures and trade of every description were rendered even more active, and in certain lines more profitable, than before, so that the unusual gains derived therefrom formed a natural subject for special taxation.
The Revenue Act of October 3, 1917, passed after we had become engaged in the war, took the place of the Act of March 3, and embodied a "war excess profits tax," with higher percentages imposed upon the income in excess of deductions and a more particular definition of terms. A scrutiny of the particular provisions of § 207 shows that it was the dominant purpose of Congress to place the peculiar burden of this tax upon the income of trades and businesses exceeding what was deemed a normally reasonable return upon the capital actually embarked. But if such capital were to be computed according to appreciated market values based upon the estimates of interested parties (on whose returns perforce the government must in great part rely), exaggerations would be at a premium, corrections difficult, and the tax easily evaded. Section 207 shows that Congress was fully alive to this, and designedly adopted a term -- "invested capital"-- and a definition of it, that would Page 256 U. S. 388 measurably guard against inflated valuations. The word "invested", in itself, imports a restrictive qualification. When speaking of the capital of a business corporation or partnership, such as the act deals with, "to invest" imports a laying out of money, or money's worth, either by an individual in acquiring an interest in the concern with a view to obtaining income or profit from the conduct of its business or by the concern itself in acquiring something of permanent use in the business, in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains. See Webster's New Internat. Dict. "Invest," 8; Century Dict. "Invest," 7; Standard Dict. "Invest," 1.
In order to adhere to this restricted meaning and avoid exaggerated valuations, the draftsman of the act resorted to the test of including nothing but money, or money's worth, actually contributed or converted in exchange for shares of the capital stock, or actually acquired through the business activities of the corporation or partnership (involving again a conversion) and coming in ab extra by way of increase over the original capital stock. How consistently this was carried out becomes evident as the section is examined in detail. Cash paid in, and tangible property paid in other than cash, are confined to such as were contributed for stock or shares in the corporation or partnership, and the property is to be taken at its actual cash value "at the time of such payment" -- distinctly negativing any allowance for appreciation in value. There is but a single exception: tangible property paid in prior to January 1, 1914, may be taken at its actual cash value on that date, but in no case exceeding the par value of the original stock or shares specifically issued for it -- a restriction, in itself, requiring the valuation to be taken as of a date prior to the war period, and in no case to exceed the stock valuation placed upon it at the Page 256 U. S. 389 time it was contributed. The provision of clause (3) that includes "paid in or earned surplus and undivided profits used or employed in the business" recognizes that, in some cases, contributions are received from stockholders in money or its equivalent for the specific purpose of creating an actual excess capital over and above the par value of the stock, and, in view of the context, surplus "earned" as well as that "paid in" excludes the idea of capitalizing (for the purposes of this tax) a mere appreciation of values over cost.
It is clear enough that Congress adopted the basis of "invested capital" measured according to actual contributions made for stock or shares and actual accessions Page 256 U. S. 390 in the way of surplus, valuing them according to actual and bona fide transactions and by valuations obtaining at the time of acquisition, not only in order to confine the capital, the income from which was to be in part exempted from the burden of this special tax, to something approximately representative of the risks accepted by the investors in embarking their means in the enterprise, but also in order to adopt tests that would enable returns to be more easily checked by examination of records, and make them less liable to inflation than if a more liberal meaning of "capital and surplus" had been adopted, thus avoiding the necessity of employing a special corps of valuation experts to grapple with the many difficult problems that would have ensued had general market values been adopted as the criteria.
Upon the strength of an administrative interpretation contained in a Treasury Regulation pertaining to the Revenue Act of 1917, under which "stocks" were to be regarded as tangible property when paid in for stock or shares of a corporation, it is insisted that appellant's stock dividend distribution of 1912 ought to be treated Page 256 U. S. 391 as paid for in tangible property, the old stock surrendered being regarded as tangible for the purpose. But that distribution, in substance and effect, was an internal transaction, in which the company received nothing from the stockholders any more than they received anything from it (see Eisner v. Macomber, 252 U. S. 189, 252 U. S. 210-211), and the old shares cannot be regarded as having been "paid in for" the new ones within the meaning of § 207(a)(2), even were they "stocks" within the meaning of that regulation, which is doubtful.
It is urged that this construction, defining invested capital according to the original cost of the property, instead of its present value, has the effect of rendering the Page 256 U. S. 392 act "glaringly unequal" and of doubtful constitutionality, the insistence being that, so construed, it operates to produce baseless and arbitrary discriminations, to the extent of rendering the tax invalid under the due process of law clause of the Fifth Amendment. Reference is made to cases decided under the equal protection clause of the Fourteenth Amendment (Southern Ry. Co. v. Greene, 216 U. S. 400, 216 U. S. 418; Gast Realty Co. v. Schneider Granite Co., 240 U. S. 55), but clearly they are not in point. The Fifth Amendment has no equal protection clause, and the only rule of uniformity prescribed with respect to duties, imposts, and excises laid by Congress is the territorial uniformity required by Article I, § 8. Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 157 U. S. 557; Knowlton v. Moore, 178 U. S. 41, 178 U. S. 98, 220 U. S. 106; Flint v. Stone Tracy Co., 220 U. S. 107, 220 U. S. 150; Billings v. United States, 232 U. S. 261, 232 U. S. 282; Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U. S. 24. That the statute under consideration operates with territorial uniformity is obvious, and not questioned.
Nor can we regard the act, in basing "invested capital" upon actual costs to the exclusion of higher estimated values, as productive of arbitrary discriminations raising a doubt about its constitutionality under the due process clause of the Fifth Amendment. The difficulty of adjusting any system of taxation so as to render it precisely equal in its bearing is proverbial, and such nicety is not even required of the states under the equal protection Page 256 U. S. 393 clause, much less of Congress under the more general requirement of due process of law in taxation. Of course, it will be understood that Congress has very ample authority to adjust its income taxes according to its discretion, within the bounds of geographical uniformity. Courts have no authority to pass upon the propriety of its measures, and we deal with the present criticism only for the purpose of refuting the contention, strongly urged, that the tax is so wholly arbitrary as to amount to confiscation.
Minor distinctions -- such as those turning upon the particular dates of January 1, 1914, and March 3, 1917 -- are easily explained, as we have seen. The principal line of demarcation -- that based upon actual costs, excluding estimated appreciation -- finds reasonable support upon grounds of both theory and practice, in addition to the important consideration of convenience in administration already adverted to. There is a logical incongruity in entering upon the books of a corporation as the capital value of property acquired for permanent employment in its business and still retained for that purpose, a sum corresponding not to its cost, but to what probably might be realized by sale in the market. It is not merely that Page 256 U. S. 394 the market value has not been realized or tested by sale made, but that sale cannot be made without abandoning the very purpose for which the property is held, involving a withdrawal from business so far as that particular property is concerned. Whether in a given case property should be carried in the capital account at market value, rather than at cost, may be a matter of judgment, depending upon special circumstances and the local law. But certainly Congress, in seeking a general rule, reasonably might adopt the cost basis, resting upon experience, rather than anticipation.
From every point of view, the tax in question must be sustained. We intimate no opinion upon the effect of Page 256 U. S. 395 the act with respect to deductions from cost values of capital assets because of depreciation or the like; no question of that kind being here involved.