Court Opinion

ID: 9448581
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:40:33.2749+00
Date Added: 2024-06-11T17:31:29.329774
License: Public Domain

WHITAKER, Judge
(dissenting).
The problem in this ease is not an easy one, but it is the constantly recurring one of ascertaining the intent of Congress, and adjudicating the rights of the parties in accordance with that intent.
Congress has defined income to mean “all income from whatever source derived, including (but not limited to) the *937following items.” The items that follow do not touch our problem. Our problem is this:
Plaintiff, as the producer of electricity, sold its output to two companies, each of whom contracted to pay plaintiff an amount equal to 5 percent of its invested capital, plus the taxes plaintiff would be required to pay because of the receipt of this income. These contracts were entered into in 1931. From that time until 1952, plaintiff paid taxes, not only on this 5 percent but also on the amount paid it to reimburse it for the taxes it was required to pay because of the receipt of this income.
This was in accord with the holding of the Supreme Court in Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918.
It met with the approval of the Internal Revenue Service until 1952. Indeed, the Commissioner of Internal Revenue, in response to plaintiff’s inquiry, wrote it on December 17, 1941, as follows:
“It is well established that the payment of a tax by a person other than the taxpayer constitutes income to the taxpayer in whose behalf the tax is paid. In such cases it is the practice of the Bureau to include such payment as additional income'to the person on whose behalf the payment is made, but beyond that point the Bureau will not pyramid liability. Accordingly, in the ease you submit there should be but one addition to the income of the Safe Harbor Water Power Corporation by reason of the taxes paid on its behalf by Consolidated Gas Electric Light and Power Company of Baltimore.” [Emphasis supplied.]
The various revenue acts from 1931 to the tax years in question had all contained the all-inclusive definition of gross income, quoted above, but neither the Supreme Court nor the Internal Revenue Service had sanctioned the inclusion in gross income of more than the initial payment of taxes due, because of the receipt of the income stipulated for in the contract between the payee and the payor. The Internal Revenue Service was charged with the duty, of course, of collecting taxes on all income which Congress had intended to include within the meaning of that word, but the Internal Revenue Service had never asserted that Congress meant to include more than the first payment made to reimburse the payee for its tax liability.
Theoretically, of course, when the initial payment is made to reimburse the payee for its tax liability, this is income to the payee, and taxes are due on this income, and when reimbursement is made for these taxes, additional income results, and so on ad infinitum. But the Internal Revenue Service never asserted Congress intended to include such payments in income, that is, not until 1952. In that year it was asserted Congress did intend to do so. Did it? If so, it had kept such an intent well concealed.
The first income tax Act was enacted in 1913. For nearly 40 years the Bureau had not thought that Congress had' required such an inclusion, and Congress reenacted the same definition of gross income many, many times without any effort to correct this Bureau interpretation. Apparently, Congress was satisfied that the Bureau had correctly divined its intention. If it had not thought so, it would have corrected it.
What warrant, then, did the Commissioner of Internal Revenue have in concluding in 1952 that Congress had meant something else, since there had been no-change in this definition of gross income? I know of none.
Of course, this mimeograph was effective only as an interpretation of what Congress intended. It could neither add to nor subtract from what Congress had enacted. It seems to me, Congress had intended, when it enacted the last Revenue Act, what it had intended from the beginning, and what the Bureau had always supposed it had intended. Nothing-Congress had done justified any depar*938ture from the time-honored interpretation of its oft-repeated language.
What then of the 1954 Revenue Act? That has relevance here because it was passed prior to the tax years in question. Did it change the prior congressional definition of gross income ?
It said that as to one particular class of income, and as to that class alone, that there should not be included therein even the first payment on account of taxes. This, of course, was contrary to the ruling of the Supreme Court in the Old Colony case, but this was in the province of Congress, since the Supreme Court in that case was construing the intent of Congress.
But what of contracts other than those dealt with in section 110 of the 1954 Revenue Act? Did Congress mean to leave the tax consequences under them the same as it had been before? The Act itself is silent on this and the Committee reports furnish no light.
But, since Congress for many years had given its tacit approval of the Bureau policy against pyramiding, it would seem that it would have expressly permitted it, had it wished to change this policy. It did not do so.
When Congress did put its mind on the inclusion within gross income of taxes paid to reimburse the payee, it provided that not even the initial payment of taxes should be included in the payee’s income. This provision of the Revenue Code of 1954 was limited to rental income; but if Congress did not mean to tax even the initial payment on account of taxes on rental income, is there any reason to suppose it meant to tax the initial payment, and the next and the next, with respect to other income? But, at any rate, it did not deal with other income, and as to it, it left the law as it was.
So, the question is, what was the law prior to the Revenue Act of 1954? As I have said above, it was as it had been interpreted by the Bureau for 35 or 40 years, and tacitly approved by the Congress over this period. I cannot conceive that Congress intended, by this omission to deal with income other than rental income, to override the long established practice of the Bureau, tacitly approved by it by its repeated reenactment of its definition of gross income, and, instead, intended to give its approval to this change in the Bureau’s interpretation. If Congress did not approve it, it is ineffective.
Since Congress had its mind on taxes on rental income, it would seem it would have made provision for other income, but it did not do so. Having failed to do so, for whatever reason, the law remained as it had been prior to the enactment of the 1954 Revenue Act.
The mimeographs did not change the law; they only changed the Bureau’s interpretation of it. The Bureau’s prior interpretation had been tacitly approved by Congress; the change in interpretation had never been approved, unless it was approved by the Technical Amendments Act of 1958. This was passed after the taxable years in question; but, even so, it did not approve the changes in interpretation by the Bureau as set out in its mimeographs. On the other hand, it expressly disapproved of pyramiding.
In conclusion, it is impossible to ascribe to Congress the intention to approve an interpretation of its language of “income from whatever source derived,” which would permit pyramiding of the tax. This leads to an absurd result. The initial payment by the purchasers of plaintiff’s power was in an amount of $869,560.17; by pyramiding, the tax amounts to $930,565.18. We cannot ascribe to Congress such a grotesque intention.
For these reasons, I dissent.
DAVIS, Judge, took no part in the consideration and decision of this case.