Welch v. Obispo Oil Co

• Decision Date: 26 April 1937
• Docket Number: No. 602,602
• Parties: WELCH v. OBISPO OIL CO
• Court: U.S. Supreme Court

301 U.S. 190

57 S.Ct. 684

81 L.Ed. 1033

WELCH

v OBISPO OIL CO.

No. 602.

Argued March 10, 11, 1937.

Decided April 26, 1937.

The Attorney General and Mr J. Louis Monarch, of Washington, D.C., for petitioner.

Mr. Joseph D. Peeler, of Los Angeles, Cal., for respondent.

Mr. Justice BRANDEIS delivered the opinion of the Court.

The Revenue Act of 1918, c. 18, 40 Stat. 1057, laid upon corporations, in addition to the income tax, a war profits and excess profits tax at very high rates. Because the profits tax might prove unduly burdensome, Congress provided by sections 327 and 328 for a special assessment of the profits tax by the Commissioner of Internal Revenue under certain circumstances. The question for decision in this case is whether, when a special assessment has been made of the profits tax, a court may entertain an action for refund of an amount paid on the accompanying income tax on the ground that the income was erroneously determined.

Obispo Oil Company brought, in the federal court for Southern California, this action to recover an amount alleged to have been illegally exacted as income tax for the year 1920. Upon final assessment, the Commissioner had assessed its net income for that year at $1,476,330.52. Under section 236(b), it was necessary to deduct the profits tax and other amounts from the net income in order to determine the amount of the taxable net income. Because the net income of that year included large funds theretofore long in litigation, the Commissioner made a special assessment under section 327(d) to determine the profits tax.¹ Where a special assessment is made, section 328 commands that 'the tax shall be the amount which bears the same ratio to the net income of the taxpayer * * * for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income * * * for such year.' The Commissioner fixed that ratio as 9.67 per cent.; and, applying it to the Obispo Company's net income of $1,476,330.52, computed the profits tax at $142,765.73. When this and other allowable sums were deducted, the taxable net income was found to be $1,245,430.63.

The statutory tax rate on net income being 10 per cent., the income tax was determined to be $124,543.06. The Company paid the income tax so assessed; filed then a claim for refund thereof, setting up several grounds of recovery; and, the refund being refused, brought this suit against the Collector of Internal Revenue for the Sixth Collection District of California for alleged overpayment. The amended complaint alleged that the sum had been 'illegally exacted from the plaintiff on account of additional income and profits taxes for the year 1920.' In a trial held in 1931, the District Court held that the company was entitled to recover the full amount claimed. 48 F.(2d) 872. The Collector appealed to the United States Circuit Court of Appeals; but before the appeal was determined there, the case was, upon agreement of the parties, referred back to the District Court for correction, to accord with our decision in North American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197, which had meanwhile been rendered. Then the Collector moved in the District Court for judgment, claiming that the Com- pany was not entitled to recover any part of the sum sued for; and, specifically, that the court had 'no jurisdiction of the subject matter of this action, the tax sought to be recovered having been assessed under the special assessment provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921 (40 Stat. 1093; 42 Stat. 275).'

The District Court overruled the Collector's motion to dismiss; ruled that the net income as determined by the Commissioner was excessive in the net amount of $40,102.44; and entered judgment for the Company in the sum of $4,010.24 with interest and costs. The Company appealed to the Circuit Court of Appeals, claiming chiefly that the 1920 net income should have been reduced by an additional depletion allowance of $516,598.10. The Collector filed a cross-appeal, claiming, among other things, that the District Court was without jurisdiction over the subject matter of the action, 'the tax sought to be recovered having been determined and assessed by the Commissioner * * * under the special assessment provisions of Sections 327 and 328 of the Revenue Acts of 1918 and 1921.' The Circuit Court of Appeals affirmed the District Court in holding that it had jurisdiction of the subject-matter; but reversed the judgment on the ground that the assessment had overstated the net income by the net amount of $556,700.54, so that there should have been deducted the sum of $516,598.10 for depletion, in addition to the sum found by the District Court. 85 F.(2d) 860. Certiorari was granted upon petition of the Collector (300 U.S. 647, 57 S.Ct. 435, 81 L.Ed. -) because of the practical importance of the question of jurisdiction presented.²

The Commissioner's action in applying or rejecting the procedure of sections 327 and 328, and his computation of the profits tax thereunder and of the regular income tax are reviewable by the Board of Tax Appeals. When no special assessment has been made of the profits tax, an action will lie to recover an amount erroneously exacted either for income or for profits taxes. But no court...