(T. D. 2185.) Special excise tax on corporations-Decision of Court. 1. DISCOUNT ON THE SALE OF BONDS. A book charge because of the sale of an issue of bonds at less than par is not deductible from gross income as part of the expenses. 2. INCREASE IN Value of ASSETS. Increase in the valuation of assets on the books of the corporation not income received during the year, where there was no addition to the plant and all that was done was to revalue the property. 3. JUDGMENT AFFIRMED. The judgment of the United States District Court (215 Fed., 967) was affirmed. TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, Washington, D. C., April 1, 1915. The appended decision of the United States Circuit Court of Appeals for the Third Circuit, in the case of the Baldwin Locomotive Works v. McCoach, collector, is published for the information of internal-revenue officers and others concerned. G. E. FLETCHER, Acting Commissioner of Internal Revenue. UNITED STATES CIRCUIT COURT OF APPEALS, THIRD CIRCUIT. MARCH TERM, 1915. ERROR to the District Court of the United States for the Eastern District of Pennsylvania. MOPHERSON, Judge: These writs of error require us to construe section 38 of the act of 1909 taxing the net income of corporations. The opinion of the District Court is reported in 215 Fed., at page 967. Several questions were raised below, but only two are before us, one on each writ. The undisputed facts are as follows: In 1909, 1910, and the first six months of 1911 the locomotive works was manufac turing locomotives in Philadelphia and made the returns of income required by the act. During this period there were some changes of corporate form and corporate name, but they involved no real change of interest and require no special attention. The tax admitted to be due was paid, but the collector demanded and on October 23, 1913, compelled the payment of a large additional sum. After repayment had been properly sought and refused, the pending action was instituted. The corporation did not succeed in its effort to sustain a credit of $500,000 that was claimed as an expense of the business in 1910 and 1911. What happened was this: In 1910 the company sold certain mortgage bonds, whose par value was $10,000,000, but received therefor $500,000 less, and of this amount $100,000 was charged against income in 1910, and $400,000 in 1911. The bonds were dated April 30, 1910, and will be due April 30, 1940, thus extending over parts of 31 fiscal years. The Government allowed one thirty-first of the discount as a proper charge against income for 1910, and half that amount against income for the first six months of 1911. The amount disallowed was $83,870.96 for 1910 and $39,935.48 for 1911, the tax thereon being $4,758.06. This is the first item in dispute, and we can add nothing of value to Judge Dickinson's excellent discussion. The reality of the transaction was that the corporation pledged its credit and its property for $10,000,000, and sold its promises to pay for $9,500,000. The sum thus received was of course not income, either gross or net; in effect, the transaction transmuted a part of the corporation's assets from credit or property into liquid cash, but it added nothing to its income. If the cost of thus changing the form of its assets is an expense of the business, it has not yet been paid, and will not be paid until 1940. The other question is raised by an appraisement of capital assets that was made in 1910. When the corporation was organized it took over certain real estate, manufacturing plant, and securities at a valuation, and took over also a large amount of patterns, drawings, tools, and fixtures without valuing them at all. In 1910 the assets were appraised at their actual value as of December 31, 1909, and by this appraisement the valuation of certain shares of stock of the Standard Steel Works Co. was increased $485,000; the value of the patterns, drawings, etc., was fixed for the first time at $2,954,086.72; and the valuation of its real estate was adjusted-raised in part and lowered in part-the net result being an increase of $593,449.66. Against this total an item not in dispute was charged off, leaving as the balance to be added to the capital valuations on its books the sum of $3,795,461.25. On this sum the Government collected a tax of $37,954.61, and this is the second item in dispute. We agree with the District Court that this increase of valuation was not income within the meaning of the statute. Nothing whatever was added to the corporate property, which remained exactly the same after the appraisement as before. The only thing done was to put upon the company's books an expression of expert opinion that certain property was worth a certain sum, and this can hardly be said to be income, or even gain, in any proper sense. The company could not become either richer or poorer by making a few book entries that merely recorded a new estimate of how much it was worth. In each case the judgment is affirmed. (T. D. 2186.) War revenue act of June 13, 1898-Stamp tax on charter parties— 1. JURISDICTION. The United States District Court has jurisdiction of suits against the United States based upon the act of July 27, 1912. 2. ACT OF JULY 12, 1912, INTERPRETED. The act of 1912 is not limited to the refund of legacy taxes assessed under section 29 of the war revenue act. 3. STAMP TAX ON CHARTER PARTIES. The stamp tax on charter parties under the war revenue act of 1898, exclusively for carriage of cargoes exported, declared unconstitutional. 