247 U.S. 179 (1918), 492, Doyle v. Mitchell Brothers Company

Docket Nº:No. 492
Citation:247 U.S. 179, 38 S.Ct. 467, 62 L.Ed. 1054
Party Name:Doyle v. Mitchell Brothers Company
Case Date:May 20, 1918
Court:United States Supreme Court

Page 179

247 U.S. 179 (1918)

38 S.Ct. 467, 62 L.Ed. 1054



Mitchell Brothers Company

No. 492

United States Supreme Court

May 20, 1918

Argued March 4, 5, 6, 1918




The purpose of the Corporation Tax Act of August 5, 1909, c. 6, 36 Stat. 11, 112, 38, is not to tax property as such, or the mere conversion of property, but to tax the conduct of the business of corporations organized for profit by a measure based upon the gainful returns from their business operations and property from the time the act took effect.

The act employs the term "income" in its natural and obvious sense, as importing something distinct from principal or capital, and conveying the idea of gain or increase arising from corporate activities.

While a conversion of capital may result in income, in the sense of the act, where the proceeds include an increment of value, such is not the case where the increment existed when the act took effect.

In distinguishing preexisting capital from income subject to the act, it is a mere question of method whether a deduction be made from gross receipts in ascertaining gross income, or from gross income, by way of depreciation, in ascertaining net income.

Before the Corporation Tax Act, a lumber company bought timber land

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to supply its mills, and after the act, it manufactured part of the timber into lumber, which it sold. Held that the amount by which the timber so used had increased in value between the date of purchase and the effective date of the act was not an element of income to be considered in computing the tax.

The principle upon which the removal of minerals by mining companies has been held not to produce a depreciation within the meaning of the act is inapplicable to the case of a company engaged in the business of manufacturing and selling lumber from timber supplied by it own timber lands, and which sell the lands incidentally after the timber is removed.

The income is to be determined from the actual fact, as to which the corporate books are only evidential.

235 F. 686 affirmed.

The case is stated in the opinion.

PITNEY, J., lead opinion

MR. JUSTICE PITNEY delivered the opinion of the Court.

This was an action to recover from the Collector additional taxes assessed against the respondent under the Corporation Excise Tax Act of August 5, 1909, c. 6, 36 Stat. 11, 112, § 38, and paid under protest. The district court gave judgment for the plaintiff, which was affirmed by the circuit court of appeals (225 F. 437; 235 F. 686), and the case comes here on certiorari.

It was submitted at the same time with several other cases decided this day, arising under the same act.

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The facts are as follows: plaintiff is a lumber manufacturing corporation which operates its own mills, manufactures into lumber therein its own stumpage, sells the lumber in the market, and from these sales and sales of various byproducts makes its profits, declares its dividends, and creates its surplus. It sells its stumpage lands, so-called, after the timber is cut and removed. Its sole business is as described; it is not a real estate trading corporation. Plaintiff acquired certain timber lands at its organization in 1903, and paid for them at a valuation approximately equivalent to $20 per acre. Owing to increases in the market price of stumpage, the market value of the timber land, on December 31, 1908, had become approximately $40 per acre.1 The company made no entry upon its books [38 S.Ct. 468] representing this increase, but each year entered as a profit the difference between the original cost of the timber cut and the sums received for the manufactured product, less the cost of manufacture. After the passage of the Excise Tax Act, and preparatory to making a return of income for the year 1909, the company revalued its timber stumpage as of December 31, 1908 at approximately $40 per acre. The good faith and accuracy of this valuation are not in question, but the figures representing it never were entered in the corporate books.

Under the act, the company made a return for each of the years 1909, 1910, 1911, and 1912, and in each instance deducted from its gross receipts the market value, as of December 31, 1908, of the stumpage cut and converted during the year covered by the tax. There appears to have been no change in its market value during these years.

The Commissioner of Internal Revenue having allowed

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a deduction of the cost of the timber in 1903 and refused to allow the difference between that cost and the fair market value of the timber on December 31, 1908, the question is whether this difference (made the basis of the additional taxes) was income for the years in which it was converted into money, within the meaning of the act.

Other items are involved in the case, arising from the sale of certain stump lands, certain byproducts, and a parcel of real estate, but they raise no different question from that which arises upon the valuation of the stumpage, and need not be further mentioned.

The act became effective January 1, 1909, and provided for the annual payment by every domestic corporation "organized for profit and having a capital stock represented by shares" of an excise tax "equivalent to one percentum upon the entire net income over and above five thousand dollars received by it from all sources during such year," with exceptions not now material. It declared that such net income should be ascertained by deducting from the gross income received within the year from all sources the expenses paid within the year out of income in the maintenance and operation of business and property, including rentals and the like; losses sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property; interest paid within the year to a limited extent; taxes, and amounts received within the year as dividends upon stock of other corporations subject to the same tax. In the case of a corporation organized under the laws of a foreign country, the net income was to be ascertained by taking into account the gross income received within the year "from business transacted and capital invested within the United States and any of its territories, Alaska, and the District of Columbia," with deductions for expenses of maintenance and operation,

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business losses, interest, and taxes, all referable to that portion of its business transacted and capital invested within the United States, etc.

An examination of these and other provisions of the act makes it plain that the legislative purpose was not to tax property as such, or the mere conversion of property, but to tax the conduct of the business of corporations organized for profit by a measure based upon the gainful returns from their business operations and property from the time the act took effect. As was pointed out in Flint v. Stone Tracy Co., 220 U.S. 107, 145, the tax was imposed

not upon...

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