American-Hawaiian SS Co. v. United States, K-476.

• Decision Date: 09 February 1931
• Docket Number: No. K-476.,K-476.
• Parties: AMERICAN-HAWAIIAN S. S. CO. v. UNITED STATES.
• Court: U.S. Claims Court

46 F.2d 592 (1931)

AMERICAN-HAWAIIAN S. S. CO. v. UNITED STATES.

No. K-476.

Court of Claims.

February 9, 1931.

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Arthur A. Ballantine, of New York City (George E. Cleary, of New York City, Clark T. Brown, of Washington, D. C., and Root, Clark, Buckner & Ballantine, of New York City, on the brief), for plaintiff.

Ralph C. Williamson, of Washington, D. C., and Charles B. Rugg, Asst. Atty. Gen. (Ottamar Hamele and Isadore Graff, both of Washington, D. C., on the brief), for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.

GREEN, Judge.

Plaintiff brings this suit principally to recover what is claimed to be an overpayment on federal income and excess-profits taxes for the year 1920. Alternatively, in case it fails to recover for an overpayment on the taxes of 1920, it seeks to recover upon a claim for additional interest upon a refund allowed upon taxes for the year 1919, and also the year 1921 is involved if a refund for 1920 is allowed because of an increase in invested capital and a consequent refund of taxes for that year which will follow if the court decides that the plaintiff is entitled to the refund claimed for 1920.

A refund of $600,663.19 is claimed for the year 1920. Whether this refund should be granted depends upon the construction to be given the words "taxable year" as used in the Merchant Marine Act of 1920 (title 46, USCA c. 24, § 861 et seq., 41 Stat. 988). That portion of this act the construction of which is in dispute reads as follows:

"Deductions allowed owners of documented vessels of United States for income and excess-profits tax purposes. The owner of a vessel documented under the laws of the United States and operated in foreign trade shall, for each of the ten taxable years while so operated, beginning with the first taxable year ending after June 5, 1920, be allowed as a deduction for the purpose of ascertaining his net income subject to the war-profits and excess-profits taxes imposed by Title III of the Revenue Act of 1918 an amount equivalent to the net earnings of such vessel during such taxable year. * * *" Section 23 (46 USCA § 878).

The act also contained certain provisions which the owner of such vessel was required to comply with in order to be entitled to the deduction.

Plaintiff was the owner of such vessels, and its net earnings therefrom in foreign trade amounted to $11,200,184.35 for the calendar year 1920. It has complied with the provisions of the act and fully satisfied all the requirements to entitle it to the deduction of the full amount of its net earnings for that year.

On March 1, 1920, the plaintiff acquired for cash substantially all the stock of the Coastwise Transportation Company, a New Jersey corporation, and the two companies became affiliated corporations, within the meaning of section 240 of the Revenue Act of 1918. During the year 1920, neither was affiliated with any other corporation.

It was the practice of the plaintiff to keep its books and records on the basis of an established annual accounting period which ended with December 31st, and it had filed its returns in accordance therewith. Its return for the year 1920 was filed on March 15, 1921. This return was a consolidated return showing the income and invested capital of plaintiff for the full calendar year 1920, and the income and invested capital of the Coastwise Transportation Company for the period from March 1, 1920 to December 31, 1920, during which time the two corporations were affiliated.

The Coastwise Transportation Company kept its books and records on the basis of an annual accounting period ending with the last day of February. The end of the fiscal year 1920 therefore coincided with the date of the acquisition of its stock by the plaintiff, and it filed a return for the fiscal year ending February 29, 1920, and on December 31, 1920, closed its books of accounts and brought its accounting period into conformity with that of plaintiff.

In finally determining the plaintiff's tax liability for the year 1920, the Commissioner of Internal Revenue divided the calendar year into two taxable periods: One beginning January 1 and ending February 29, 1920, during which time the plaintiff and the Coastwise Transportation Company were not affiliated; and one beginning March 1 and ending December 31, 1920, during which time the two companies were affiliated. The computation of the tax liability for the period January 1 to February 29, inclusive, was based on the net income and invested capital for that period of the plaintiff alone, and the computation of the tax liability for the period March 1 to December 31, inclusive, was based on the consolidated net income and invested capital of the affiliated companies for this period. Consequently, for the period of January 1 to February 29, 1920, the commissioner disallowed the deduction provided by section 23 of the Merchant Marine Act of 1920, the amount disallowed being two-twelfths of the net earnings of the plaintiff's vessels operated in foreign trade, or $1,866,697.39. This disallowance resulted in the additional taxes, the refund of which is sought herein.

In refusing to make any deduction for the period from January 1 to February 29, 1920, the commissioner based his action upon the theory that this period was a separate taxable year, as it ended prior to the enactment of the Merchant Marine Act of June 5, 1920. If it was in fact a "taxable year" within the meaning of the statute, it was a year for which no deduction was allowable under the terms of the act. On the other hand, the plaintiff contends that the only return it was required to file for the year 1920 was the return which it made as stated above, being one return for the calendar year including the income and invested capital of both of the affiliated companies. As the issue between the parties is wholly with reference to the meaning of the words "taxable year" as used in the act, we next proceed to a consideration of that question.

At the outset it must be said that the words "taxable year," when used in the ordinarily accepted meaning, refer to the annual accounting period of a taxpayer. On the other hand, it must be conceded that the term "taxable year" has often been used to mean a period less than twelve months. The words "taxable year" therefore, as used in the Merchant Marine Act, are ambiguous, and it becomes necessary to determine the intent of Congress in the enactment of the statute from the surrounding circumstances.

The purpose of the act was to encourage the building of American ships to be operated in the foreign trade, and we think this aid was...