American National Co v. United States, 167

• Citation: 47 S.Ct. 520,274 U.S. 99,71 L.Ed. 946
• Decision Date: 11 April 1927
• Docket Number: No. 167,167
• Parties: AMERICAN NATIONAL CO. v. UNITED STATES
• Court: U.S. Supreme Court

274 U.S. 99

47 S.Ct. 520

71 L.Ed. 946

AMERICAN NATIONAL CO.

v UNITED STATES.

No. 167.

Argued Feb. 25, 1927.

Decided April 11, 1927.

Messrs. Charles H. Garnett and Streeter B. Flynn, both of Oklahoma City, Okl., for appellant.

The Attorney General and Mr. Alfred A. Wheat, of Washington, D. C., for the United States.

Mr. Justice SANFORD delivered the opinion of the Court.

The receiver of the F. B. Collins Investment Company-proceeding under section 24, par. 20, of the Judicial Code¹-brought this suit against the United States to recover an additional income and excess profits tax of $4,287.64 that had been assessed against the Company for the year 1917 under the Revenue Act of 1916² and the War Revenue Act of 1917³, and paid by it under protest. The District Court, sitting as a Court of Claims, on its findings of fact, entered judgment in favor of the United States, before the effective date of the Jurisdictional Act of 1925. And this direct appeal was allowed. J. Homer Fritch, Inc., v. United States, 248 U. S. 458, 39 S. Ct. 158, 63 L. Ed. 359.

The question here presented is whether under the provisions of the Revenue Act of 1916, the Company in computing its taxable net income for 1917 was entitled to deduct from its gross income the amount of certain obligations for the payment of money which it claimed were 'expenses' incurred in the operation of its business within that year.

The Revenue Act of 1916 provided, in sections 12(a) and 13(a), that the net income of a corporation should be ascertained by deducting from its gross income received within the year, first, the 'ordinary and necessary expenses paid within the year in the maintenance and operation of its business'; and, in section 13(d), that a corporation 'keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of Internal Revenue, * * * make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned.' In Treasury Decision 2433,⁴ issued in January, 1917, dealing with the latter provision, the Commissioner ruled that:

'Under this provision it will be permissible for corporations which accrue on their books monthly or at other stated periods amounts sufficient to meet fixed annual or other charges to deduct from their gross income the amounts so accrued, provided such accruals approximate as nearly as possible the actual liabilities for which the accruals are made, and provided that in cases wherein deductions are made on the accrual basis as hereinbefore indicated income from fixed and determinable sources accruing to the corporations must be returned, for the purpose of the tax, on the same basis. * * * This ruling contemplates that the income and authorized deductions shall be computed and accounted for on the same basis and that the same practice shall be consistently followed year after year.'

The findings of fact show that the Company, an Oklahoma corporation, had been engaged since 1908 in the business of making loans secured by mortgages upon real estate, which it negotiated and sold to investors. Under its usual course of business the borrower, upon the making of a loan, executed to the order of the Company his note for the amount loaned, due in five years, with interest at 5 per cent. per annum, payable semiannually; with the privilege of paying $100 or any multiple thereof on the principal, on or after two years, at the maturity of any interest payment. At the same time the borrower executed to the Company another note due in two years, without interest, for 10 per cent. of the total amount of the loan, as the Company's commission or compensation for making and negotiating the loan. From these commission notes the Company derived its income.

At first the Company negotiated and sold the loan notes to investors entirely through brokers or agents, to whom it paid fees or commissions. But from and after 1916 it sold many of these notes direct to investors; and being thus relieved from payment of these fees or commissions, and as an inducement to investors to purchase from it direct, agreed to pay them bonuses upon the notes as added consideration for the purchases; this being evidenced by a contract, styled a Guarantee, which the Company gave the investor, agreeing to pay him during the life of the loan, according to the terms of the note, 1 per cent. per annum of its amount, in addition to the 5 per cent. per annum that the borrower was to pay.

The Company consistently kept its books of account from year to year on an 'accrual basis.' Under the practice followed from the inception of its bonus method of doing business, whenever a loan note was sold it charged on its books, as an expense incurred in the sale, the aggregate amount of the payments called for in the bonus contract, computed at 1 per cent. per annum to the maturity of the note, and credited the investor on its books with a like amount, in a subsidiary bills payable ledger. The total amount of this liability on the bonus contracts was carried on its general ledger under a control account called the...