367 U.S. 303 (1961), 151, Jarecki v. G. D. Searle & Co.
|Docket Nº:||[81 S.Ct. 1580] No. 151|
|Citation:||367 U.S. 303, 81 S.Ct. 1579, 6 L.Ed.2d 859|
|Party Name:||Jarecki v. G. D. Searle & Co.|
|Case Date:||June 12, 1961|
|Court:||United States Supreme Court|
[81 S.Ct. 1580]
Argued March 21, 1961
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
1. Development of new products is not "discovery" within the meaning of § 456(a)(2)(B) of the Internal Revenue Code of 1939, as amended, and income resulting from the manufacture and sale of certain patented drugs, cameras, camera equipment, and stereo products resulting from inventions is not included within the statutory definition of "abnormal income," in § 456(a), so as to qualify for Korean War excess profits tax relief under the Excess Profits Tax Act of 1950. Pp. 304-313.
2. Such income is not made eligible for Korean War excess profits tax relief by the concluding sentence of paragraph (2) of § 456(a), which provides that
The classification of income of any class not described in subparagraphs (A) to (D), inclusive, shall be subject to regulations prescribed by the Secretary.
274 F.2d 129 reversed.
278 F.2d 148 affirmed.
WARREN, J., lead opinion
MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.
These cases present problems in the interpretation of § 456(a) of the Internal Revenue Code of 1939, a section of the Excess Profits Tax Act of 1950, 64 Stat. 1137. The Act, which is intended to tax at high rates unusually high profits earned during the Korean War, imposes a tax on profits in excess of an amount deemed to represent the taxpayer's normal profits.1 Recognizing, however, that some profits otherwise subject to tax under this scheme might stem from causes other than the inflated wartime economy, Congress enacted § 456. This section grants relief in certain cases of "abnormal income" as defined in § 456(a)2 by allocating some of this income
to years other than those in which it [81 S.Ct. 1581] was received for purposes of computing the tax.
The dispute in these cases is whether income from the sales of certain new products falls within the statutory definition of "abnormal income." Taxpayers claim that the income from the sales of their products is income resulting from "discovery." They claim it is therefore "abnormal income" within the class defined by § 456(a)(2)(B) as
Income resulting from exploration, discovery, or prospecting, or any combination of the foregoing, extending over a period of more than 12 months.
Taxpayer in No. 151 is a corporation engaged in the manufacture and marketing of drugs. As a result of research extending for more than 12 months, it produced two new drugs, "Banthine," used in the treatment of peptic ulcers, and "Dramamine," for relief from motion sickness. Taxpayer received patents on both drugs, and it asserts that both were new products, and not merely improvements on preexisting compounds. Taxpayer received income from the sale of "Banthine" and "Dramamine" in the years 1950 through 1952. It paid its tax without claiming relief under § 456, and then claimed a refund. On denial of its claim, taxpayer filed a complaint in the District Court for the Northern District of Illinois. The District Court dismissed the complaint, but the Court of Appeals for the Seventh Circuit reversed. It held that "discovery" might include the preparation of new products, and that the case must be remanded for a trial
on the issue of whether taxpayer's drugs "were actually discoveries." 274 F.2d 129, 131.
Taxpayer in No. 169 is the inventor and producer of the "Polaroid Land Process," a camera and film which produce a photograph in 60 seconds, and the "Polaroid 3-D Synthetic Polarizer," a device incorporated in the "viewers" through which audiences watched the three dimensional motion pictures in vogue some years ago. These inventions, each the product of more than 12 months' research, are novel, according to taxpayer, and each has been patented. The Polaroid Land equipment was the subject of 238 patents by the end of 1958, and taxpayer characterizes this invention as "revolutionary." Its production was a new departure in the business of taxpayer, which had hitherto been engaged primarily in manufacturing and selling such optical products as polarizing sunglasses, visors and camera filters. In its returns for 1951 through 1953, taxpayer utilized the provisions of § 456 in computing its tax on income from the sales of its photographic equipment and 3-D polarizers. The Commissioner determined that § 456 was not applicable, and the Tax Court upheld his determination of a deficiency. The Court of Appeals for the First Circuit affirmed, holding that taxpayer's inventions were not "discoveries," and its income from their sale not "abnormal income." 278 F.2d 148.
