La Belle Iron Works v. United States

Decision Date16 May 1921
Docket NumberNo. 453,453
Citation41 S.Ct. 528,256 U.S. 377,65 L.Ed. 998
CourtU.S. Supreme Court

Messrs. Charles McCamic and James Morgan Clarke, both of Wheeling, W. Va., Charles E. Hughes, of New York City, and J. Harry Covington, Edward B. Burling, Spencer Gordon, and Oscar W. Underwood, Jr., all of Washington, D. C., for appellant.

[Argument of Counsel from pages 378-382 intentionally omitted] Mr. Solicitor General Frierson, for the United States.

Mr. Justice PITNEY delivered the opinion of the Court.

The Court of Claims dismissed appellant's petition which claimed a refund of $1,081,184.61, alleged to have been erroneously assessed and exacted as an 'excess profits tax' under title 2 of the Revenue Act of 1917 (Act of October 3, 1917, c. 63, 40 Stat. 300, 302 et seq. [Comp. St. 1918, Comp. St. Ann. Supp. 1919; § 6336 3/8a et seq.]). The case involves the construction and application of those provisions by which the deduction from income, for the purposes of the tax, is measured by the 'invested capital' of the taxpayer; and a question is raised as to the constitutionality of the act as construed and applied.

Title 1 of the act imposed 'war income taxes' upon individuals and corporations in addition to those imposed by Act of September 8, 1916, c. 463, 39 Stat. 756. Title 2 provided for the levying of 'war excess profits taxes' upon corporations, partnerships, and individuals. As applied to domestic corporations, the scheme of this title was that, after providing for a deduction from income (section 203, p. 304 [Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336 3/8 d]), equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period (the years 1911, 1912, and 1913) was of the invested capital for that period, but not less than 7 nor more than 9 per cent., plus $3,000, it imposed (section 201, p. 303 [Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336 3/8b]), in addition to other taxes, a graduated tax upon the net income beyond the deduction, commencing with 20 per centum of such net income above the deduction, but not above 15 per centum of the invested capital for the taxable year, and running as high as 60 per centum of the net income in excess of 33 per centum of such capital. It applied to 'all trades or business,' with exceptions not now material (page 303).

What should be deemed 'invested capital' was defined by section 207 (page 306 [Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336 3/8h]), which, so far as pertinent, is set forth in the margin.1

The case was decided upon a demurrer to the petition, in which the facts were stated as follows: Appellant is a domestic corporation and, prior to the year 1904, acquired ore lands for which it paid the sum of $190,000. Between that time and the year 1912 exten sive explorations and developments were carried on (the cost of which is not stated), and it was proved that the lands contained large bodies of ore and had an actual cash value not less than $10,105,400, and at all times during the years 1912 to 1917, inclusive, their actual cash value was not less than the sum last mentioned. In the year 1912 the company increased the valuation of said lands upon its books by adding thereto the sum of $10,000,000, which it carried to surplus, and thereupon, in the same year, declared a stock dividend in the sum of $9,915,400, representing the increase in value of the ore lands. Theretofore appellant's capital stock and consisted of shares issued, all of one class, having a par value of $9,915,400. The declaration of the stock dividend was carried out by the surrender to the company of all the outstanding stock, and its cancellation, and the exchange of one share of new common and one share of new preferred stock for each share of the original stock.

In returning its annual net income for the year 1917 the company stated its invested capital to be $26,322,904.14, in which was included the sum of $10,105,400 as representing the value of its ore lands. The Commissioner of Internal Revenue caused a reassessment to be made, based upon a reduction of the invested capital to $16,407,507.14; the difference ($9,915,400) being the increase in the value of the ore lands already mentioned. The result was an additional tax of $1,081,184.61, which, having been paid, was made the subject of a claim for refund; and this having been considered and rejected by the Commissioner, there followed a suit in the Court of Claims, with the result already mentioned.

