Legal Document

339 U.S. 583 70 Supreme Court Reporter 820 94 L.Ed. 1081 BROWN SHOE CO., Inc.v.COMMISSIONER OF INTERNAL REVENUE. Number 445. Argued April 5, 1950. Decided May 15, Mr. Charles baron McInnis, Washington, D.C., for petitioner. Harry Marselli, respondent. Mr .justice CLARK delivered the opinion of Court. 1 This proceeding seeks redetermination petitioner's excess profits tax, computed by invested capital method, fiscal years ended 1942 and 1943.1 The issues arise from payment cash transfer other property to petitioner certain community groups as an inducement location or expansion factory operations in communities. Petitioner claimed, Commissioner disallowed, (1) a deduction gross income depreciation on contributed full cost acquired part with equivalent funds, (2) inclusion total value contributions equity capital. Tax reversed Commissioner's ruling part. 10 United States Reports KF6280 A2 U55 291, 1948. Appeals Eighth Circuit held all issues. 175 Federal Reporter, 2nd Series 305, 1949. We granted certiorari, 1950, 338 909, 348, view asserted conflict between decision below that Third versus McKay Products Corp., 1949, 178 639, reversing Court, 1947, 9 1082. 2 Two questions must be determined: First, whether computing its normal tax net income, which is adjusted determining entitled deductions respect transferred it extent received such groups. contends properties so were depreciable 'gifts' under § 113(a)(2) Internal Revenue Code, 26 Code Annotated KF65 U5 113(a)(2), 'contribution capital' 113(a)(8)(B) both; alternatively they had 'cost' taxpayer 113(a).2 Second, we decide credit aggregate assets may included 718(a) 718(a), either 'accumulated earnings profits.'3 3 New York corporation at times material conducted manufacturing number plants located Illinois, Indiana, Missouri Tennessee. From 1914 1939 seventeen transactions $885,559.45 $85,471.56 buildings4 various twelve towns. Except one instance, each was pursuant written contract respective group. contracts three types: first required locate, construct equip, enlarge community, operate 'continuously long practicable conduct business least period ten years,' meet minimum payroll, consideration group agreed land 'to used suitable building buildings'; instance existing also another only buildings no sum. Under this type obligated event noncompliance back repay second agreement undertook stipulated addition personnel. A third called construction Contracts latter nature supplementary agreements have involved obligation continue operation additional plant facilities unexpired remainder not exceeding upon earlier contract. No restriction imposed any use might make cash, proceeds if should disposed of, after expiration operation. assumed performance according terms agreements, did differ. In case eleven expired prior taxable question. 4 single transaction based contractual obligations $10,000 bonus paid 1914, minutes board directors, 'as * organization expenses starting factory' particular town. 5 sums earmarked for, intact applied against, acquisitions communities but deposited general bank account operating acquired, including equipment towns involved. payments debited side ledger credited earned surplus receipt having been assigned surplus. values set up surplus.5 every less than amount expended acquisition local equipment. 6 controversy deducted enlarged cash. $971,031.01 7 disallowed (in $85,471.56) $885,559.45).6 allowed, portion buildings, machinery funds.7 making reductions allocated contribution item, purchased, proportion item project. transferred, reducing $971,031.01. 8 disallowance It concluded these items therefore 'basis' petitioner, since own unrestricted funds without earmarking; sustained ground transfers gifts transferor's basis available error recording 'contributions because stockholders could contributions.8 Appeals, allowance there petitioner.9 think represented within meaning reduction acquired.10 additions 'capital' term has commonly understood both accounting practice;11 conformably usage pertinent Treasury Regulations consistently recognized originate persons proprietary interest business.12 That interpretation harmony broad congressional policy emphasized when considering similar situation presented supra, 643: '* are being business. They will time wear out, (the taxpayer) business, physical eventually replaced. Looking do toward continuity, Code's provisions—and especially those provide substituted rather basis—would seem envision situations