Opinion ID: 1476460
Heading Depth: 1
Heading Rank: 3

Heading: Federal Income and Profits Taxes.

Text: Wrigley's account, as first filed, claimed for this item $563,933.89 attributable to Doublemint profits; in the supplemental account filed, it was stated at $621,108.97. The master states that these figures so claimed are on the basis that the Doublemint profits were the last to be made and should bear the highest rate of tax, but states that this theory was afterward conceded to be improper, and that the Doublemint share of federal taxes, on the basis of the proportion of profits, would be $372,942.09. Both master and court refused to allow any such tax in reduction of the profits, and the decree represents no deduction for such taxes paid by Wrigley. We do not understand why federal income and excess profits taxes paid by a corporation are not a proper item of expense to be charged against the gross profits for the year, in the ascertainment of what the net profits for such year were. If, instead of only the Doublemint profits, Larson were held entitled to receive from Wrigley the entire net profits of the Wrigley business, can it be doubted that there would be deducted from the gross profits the federal income and excess profits taxes which Wrigley had paid? This might be simple enough in a case where the accounting was for the net profits of an entire business. But is the principle any different where the liability is for only a part of the net profit? It is stated, both by the master and the District Judge, that Larson would, in any event, have to pay federal income tax on the amount decreed, for the year in which the decree was paid. This might be so in some cases. But if it appears that the amount decreed is only what is left after reimbursement to Wrigley of the federal tax already paid thereon, it is unthinkable that collection of the same tax from Larson would be again undertaken. Moreover, the very theory on which Larson may recover these net profits from Wrigley is that Wrigley, in handling the infringing Doublemint gum packages, did so as Larson's trustee or agent  albeit ex maleficio. While equity requires in such circumstances accounting for the profits, equity also allows in reduction outlays in that behalf made in good faith; and what outlay more necessary  yea, compulsory  than the federal income and excess profits tax? If an agent, conducting business for an absent principal, pays such tax on the profits, should the principal be required to pay another such tax if and when he collects the balance due him from the agent? Surely this ought not to be. The master reasoned that, if required to pay the net profits, unreduced by Doublemint's fair proportion of the tax, Wrigley could deduct the whole amount paid from subsequently returned profits taxes. This would scarcely meet the situation. There may be no profits adequate therefor, in which event the tax thus paid would be lost to Wrigley. But, in any event, we do not think it would be equitable as between these parties to require Wrigley to pay back the full net profits without any reduction for this tax, on the faith that somehow and somewhere and sometime it will be refunded. In dealing with a comparable situation, Judge Rose said: Where the owner of the patent seeks to charge the infringer, as a trustee, with the profit made, no arbitrary rule should require him to turn over a sum greatly exceeding any profit the law has allowed him to keep for himself. Only equity can award profits, and, in equity, equity must be done. Sly Mfg. Co. v. Pangborn Corp. (D. C.) 276 F. 971. The Circuit Court of Appeals specifically approved this reasoning. Id. (C. C. A.) 284 F. 217. While not undertaking to lay down a hard and fast rule for fixing the amount of such tax deduction, we venture some suggestions thereon. It is contended for Wrigley that, since the Wrigley profits for the rest of the business carried the Wrigley taxes into the highest bracket, the additional tax on account of the profit attributable to Doublemint was likewise taxable at the highest rate, and that the deduction from the profits attributable to Doublemint should be fixed at such rate. There would be more in this contention if Larson's excess profits taxes for the years in question likewise reached into the highest bracket, so that further profit would likewise have carried the highest rate. But, if this is not the fact, it would not be equitable to require Larson to pay at a higher rate than that at which it would have paid, if the net profits had been paid by Wrigley to Larson as they accrued, and before Wrigley had paid any tax thereon. In undertaking to avoid inequity toward Wrigley, inequity should not be done Larson, through requiring Larson to bear a higher tax than would have been collectible, had the profits been paid over as earned. It occurs to us that the total net profits awarded Larson (without deduction for federal income and excess profits taxes) should be allocated, as nearly as may be, to each year during the accounting period in which they were earned, and that, considering such amounts for each year as additional net profit to Larson in such year, the added amount of income and excess profits tax thereon which Larson would have had to pay should be estimated, as nearly as may be done; the aggregate of such yearly additional tax which Larson would thus have been required to pay, to be deducted from the profits on Doublemint as found. Larson would thus be paying only the taxes it would have paid, had it received the profits as they accrued, and Wrigley will have credit at once for the taxes thus paid on Larson's profits. True, this might leave Wrigley out of pocket to the extent that its payment at the highest rate on Doublemint profits exceeded the amount at any lower rate at which Larson would have been charged; but this is not Larson's fault, and if, as between the two, one must suffer, it should be Wrigley, who brought about the condition. Whether or not Wrigley might then have a collectible claim against the government, through having paid at a higher rate upon the profits to which Larson was entitled, and which Larson thus actually paid at a lower rate, is not here involved. Possibly difficulty will be experienced in allocating the net profits awarded (exclusive of deduction for these taxes) to the different years of the accounting period. While it may be this cannot be accurately done, it should be approximated as nearly as the nature of the case will admit. Of course, nothing here said has application to whatever, if any, liability for income tax may accrue to Larson on account of payment, when made, of interest on the award. We are of opinion that the amount of this tax attributable to the net profit on Doublemint should be ascertained under the direction of the District Court, and the award to Larson reduced accordingly.