Case Name: Appeal of THEODORE SCHILLING
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-02-19
Citations: 3 B.T.A. 936
Docket Number: Docket No. 4323
Parties: Appeal of THEODORE SCHILLING.
Judges: Before Sternhagen and Arundell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 3
Pages: 936–941

Head Matter:
Appeal of THEODORE SCHILLING.
Docket No. 4323.
Submitted September 25, 1925.
Decided February 19, 1926.
Gerard B. Townsend, Esq., for the taxpayer.
W. F. Gibbs, Esq., for the Commissioner.
Before Sternhagen and Arundell.

Opinion:
OPINION.
ARUndell
: The taxpayer made his 1921 income-tax return for the calendar year. The principal part of his income was his distributive share, as a partner, of the net income of Frederick Ludevig & Co. The latter made a return on the basis of a fiscal year ended June 30, 1921. The taxpayer reported the entire amount of his distributive share of the income of the partnership for the fiscal year mentioned, which is in conformity with section 210 (a) of the Eevenue Act of 1921. This statute also provides (section 205 (c)) for subjecting such income to tax at the rates in effect in the different calendar years into which the fiscal year extends. The section reads as follows:
If a fiscal year of a partnership begins in 1920 and ends in 1921, or begins in 1921 and ends in 1922, then (1) the' rates for the calendar year during which such fiscal year begins shall apply to an amount of each partner's share of such partnership net income (determined under the law applicable" to such year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and (2) the rates for the calendar year during which such fiscal year ends shall apply to an amount of each partner's share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year.
In the 1918 Act, and also in the 1924 Act, a method of computing the tax in such cases was prescribed. The 1918 provision is set out below; the 1924 provision is substantially the same.
Sec. 206. That whenever parts of a taxpayer's income are subject to rates for different calendar years, the part subject to the rates for the most recent calendar year shall be placed in the lower brackets of the rate schedule provided in this title, the part subject to the rates for the next preceding calendar year shall be placed in the next higher brackets of the rate schedule applicable to that year, and so on until the entire net income has 'been accounted for.
There is no similar provision in the 1921 Act.
In computing the tax the Commissioner allocated the entire net income to the so-called brackets provided for by section 211 of the 1921 Act — apparently first disposing of the proportion of net income subject to 1921 rates, and then allocating the proportion subject to 1920 rates without leaving any gaps in the brackets not entirely filled by the 1921 proportion. He then computed the tax on the entire amount at one operation, assuming that, since the 1920 rates and 1921 rates are the same in so far as they affect this taxpayer, there would by his method of allocation be no difference in the result, which is true. The taxpayer in making his computation placed each proportion of his income in the lower brackets of the respective years.
Section 205 (c) of the 1921 Act provides that " the rates for the calendar year during which such fiscal year begins shall apply The question is, to what rates does this language refer? Hoes it mean the minimum rates, as contended by the taxpayer, or does it mean those rates of the 1920 rate schedule corresponding to the 1921 rates which would apply without question if section 205 (c) did not exist. In support of his position, the taxpayer invokes the rule of strict construction; that taxing statutes must not be extended by implication beyond their clear import, Gould v. Gould, 245 U. S. 151; United States v. Field, 255 U. S. 257; and the corollary, that if words are doubtful, the doubt must be resolved against the Government and in favor of the taxpayer. United States v. Merriam, 263 U. S. 179.
Section 205 (c) must be construed with reference to the other sections of the Act and its meaning found from the Act as a whole. Kohlsaat v. Murphy, 96 U. S. 153; Mansfield v. Excelsior Refining Co., 135 U. S. 326, 336; United States v. Burr, 159 U. S. 78, 84. Consideration of the other sections of Title II (relating to " income tax "), impels us to the conclusion that the meaning and intent of this section are clear, and therefore there is no room for the appli-nation of the principles relied on by the taxpayer. The vital sections in this title are 210 and 211. These are the sections that impose the tax. The other sections of the" title contain definitions, bases for arriving at net income, methods of computing the tax in special cases, administrative provisions, etc. Section 210 imposes for each taxable year a normal tax of 8 per centum. Section 211 provides that, in addition to the normal tax, " there shall be levied, collected, and paid for each taxable year " a surtax upon net income from $5,000 (in the case of the year 1921) on up, by gradations, at progressively increasing rates. The net income reported by this taxpayer is all income for the taxable year 1921. For arriving at the amount of the surtax upon the net income for the taxable year, section 211 does two things; it specifies the graduated amounts of net income, (commonly referred to as brackets), which shall be subject to surtax; and it prescribes a graduated schedule of rates to be applied in these several brackets. It expresses clearly the intention of Congress to adopt a plan under which income should be subjected to progressively greater tax as it increased in amount. The section is modified by section 205 (c) only in the respect that, in the class of cases therein mentioned, a different schedule of rates is to be applied to a part of this income. We can find nothing in section 205 (c) which would authorize such part of the income to be taken out of the brackets where it is put by section 211 and to be placed in the lower brackets. Cf. Appeal of M. Fowler, 1 B. T. A. 1212. Section 205 (c) is subordinate to section 211, and the expressed intent of the latter is controlling in the construction of section 205 (c). Caha v. United States, 152 U. S. 211, 214; United States v. Burr, 159 U. S. 78, 84.
The taxpayer also argues that his method must be adopted in order that effect may be given to the action of Congress in repealing section 206 of the Bevenue Act of 1918. It is our view that section 206 merely prescribes the maimer in which the tax shall be computed in cases coming within section 205 (c). Its omission left the way-open to the Commissioner to adopt a method of applying section 205 (c) consistent with the provisions of the Act. We think the Commissioner's method is proper.