Polaroid Corporation v. CIR

• Citation: 278 F.2d 148
• Decision Date: 03 May 1960
• Docket Number: No. 5622.,5622.
• Parties: POLAROID CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

278 F.2d 148 (1960)

POLAROID CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5622.

United States Court of Appeals First Circuit.

Heard April 5, 1960.

Decided May 3, 1960.

COPYRIGHT MATERIAL OMITTED

Isaac M. Barnett, New York City, with whom Julius Silver and Silver, Saperstein & Barnett, New York City, were on the brief, for petitioner.

Norman H. Wolfe, Atty., Dept. of Justice, Washington, D. C., with whom Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson and Harry Marselli, Attys., Dept. of Justice, Washington, D. C., were on the brief, for respondent.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

ALDRICH, Circuit Judge.

This is a petition by Polaroid Corporation, hereinafter called taxpayer, to review a decision of the Tax Court holding that certain income received during the years 1951, 1952 and 1953 did not constitute "abnormal income" within the meaning of § 456(a) (2), Internal Revenue Code of 1939, 64 Stat. 1186 (1951), so as to qualify for the relief provided therein from the Korean War excess profits tax.¹ The taxpayer also contests a ruling that, in computing its net abnormal income for 1951 under § 456(a) (3) of the Int.Rev.Code of 1939, the interest with which it was credited in 1951 upon its successful claim for an excess profits tax refund for the years 1942 and 1943 must be reduced by the interest it was charged on income tax deficiencies which resulted from the reduced excess profits tax. All facts were stipulated, and the only questions are of law.

Turning to the first issue, it appears that taxpayer was incorporated in 1937. In argument before this court it described itself as "a discovery company," exclusively engaged in exploiting its own discoveries. Edwin H. Land, its President and Director of Research, is internationally known for inventions in the optical and photographic fields, perhaps the most notable of which is the Polaroid Land Camera and film, income from the manufacture and sale of which constitutes the principal matter herein involved.² The camera and film together (they cannot be used separately) are termed by taxpayer the Polaroid Land process. This process is unique in that it enables any user to develop his own pictures and obtain positive prints anywhere, sixty seconds after exposure. Taxpayer describes this process as a "revolutionary discovery." We shall regard that characterization as accurate. Because of numerous patents, taxpayer has no competitors. The result has been a very substantial return of income.

Taxpayer, under Land's direction, started to develop its process in 1944. Much expenditure of time and money was required before its satisfactory achievement in 1947. Unfortunately for taxpayer, large scale production and commercial success coincided with the Korean War years, as a consequence of which income attributable in part to activities in earlier years fell within the provisions of the KW Act. The Act contains several relief provisions. Taxpayer asserts that one in particular is applicable. The Commissioner has disagreed, and the Tax Court has sustained him.

Under the provisions of § 456 of the KW Act, income is regarded as "abnormal income," and as such is relieved from the full incidence of the excess profits provisions by reallocation to other tax years, if it falls into certain specified "classes," and meets certain additional requirements which were here concededly met. The principal issue here is whether the income falls within that class described in § 456(a) (2) (B): "Income resulting from exploration, discovery or prospecting, or any combination of the foregoing, extending over a period of more than 12 months; * *."³ Taxpayer asserts that the word "discovery" is broad enough to encompass its process. The government contends that in the context of the Act it relates only to discovery of coal, oil, gas and other natural resources. It bases this in part upon internal evidence, and in part upon legislative history.

Starting with subparagraph (B), standing alone, we note that the word "discovery" admits of so many meanings that some interpretation is called for.⁴ The possibility of a number of meanings for one word is a species of ambiguity. We then observe that the word is not isolated, but is sandwiched between the words "exploration" and "prospecting." The government, accordingly, invokes the doctrine of noscitur a sociis. In case of ambiguity this is an "appropriate and reasonable," though not always determinative test. Russell Motor Car Co. v. United States, 1923, 261 U.S. 514, 519, 43 S.Ct. 428, 430, 67 L.Ed. 778. On a proper occasion "such association justifies, if it does not imperatively require," the application of a restricted meaning. Neal v. Clark, 1877, 95 U.S. 704, 709, 24 L.Ed. 586. It is particularly appropriate where one meaning of each of the grouped words has a readily apparent common denominator. Thus the words "barrel," "lock" and "stock" have each, individually, a number of quite different meanings. But if used in the phrase, "lock, stock and barrel" there could be little difficulty in determining which particular one of the several meanings was intended. The word "discovery" is clearly identified with the mining industry. See note 4, supra. So also are "exploration" and "prospecting." Accordingly we find a consistent, integrated unit, each portion of which casts light upon the other.⁵