Appellant's contentions, in brief, are: First, that the increased value of the ore lands, placed upon the company's books in 1912, ought to be included in invested capital under section 207(a)(3), as 'paid in or earned surplus and undivided profits.' Second, that within the meaning of clause (2), which provides that invested capital shall include 'the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation,' the stock of the company issued in 1912, consisting of $9,915,400 of preferred stock and an equal amount of common, was fully paid for: Either (a) by the tangible assets, including the ore properties at their increased value, or (b) by the surrender of all the certificates representing the old common stock, which, it is said, had an actual cash value equal to double its par. And, third, that the construction put upon the act by the Treasury Department, based as it is said not upon value but upon the single feature of cost, disregarding the time of acquisition, would render the act unconstitutional as a deprivation of property without due process under the Fifth Amendment, because so arbitrary as to amount in effect to confiscation, and hence that this construction must be avoided.

Reading the entire language of section 207 in the light of the circumstances that surrounded the passage of the act, we think its meaning as to 'invested capital' is entirely clear. The great war in Europe had been in progress since the year 1914, and the manufacture and export of war supplies and other material for the belligerent powers had stimulated many lines of trade and business in this country, resulting in large profits as compared with the period before the war, and as compared with ordinary returns upon the capital embarked. The United States had become directly involved in the conflict in the spring of 1917, necessitating heavy increases in taxation; at the same time manufactures and trade of every description were rendered even more active, and in certain lines more profitable, than before, so that the unusual gains derived therefrom formed a natural subject for special taxation.

On the eve of our entry, and in order to provide a 'special preparedness fund' for army, navy, and fortification purposes, Act March 3, 1917, c. 159, 39 Stat. 1000, was passed, which, in title 2, provided for an excess profits tax on corporations and partnerships equal to 8 per centum of the amount by which their net income exceeded $5,000 plus 8 per centum of the 'actual capital invested'; and, in section 202 (p. 1001), defined this term to mean '(1) actual cash paid in; (2) the actual cash value, at the time of payment, of assets other than cash paid in; and (3) paid in or earned surplus and undivided profits used or employed in the business,' but not to include money or other property borrowed.

The Revenue Act of October 3, 1917, passed after we had become engaged in the war, took the place of the Act of March 3, and embodied a 'war excess profits tax,' with higher percentages imposed upon the income in excess of deductions and a more particular definition of terms. A scrutiny of the particular provisions of section 207 shows that it was the dominant purpose of Congress to place the peculiar burden of this tax upon the income of trades and businesses exceeding what was deemed a normally reasonable return upon the capital actually embarked. But if such capital were to be computed according to appreciated market values based upon the estimates of interested parties (on whose returns perforce the government must in great part rely), exaggerations would be at a premium, corrections difficult, and the tax easily evaded. Section 207 shows that Congress was fully alive to this and designedly adopted a term—'invested capital' and a definition of it, that would measurably guard against inflated valuations. The word 'invested' in itself imports a restrictive qualification. When speaking of the capital of a business corporation or partnership, such as the act deals with, 'to invest' imports a laying out of money, or money's worth, either by an individual in acquiring an interest in the concern with a view to obtaining income or profit from the conduct of its business, or by the concern itself in acquiring something of permanent use in the business; in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains. See Webster's New Internat. Dict. 'Invest,' 8; Century Dict. 'Invest,' 7; Standard Dict. 'Invest,' 1.

In order to adhere to this restricted meaning and avoid exaggerated valuations, the draftsman of the act resorted to the test of including nothing but money, or money's worth, actually contributed or converted in exchange for shares of the capital stock, or actually acquired through the business activities of the corporation or partnership (involving again a conversion) and coming in ab extra, by way of increase over the original capital stock. How consistently this was carried out becomes evident as the section is examined in detail. Cash paid in, and tangible property paid in other than cash, are confined to such as were contributed for stock or shares in the corporation or partnership; and the property is to be taken at its actual cash value 'at the time of such payment'...

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    ...of the laws. Here, we are concerned only with the Fifth Amendment. As was said by this Court in La Belle Iron Works v. United States, 256 U. S. 377, 392, 41 S. Ct. 528, 532, 65 L. Ed. 998: 'The Fifth Amendment has no equal protection clause; and the only rule of uniformity prescribed with r......
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