333 U.S. 496 (1948), 384, Commissioner of Internal Revenue v. South Texas Lumber Co.

Docket Nº:No. 384
Citation:333 U.S. 496, 68 S.Ct. 695, 92 L.Ed. 831
Party Name:Commissioner of Internal Revenue v. South Texas Lumber Co.
Case Date:March 29, 1948
Court:United States Supreme Court

Page 496

333 U.S. 496 (1948)

68 S.Ct. 695, 92 L.Ed. 831

Commissioner of Internal Revenue


South Texas Lumber Co.

No. 384

United States Supreme Court

March 29, 1948

Argued January 14, 1948




1. A corporate taxpayer which filed its federal income and excess profits tax return on the accrual basis, but elected to report income from certain installment sales on the installment basis, as authorized by § 44 of the Internal Revenue Code, may not, in computing its excess profits tax credit under § 714, include in "invested capital" (as "accumulated earnings and profits") the unrealized and unreported profits from such installment sales. Pp. 497-506.

2. The provision of § 29.115-3 of Treasury Regulations 111, applicable to excess profits tax as well as to income tax, that "a corporation computing income on the installment basis as provided in § 44 shall, with respect to the installment transaction, compute earnings and profits on such basis," is valid. Pp. 500-503.

3. Treasury Regulations constitute contemporaneous constructions of the revenue statutes by those charged with the administration of these statutes, and should not be invalidated except for weighty reasons. P. 501.

4. The provision of § 29.115-3 of Treasury Regulations 111 here in question is not in conflict with §§ 115(1), 111, 112, and 113 of the Internal Revenue Code. Pp. 504-506.

162 F.2d 866, reversed.

The Commissioner's redetermination of respondent's income and excess profits tax was sustained by the Tax Court. 7 T.C. 669. The Circuit Court of Appeals reversed. 162 F.2d 866. This Court granted certiorari. 332 U.S. 829. Reversed, p. 506.

Page 497

BLACK, J., lead opinion

MR. JUSTICE BLACK delivered the opinion of the Court.

This case raises a question as to respondent's liability for the taxable year 1943 under the Excess Profits Tax of 1940, as amended. 54 Stat. 975, 26 U.S.C. § 710 et seq. The law was passed to tax abnormally high profits due to large governmental expenditures about to be made from appropriations [68 S.Ct. 697] for national defense.1 The excess profits tax was a graduated surtax upon a portion of corporate income, and was imposed in addition to the regular income tax. It applied to all corporate profits and gains over and above what Congress deemed to be a fair and normal return for the corporate business taxed.

Under the controlling 1943 law, the amount of income subject to this excess profits tax is computed by subtracting from the net income subject to regular income tax the amount of earnings Congress deemed to be a taxpayer's normal and fair return.2 This deductible amount, called the excess profits credit, was to be computed in one of two ways, whichever resulted in the lesser tax. § 712. The first, not used here, permits a deduction of an amount equal to the company's average net income for the taxable years 1936 to 1939, inclusive. § 713. The second, used here, permits a deduction of an amount equal to 8 percentum of the taxpayer's invested capital for the taxable year.3 § 714. An includable element of the "invested capital" is the "accumulated earnings and profits as of the beginning of such taxable year." § 718. It thus appears that, by this method, Congress intended, with minor exceptions not here relevant, to impose the excess profits tax on all annual net income in excess of 8% of a

Page 498

corporation's working capital, including its accumulated profits. The controversy here is over the taxpayer's claim that, in computing its 1943 tax, the statute allows it to include in this 8% deduction its "accumulated profits" from certain installment sales, which profits the taxpayer, in accordance with an option conferred upon him, had elected not to report as a part of its taxable income in prior years.

Beginning in 1937 and extending over a four-year period, respondent sold parcels of real estate, gave deeds, and took installment notes, which were secured by mortgages and vendors liens. It kept its books generally on a calendar year accrual basis of accounting, a basis under which all obligations of a company applicable to a year are listed as expenditures, whether paid that year or not, and all obligations to it incurred by others applicable to the year are set up as income on the same basis. Under 26 U.S.C. § 41, an income taxpayer may report income and expenditures either on an accrual basis, or on a cash basis -- under which latter method, annual net income is measured by the difference between actual cash received and paid out within the taxable year. In any event, the basis used must, in the language of § 41, "clearly reflect the income."

Respondent did not report the value of its land installment notes as income on the accrual basis, as it could have done under § 41. Instead, from 1937 up to and including 1943, it has consistently reported its annual income from the installment sales on a third, or "installment" basis, expressly authorized for certain types of installment sales by 26 U.S.C. § 44. That section permits a taxpayer to return as taxable income for a given year only

that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.

Thus, respondent's installment

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income has actually been reported for taxes all along substantially on a modified cash receipts basis, and the taxpayer's net income, which is subjected both to the normal income tax and to the excess profits tax, has not in any of these years reflected the unpaid balances on the installment notes, or any part of them. On the contrary, these balances were listed on respondent's tax returns during these years as "Unrealized Profit Installment Sales."

[68 S.Ct. 698] On its 1943 excess profits tax return, respondent nevertheless reported as "accumulated earnings and profits" the amount of "Unrealized Profit Installment Sales" shown on its books at the end of 1942,4 and included this amount in "invested capital." It thus sought to deduct 8% of its theretofore designated "unrealized profit" in computing its excess profits tax. The Commissioner redetermined the tax for 1943 after eliminating this item from "invested capital." The Tax Court sustained...

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