Case Name: Appeal of NATIONAL GROCER CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1925-02-28
Citations: 1 B.T.A. 688
Docket Number: Docket No. 562
Parties: Appeal of NATIONAL GROCER CO.
Judges: Before James, Steenhagen, and Teussell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 1
Pages: 688–690

Head Matter:
Appeal of NATIONAL GROCER CO.
Docket No. 562.
Submitted January 26, 1925;
decided February 28, 1925.
W. Alfred Debo, Esq., for the taxpayer.
Arthur E. Fast, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.
Before James, Steenhagen, and Teussell.

Opinion:
OPINION.
Trussell :
The decision of this appeal must be determined in accordance with the terms and the meaning of section 326 of the Revenue Act of 1918 which, so far as relevant, reads as follows:
(a) That as used in this title the term "invested capital" for any year means (3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.
The $51,252.58 which the Commissioner has deducted from the invested capital of this taxpayer for the years 1918 and 1919 is ninety-six one-hundred-and-eighty-fifths of $98,768, the gain realized by the taxpayer during the preceding calendar year from a sale of a portion of its capital assets. This sum of $98,768 wás a gain or profit accruing to the taxpayer from dealings in property, and under the provisions of section 213 of the same revenue act the taxpayer was required to report this gain as a part of its gross income for the calendar year 1917, and, except for the retroactive exemption contained in the Revenue Act of 1921, section 234 (a) (14), the full amount of this gain and profit would then have been taxable income. Congress, however, saw fit to provide, in the Revenue Act of 1921, that an ascertainable proportion of this gain, realized by the taxpayer under the conditions prescribed, should be deducted from gross income. In like manner Congress has provided for the exemption from taxation of gains and profits from other sources, among which are dividends received by one corporation from other domestic corporations, and it has also provided that certain gains and profits should be excluded from gross income, among which are amounts of interest received upon the obligations of States and municipal subdivisions thereof and certain obligations of the United States. All of these gains and profits, however, received by a corporation and exempt from income taxes, must necessarily find their way into and become a part of the surplus and undivided profits of such corporation, and we have yet to hear of anyone claiming that amount of interest upon municipal obligations, and dividends upon the stock of other corporations either should be or could be eliminated from the sum or surplus and undivided profits which the law provides shall be included in invested capital.
The surplus and undivided profits of a corporation at any given time is made up of all the realized gains, profits, and income of preceding years or periods and which " remains after expenses and dividends " are paid. (Marks v. American Brewing Co., 52 South. 985.) It thus conclusively appears that this sum of $51,252.58, having been a part of the realized gains and profits of this taxpayer for the calendar year 1917, although not included in its taxable net income, found its way into the company's general account of surplus and undivided profits, and section 826 of the Revenue Act of 1918 specifically provides that so much of this surplus and undivided profits account as remains in the possession of the corporation at the beginning of any taxable period shall be included in invested capital. It appears that there is no authority in any revenue act, nor is there any accounting reason, to support the action of the Commissioner in eliminating this sum from the taxpayer's invested capital for the years 1918 and 1919.
We are, therefore, of the opinion that the said sum must be restored to invested capital for each of the years under consideration, and the deficiency in tax for the year 1918 and the overassessment for the year 1919 should be recomputed accordingly.