Munson SS Line v. Commissioner of Internal Revenue

• Decision Date: 03 June 1935
• Docket Number: No. 265.,265.
• Citation: 77 F.2d 849
• Parties: MUNSON S. S. LINE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

77 F.2d 849 (1935)

MUNSON S. S. LINE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 265.

Circuit Court of Appeals, Second Circuit.

June 3, 1935.

White & Case, of New York City (Walter S. Orr, Russell D. Morrill, and Josiah Willard, all of New York City, of counsel), for petitioner.

Frank J. Wideman, Asst. Atty. Gen. (Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., of counsel), for respondent.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

This proceeding involves excess profits taxes for the year 1920 in the amount of $178,930.52, resulting from the disallowance of a deduction claimed under section 23 of the Merchant Marine Act of 1920, set forth in the margin.¹ The facts are not in dispute. During the year 1920 Munson Steamship Line, hereafter referred to as the petitioner, operated in foreign trade a fleet of ten vessels. The legal title to two of the vessels was in the petitioner. Each of the other eight vessels had been transferred by the petitioner to one of eight wholly-owned subsidiary corporations. All the vessels were built in American shipyards, were American owned, and were documented under the laws of the United States. The vessels registered in the names of the subsidiary corporations were operated by the petitioner under written time charters in some instances, and in others without any formal arrangements. The petitioner advertised all the vessels in the fleet, issued all bills of lading, hired the crews, paid their wages, and transacted the business under its own name. Through stock ownership and identity of officers and directors, the petitioner exercised complete dominion and control of the vessels, collecting the revenues, paying the expenses, and allocating to the subsidiaries by bookkeeping entries whatever Mr. Munson, the petitioner's president, considered as a fair share of the net earnings of the vessels. When any subsidiary declared a dividend the petitioner deposited in the bank account of such subsidiary a sufficient amount to enable it to pay the dividend to the petitioner as sole stockholder on the following day. Thus for practically all purposes the vessels were treated as though owned by the parent corporation. Of the net taxable income for 1920 of the eight subsidiaries, the sum of more than $1,000,000 represented net income from "charter hire" of the eight vessels while operated in foreign trade during that year. In the consolidated return of the petitioner and its affiliates, a deduction of $1,384,738.82 was claimed under section 23 of the Merchant Marine Act of 1920 (46 USCA § 878); the petitioner having during the year invested money in the building of a new vessel as required by that section. The Commissioner allowed the deduction in the amount of only $161,146.33. This represented the difference between the net earnings in foreign trade of one, and the net loss in foreign trade of the other, of the two vessels documented in the name of the petitioner. The Board sustained the Commissioner's ruling that no deduction was allowable on account of the net earnings in foreign trade of the subsidiaries' vessels. The correctness of this ruling is the first question for decision.

The declared purpose of the Merchant Marine Act of 1920 was to encourage the development and maintenance of an American merchant marine. 46 USCA § 861. Pursuant to that purpose section 23 (46 USCA § 878) offered to the "owner" of a vessel documented in the United States and operated in foreign trade, as an inducement to invest the earnings in additional ships, the allowance of a deduction for the computation of war-profits and excess-profits taxes. The present dispute concerns the meaning of the word "owner" as used in this section. Construed narrowly, as the Commissioner contends it should be, only the subsidiary corporations may be deemed the owners of the vessels respectively documented in their names. Construed broadly, the petitioner may be deemed the owner of the subsidiaries' vessels because of its stock ownership of the subsidiaries and its exercise of dominion over them and their property. That the word "owner" may be given a broad interpretation in order to carry out the legislative purpose is well illustrated by Flink v. Paladini, 279 U. S. 59, 49 S. Ct. 255, 73 L. Ed. 613, where stockholders of a corporation which owned a vessel were held to be within the act limiting the liability of shipowners (46 USCA § 183) in order to save them from the rigors of a California statute which made stockholders liable for corporate obligations. The opinion by Mr. Justice Holmes states the rationale of the decision as follows: "The purpose of the act of Congress was `to encourage investment by exempting the investor from loss in excess of the fund he is willing to risk in the enterprise.' * * * For this purpose no rational distinction can be taken between several persons owning shares in a vessel directly and making the same division by putting the title in a corporation and distributing the corporate stock. The policy of the statutes must extend equally to both. In common speech the stockholders would be called owners, recognizing that their pecuniary interest did not differ substantially from those who held shares in the ship. We are of opinion that the words of the acts must be taken in a broad and popular sense in order not to defeat the manifest intent." Similarly, in Olds & Whipple, Inc., v. Com'r, 75 F.(2d) 272, this court interpreted broadly the phrase "owned by the same interests" and held that a corporation and its stockholders were the same interests for purposes of the statute relating to affiliation.

The petitioner's argument that the broad construction for which it contends is more consonant with...