Doyle v. Mitchell Bros Co.

• Decision Date: 30 June 1916
• Docket Number: 2864.
• Citation: 235 F. 686
• Parties: DOYLE, Internal Revenue Collector, v. MITCHELL BROS. CO.
• Court: U.S. Court of Appeals — Sixth Circuit

235 F. 686

DOYLE, Internal Revenue Collector, v. MITCHELL BROS. CO.

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.

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 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 of the sale of a building or other permanent assets are as clearly a substitute therefor as is the insurance money paid to indemnify for a building burned

Indeed, no one disputes the proposition, in its broadest aspect, that the selling price of capital assets is not 'income'; the assessment made by the Commissioner of Internal Revenue, and here involved, goes upon the theory that it is right to deduct the proceeds of such assets from the receipts of the year before ascertaining net income; but the only controversy is as to the proper definition of those capital assets which are to be thus excluded.

It is equally clear-- to us-- that 'income' is not limited to cash receipts. Of course, the word is capable of this restricted meaning, and any number of interesting problems can be evolved through nice refinements in the precise meaning of 'income,' 'received,' 'depreciation,' 'actually paid,' and other statutory words; but this law was passed to make a workable system of raising revenue, and not to provide exercise in dialectics. The theory which should undertake to consider only the cash received during the year for property sold, and then to ascertain the cost of each item so sold, no matter whether produced during the year or long before, would, in the ordinary, typical manufacturing or merchandising business, be impossible of intelligent application. 'Income received' need not be in cash. If, in the regular course of business, the property has been sold and is represented by a bill or account receivable, it is no undue stretch of language to say that these proceeds are income received. It is only a step further in the same line to say that property, regularly on hand for sale at the end of the year and which has an ascertainable market value, realizable at the owner's option, has been 'received' by the business and should enter into a computation of income. Otherwise, a business which had been very profitable, but in which the bulk of the annual output was being held at the close of the year for a further market rise, would have no income at all. Indeed, in the present case, that part of the computation upon which the taxpayer and the Commissioner and the collector's counsel all unite, for ascertaining income, includes, as a part of the income for 1909, more than $300,000 for lumber in the yard unsold at the end of the year, and the elimination of this item would wipe out all net income several times over.

Doubtless there may be difficulties in making the proper appraisal of property on hand. Perhaps it should be listed at market price less cost of sale, or perhaps at cost of production, because the element of gain or loss reached by comparison with market selling price may be too contingent to justify a permanent taking over into the accounts; but these are practical questions, and they can be met in a practical way. Those business enterprises which the law affects have well-known methods and customs for meeting these problems, and have no difficulty in finding the gains or profits or income-- or whatever they may be called-- which have been received, and stating them surely enough and definitely enough to form an acceptable basis for the declaration and payment of dividends in a corporation, or for affecting and fixing the selling price of corporate stock or of any and every going business enterprise; and the use of the same methods, in good faith, will easily determine the taxable 'net income' of such an enterprise as this.

If property on hand at the end of the year, figured at its true inventory or market value, must be put upon one side of the income account, there can be no escape from putting the corresponding true value at the beginning of the year upon the other side of the account; and this must include the raw materials which were on hand at the beginning. The law contemplates distinct periods. Everything before 1909 must be in one period; everything later in another; and then, for taxing purposes, each calendar year after that date forms a distinct subperiod; the law plainly contemplates that all income shall be definitely located somewhere. The law applied to and took effect upon business...