[81 S.Ct. 1582] We grant certiorari in each case to resolve the conflict between the decisions of the First and Seventh Circuits. 364 U.S. 812, 813.
For present purposes, we accept, as did the First Circuit, taxpayers' assertions of the novelty of their products. But we also agree with that court that taxpayers' inventions are not "discoveries" as that word is used in § 456(a)(2)(B), and that income from sales of the new
products may not receive the special treatment provided by § 456.
We look first to the face of the statute. "Discovery" is a word usable in many contexts, and with various shades of meaning. Here, however, it does not stand alone, but gathers meaning from the words around it. These words strongly suggest that a precise and narrow application was intended in § 456. The three words in conjunction, "exploration," "discovery," and "prospecting," all describe income-producing activity in the oil and gas and mining industries, but it is difficult to conceive of any other industry to which they all apply. Certainly the development and manufacturer of drugs and cameras are not such industries. The maxim noscitur a sociis, that a word is known by the company it keeps, while not an inescapable rule, is often wisely applied where a word is capable of many meanings in order to avoid the giving of unintended breadth to the Acts of Congress. See, e.g., Neal v. Clark, 95 U.S. 704, 708-709. The application of the maxim here leads to the conclusion that "discovery" in § 456 means only the discovery of mineral resources.
When we examine further the construction of § 456(a)(2) and compare subparagraphs (B) and (C), it becomes unmistakably clear that "discovery" was not meant to include the development of patentable products. If "discovery" were so wide in scope, there would be no need for the provision in subparagraph (C) for "Income from the sale of patents, formulae, or processes." All of this income, under taxpayers' reading of "discovery," would also be income "resulting from . . . discovery" within subparagraph (B). To borrow the homely metaphor of Judge Aldrich in the First Circuit, "If there is a big hole in the fence for the big cat, need there be a small hole for the small one?" The statute admits a reasonable construction which gives effect to all of its provisions. In these circumstances, we will not adopt a strained reading
which renders one part a mere redundancy. See, e.g., United States v. Menasche, 348 U.S. 528, 538-539.
Taxpayers assert that it is the "ordinary meaning" of "discovery" which must govern. We find ample evidence, both on the face of the statute and, as we shall show, in its legislative history, that a technical usage was intended. But, even if we were without such evidence, we should find it difficult to believe that Congress intended to apply the layman's meaning of "discovery" to describe the products of research. To do so would lead to the necessity of drawing a line between things found and things made, for, in ordinary present-day usage, things revealed are discoveries, but new fabrications are inventions.3 It would appear senseless for Congress to adopt this usage, to provide relief for [81 S.Ct. 1583] income from discoveries, and yet make no provision for income from inventions. Perhaps, in the patent law, "discovery" has the uncommonly wide meaning taxpayers suggest, but the fields of patents and taxation are each lores unto themselves, and the usage in the patent law (which is by no means entirely in taxpayers' favor)4 is unpersuasive here. All the evidence is
to the effect that Congress did not intend to introduce the difficult distinction between inventions and discoveries into the excess profits tax law.
The relevant legislative history fortifies the conclusions to which the words of the statute lead us. The word "discovery" has been used for many years in the tax laws, and has always been used with the limited meaning of the finding of mineral deposits. In the Revenue Act of 1918, enacting one of the earliest excess profits tax laws, a limit was placed on the excess profits tax on income from
a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer.
Revenue Act of 1918, § 337, 40 Stat. 1096.5 An identical limitation was imposed on the income tax levied under that Act,6 and the same usage of "discovery" obtained in the allowance of depletion deductions.7 The limitation on the income tax on the proceeds of the sale of mineral deposits was reenacted without significant change in the Revenue Acts of 1921, 1924, 1926, 1928, 1932, 1936 and 1938.8 It remains in the income tax provisions of the Internal Revenue Code of 1939 as § 105, and has been carried forward as § 632 of the 1954 Code. In each reenactment "discovery"
is linked with "exploration" and "prospecting," and, in each, the word is restrictively applied to extractive industries. A correspondingly narrow use of "discovery" has continued since 1918 in the depletion allowance...
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