235 F. 686 (6th Cir. 1916), 2864, Doyle v. Mitchell Bros Co.

Docket Nº:2864.
Citation:235 F. 686
Party Name:DOYLE, Internal Revenue Collector, v. MITCHELL BROS. CO.
Case Date:June 30, 1916
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 686

235 F. 686 (6th Cir. 1916)

DOYLE, Internal Revenue Collector,



No. 2864.

United States Court of Appeals, Sixth Circuit.

June 30, 1916

In Error to the District Court of the United States for the Western District of Michigan; Clarence W. Sessions, Judge.

Action by the Mitchell Bros. Company against Emanuel J. Doyle as Collector of Internal Revenue for the Fourth District of Michigan. There was a judgment for plaintiff (225 F. 437), and defendant brings error. Affirmed.

Myron H. Walker, U.S. Atty., of Grand Rapids, Mich., for plaintiff in error.

Mark Norris and Oscar E. Waer, both of Grand Rapids, Mich., for defendant in error.

Before KNAPPEN and DENISON, Circuit Judges, and EVANS, District Judge.

DENISON, Circuit Judge.

Mitchell Bros. Company, a Michigan corporation, acting pursuant to the Corporation Tax Law of 1909 (36 Stat. 112, c. 6, Sec. 38 (Comp. St. 1913, Secs. 6300-6307)), made an income return and paid the tax due thereunder. Later the Commissioner of Internal Revenue, after an investigation, raised the figures of income return and assessed an additional tax. The company paid under protest, and this action was brought in the court below to recover the amount so paid. The case was tried without a jury, and the District Judge made special findings of fact and of law, and rendered judgment for plaintiff. The collector alleges error.

Page 687

Several items are involved, but all depend upon the same principles, and we state one only-- and, for simplicity, in figures of acreage, instead of per thousand feet of lumber. The plaintiff corporation was organized in 1903. Its capital stock was represented mainly by timber lands entered on the books at their purchase price. This standing timber-- or stumpage-- then had a market value of $20 per acre, and it was taken in as capital at this figure. Owing to the market increase in stumpage prices, and to new methods of using much stumpage formerly wasted, the market price of such standing timber had become, on December 31, 1908, $40 per acre. No entry was ever made on the books representing this increase in value, but each year the company entered on its books, as a profit, the difference between the original cost, $20, and the sums received for the manufactured product cut from an acre, less the cost of manufacture, and the profits so seeming to accrue were either paid out in dividends or carried into the surplus account. After the passage of this tax law, in August, 1909, and preparatory to making the income return for 1909, the company revalued this stumpage, as of December 31, 1908, and fixed that value at (about) $40 per acre. The good faith and accuracy of this valuation are not questioned. It was made upon the basis of price per thousand, but the figures so reached were never entered in the corporate books of the company and never affected the showing of profits made thereon. In making its return for 1909, and in stating net income, the company deducted, from the proceeds of lumber sold, this sum of $40; but the Commissioner restored $20 of that amount, and held that the only deduction authorized by the law was the $20 which had been originally entered and which had been carried on the account books as the cost of the stumpage. The decisive question here is whether the $20 difference--the additional value of the timber which had accrued before 1909, but had not been entered on the books-- was taxable income for 1909. The amount of the tax so in dispute for the four years, 1909-1912, is $2,732, with interest at 5 per cent. from December 22, 1913, the date when payment under protest was made.

The collector insists that the net income taxable under this law is a different thing from profits, and complains that the District Judge overlooked the distinction. The statute refers to 'net income,' but it expressly provides for deducting certain items from the gross income, and whether the residuum does or does not substantially differ from what are commonly called profits is an academic question in this case. It makes no difference what name is given to the net sum which thus becomes taxable. The collector also urges that the 'income received,' named in the statute, must be defined with specific reference to the word 'received.'

It is clear that, by the term 'income,' Congress did not intend to include the proceeds of capital assets sold or converted during the year; nor can it be material whether such proceeds are reinvested in other property or remain in the treasury of the company or are distributed to the stockholders; nor whether, in case of such distribution, they are called dividends or capital. The controlling question must be whether assets so converted were in fact, at the beginning of the tax

Page 688

period, properly to be classed as capital assets. If they were of that character, they cannot be 'income' received during the later period; they represent merely capital in a changed form. 1 If an illustration were needed to show that money received from selling capital assets cannot be 'income,' it would be found in the statutory treatment of insurance money. A loss suffered during the year may be deducted from income, but not so if the loss was compensated by insurance. Fire insurance money is clearly a substitute for the assets burned; but we find that in case of a fire loss uninsured the loss may be deducted from income, while if it is insured, and if the insurance money is 'income,' the loss may not be deducted, and the insurance money must be added-- an absurdity which can be avoided only by saying that such insurance money is not income at all. The proceeds...

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