like this. *' contends, however, conclusion foreclosed Detroit Edison company Commissioner, 1943, 319 98, 63 902, 904, 87 1286. denied base electric power lines line extensions premises applicants service. taxpayer, neither nor taxpayer's consider controlling issue here. Because 'The customer price service,' 'it overtaxes imagination regard farmers customers who furnished makers donations Company.' Since service, infer different purpose provided citizens sought anticipated direct service recompense whatever, their expectation prove advantageous large. circumstances manifested definite working company.13 likewise credit.14 Cf. I.R.C. 728, 728. Precisely same placed relevant appearing expression provisions.15 provision characterizes 'invested' 'paid in' does indicate, urges, concept constricted legal originating business; instead investment includes properly 'treated his investment,' cf. Reisinger Cir., 1944, 144 475, 477—478 though taxpayer. 723, 723. would oddity Congress actual turn transferor owned failed two shares stock transfer.16 11 LaBelle Iron Works States, 1921, 256 377, 41 528, 65 998, contrary. decided law 1917, 40 Statutes-at-Large 302 et seq., 'invested defined '(1) Actual in, tangible (3) undivided employed *.' 306, 207. unearned appreciation ore lands surrender old exchange new value, regarded 'the cash' profits.' includability outsiders passed upon.17 12 To December 31, 1920, 113(a)(8)(B). include (2). judgment remanded directions remand further proceedings conformity opinion. 13 Reversed. 14 Justice BLACK agrees affirm judgment. provisions Second Act 1940, 54 974, 975, amended, 710 seq. levied remaining $5,000 specific exemption representing profit. permitted computation average over capital,' 50 percent borrowed repealed 1945. 59 556, 568. Section 23(l) permits property, 23(n) provides shall 114, adopts 'adjusted basis' 113(b) gain. subsection refers 113(a) 'basis (unadjusted)' exceptions following: 'If gift hands donor last preceding owner whom *'; 113(a)(8) (B) paid-in capital, then relevantly: day year sum following amounts, reduced (b)— Money proviously stock, surplus, capital; '(2) Property (other money) previously (regardless in) *; '(4) accumulated beginning 982, KF62 (1940 ed.) 718(a)(1, 2, 4), 4). books unimportant proceeding. Both courts expressly assumed, asserts, receipts taxed income. deny thus $22,472.60 $24,307.10 1943. There determination deficiency year. relied point Corporation 1082, followed Frank Holton & 1928, B.T.A. 1317, A.C.F. Gasoline 1927, 1337, laws, Liberty Mirror 1018, involving 718. opinions controlling. For result cited 1286; Arundel-Brooks Concrete 1945, 152 225, 162 American Law 1200; C. L. Downey 172 810. affirming note case. See O'Meara, Contributions Capital Non-Shareholders, L.Rev. 568, 572 (1948). suggestion made subject 'contributions' statute. See, e.g., Current Problems Accounting—Proceedings Accounting Institute, 941, Page 20 (Revised Statement Association Principles underlying Corporate Financial Statements); Guthmann Dougall, Policy 525 (1940); Harvey, Some Indicia Transfers Income Laws, 37 Mich.L.Rev. 745, 747, n. (1939); Marple, Surplus Net Worth 12, 136—137 (1936). Magill, Taxable 389 (Rev.Ed.1945); Mertens, Taxation 5.14 (1942); Texas Pac. R. 1932, 286 285, 289, 52 76 1108; Lykes Bros. S.S. Co., Inc., 42 1395, 1401, affirmed 1942, 126 725, 727; Helvering Claiborne-Annapolis Ferry 1938, 93 875, 876. Treas.Reg. 86, Art 113(a)(8)—1; 94, Article 101, 103, 19.113(a)(8)—1; 111, 29.113(a)(8)—1 read part: 'In shareholder person made. 113(a)(8)(B), appeared federal revenue legislation, reenacted change 1934 and, above regulations, Acts 1936 1938 Code. court below, concrete mixing plant, financed nearby supplier raw concrete, taxpayer; issue, question basis. However, services rendered. directly benefited materials insuring sole product served through affiliation parent wholly form exclusive marketing arrangement saved expense sales organization. 129 762. Brewster, Excess Profits Tax, 110—111 (1941). 15 109, 30.718—1; 112, 35.718—1. §§ 718(a). 16 Montgomery's Taxes—Corporations Partnerships—1946—47, 372. 17 Southern Edwards, D.C.S.D.N.Y.1932, 57 891, donation non-stockholder includable 'paid-in surplus' 1917 Act. often thought donated see Hoagland, Finance 555 (3d Ed.1947); reason among others added 1940 Act, (§ 113(a)(8)) indicate intended computation. S.Rep.No.665, 72d Cong., 1st Sess. 27—28 (1932); H.R.Rep.No.1492, (1932).

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