Taxpayer makes no response to this (other than that set forth in the footnote), except a bare statement that the doctrine of noscitur a sociis is inapplicable. Its position is that since the dictionary permits it, "discovery" must be taken to comprehend inventions, or at least major "basic" inventions. If "discovery" is to have that breadth of meaning we could not accept any distinction based upon degrees of invention.⁶ While we agree that basic inventions can be described as discoveries, so may any invention, no matter how minor, if it is of sufficient consequence to be entitled to a patent. Cf. United States Constitution, Art. I, § 8, Cl. 8; 35 U.S.C. §§ 100(a), 101. If the word "discovery" is to be taken as broad enough to include inventions, we see no reason for including some and excluding others. We are normally reluctant to adopt a construction of a taxing statute which would create difficult administrative problems.⁷ We are entirely unwilling to do so here where the act makes no suggestion of any standard.⁸

However, there is an equally serious difficulty if "discovery" is to include all processes and patented inventions. What, then, is the purpose of subparagraph (C), "Income from the sale of patents, formulae, or processes," of § 456(a) (2)? See, supra, note 3. True, that subparagraph relates only to income from the sale of the patent or process. But subparagraph (B) relates to all income. If "discovery" in subparagraph (B) includes inventions, what is the role of subparagraph (C)? If there is a big hole in the fence for the big cat, need there be a small hole for the small one?

The existence of subparagraph (C) casts further light upon the intended meaning and scope of subparagraph (B). Suppose that instead of manufacturing under its patents, taxpayer had licensed its process to others. Would it be contended that the royalties could be claimed as abnormal income under subparagraph (B), although admittedly, should there be a sale of the process, the proceeds would fall under subparagraph (C)? Rather, it seems more reasonable to hold that Congress, having specifically provided for sales, did not intend by some more general clause to cover income of a similar nature but of less magnitude, i. e., income from a single year's use. There is an even more compelling argument. It is to be noted that § 456 does not group together all sources of abnormal income, but is constructed so that the income-percentage requirements must be separately applied as to each classification or group. In determining whether, for example, abnormal income resulting from a judgment (A) is of sufficient size to qualify for relief, it is not possible to take into account abnormal income from prospecting (B). There could be no purpose to this unless each classification or group was intended to have some homogeneity within itself. This is an additional reason for applying the doctrine of noscitur a sociis within each group, and at the same time for differentiating one group from another. Taking the statute as a whole, we cannot accept the contention that subparagraph (B) was intended to encompass taxpayer's manufacturing income resulting from its process. On the contrary, we think it clear that "discovery" as used in that subparagraph relates to the mining industries, and to nothing else.

Ordinarily we would stop here, but since the opposite conclusion was reached in G. D. Searle & Co. v. Jarecki, 7 Cir., 1960, 274 F.2d 129, supra note 8, we will deal briefly with the legislative history to which the government has devoted its brief. This history falls into two parts; the use since 1918 of the words "exploration," "discovery," and "prospecting" in conjunction, solely with relation to the mining industry, and the particular changes effected by the KW Act over its predecessor, the World War II Act.⁹ In Title III, "War-Profits and Excess-Profits Tax," of the Revenue Act of 1918, c. 18, 40 Stat. 1057 (1919), we find a limit placed on the excess profits tax that could be imposed on the proceeds from "a bona fide sale of mines, oil or gas wells, * * * where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer * * *." Section 337, 40 Stat. 1096. An identical provision in the income tax portion of the statute, § 211(b), 40 Stat. 1064, limited the surtax upon such income in the case of individual taxpayers. Congressional history discloses that these provisions were designed to encourage the search for oil and ore deposits during...