4. JUDGMENT AFFIRMED. The judgment of the United States District Court (217 Fed., 680) affirmed. TREASURY DEPARTMENT, OFFICE OF COMMISSIONER OF INTERNAL REVENUE, Washington, D. C., April 7, 1915. The appended opinion of the Supreme Court of the United States in the case of the United States, plaintiff in error, v. Frederick W. 7 Hvoslef and William S. Walsh, survivors of William Bennett, is published for the information of internal-revenue officers and others concerned. G. E. FLETCHER, Acting Commissioner of Internal Revenue. SUPREME COURT OF THE UNITED STATES. No. 331. OCTOBER TERM, 1914. United States, plaintiff in error, v. Frederick W. Hvoslef and William S. Walsh, sur... vivors of William Bennett. IN ERROR to the District Court of the United States for the Southern District of New York. [March 22, 1915.] Mr. Justice HUGHES delivered the opinion of the court: This is a writ of error to review a judgment of the District Court awarding a recovery against the United States for the amount paid as stamp taxes upon certain charter parties under section 25 of the war revenue act of June 13, 1898 (c. 448, 30 Stat., 448, 460). These charter parties were exclusively for the carriage of cargo from ports in the States of the United States to foreign ports and the imposition of the taxes was held to be in violation of section 9, Article I, of the Constitution of the United States, which provides: "No tax or duty shall be laid on articles exported from any State." The suit was brought under paragraph 20 of section 24 of the Judicial Code, which confers jurisdiction, concurrent with the Court of Claims, upon the District Court “of all claims not exceeding ten thousand dollars founded upon the Constitution of the United States or any law of Congress" (see act of March 3, 1887, c. 359, sec. 1, 24 Stat., 505); and the claim of the plaintiffs (defendants in error) was based upon the act of July 27, 1912 (c. 256, 37 Stat., 240), which is as follows: That all claims for the refunding of any internal tax alleged to have been erroneously or illegally assessed or collected under the provisions of section twenty-nine of the act of Congress approved June thirteenth, eighteen hundred and ninety-eight, known as the war revenue tax, or of any sums alleged to have been excessive or in any manner wrongfully collected under the provisions of said act, may be presented to the Commissioner of Internal Revenue on or before the first day of January, nineteen hundred and fourteen, and not thereafter. SEC. 2. That the Secretary of the Treasury is hereby authorized and directed to pay, out of any moneys of the United States not otherwise appropriated, to such claimants as have presented or shall hereafter so present their claims, and shall establish such erroneous or illegal assessment and collection, any sums paid by them or on their account or in their interest to the United States under the provisions of the act aforesaid. The Government demurred to the petition upon the grounds that the court had no jurisdiction of the defendant or of the subject of the action and that the petition did not state facts sufficient to constitute a cause of action. The demurrer was overruled (217 Fed., 680) and, after answer, the case was heard on the merits. The court found in substance that the firm, of which the defendants in error were the surviving members, had paid without protest certain stamp taxes on charter parties of the character described; that on filing their claim under the act of 1912 it had been certified by the collector to be correct in its statement of facts, but that the Commissioner of Internal Revenue had rejected it for the reason that the act was not applicable. Holding the taxes to be unconstitutional and the claim to have been duly presented, the court rendered judgment for the claimants. The Government contends that the court erred in deciding (1) that the court had jurisdiction of the case, (2) that it need not be averred or proved that the tax was paid under protest, and (3) that the tax was invalid. 78411°-VOL 17-15-10 The first contention-with respect to jurisdiction-is that, the claim having been rejected, the remedy of the claimants was an action against the collector of internal revenue and not against the United States. The course of the pertinent legislation since the passage of the war revenue act of 1898 may be briefly reviewed: In 1900 Congress provided for the redemption of, or allowance for, internal revenue stamps, including cases where "the rates or duties represented thereby" had been "excessive in amount, paid in error, or in any manner wrongfully collected." Act of May 12, 1900 (c. 393, 31 Stat., 177). In 1902, various provisions of the war revenue act, and amendments thereof, including sections 6, 12, 25, Schedules A and B, with regard to stamp taxes, and section 29 as to taxes on legacies and distributive shares were repealed. Act of April 12, 1902 (c. 500, 32 Stat., 96, 97). The repealing act was to take effect on July 1, 1902, and shortly before that date Congress made specific provision that certain taxes collected under the repealed statute should be refunded. Act of June 27, 1902 (c. 1160, 32 Stat., 406). These taxes were (1) those that had been paid upon bequests for uses of a religious, literary, charitable, or educational character, etc.; (2) the "sums paid for documentary stamps used on export bills of lading, such stamps representing taxes which were illegally assessed and collected;" and (3) taxes theretofore or thereafter paid upon legacies or distributive shares to the extent that they were collected "on contingent beneficial interests' which had not become vested prior to July 1, 1902. It was also provided that no tax should thereafter be assessed under the act in respect of any such interest which had not become "absolutely vested in possession or enjoyment" prior to the date mentioned. The act of 1902 was followed by other refunding statutes. In United States v. New York & Cuba Mail Steamship Co. (200 U. S., 488) suit had been brought in the District Court to recover taxes which had been paid under the war revenue act upon manifests of cargoes bound to foreign ports, and it was held (following Chesebrough v. United States, 192 U. S., 253) that no recovery could be had because the payment had been voluntarily made; the jurisdiction of the court was not impugned. Thereupon Congress provided for the refunding of sums paid for stamps "on export ships' manifests" representing taxes "which were illegally assessed and collected"-“said refund to be made whether said stamp taxes were paid under protest or not, and without being subject to any statute of limitations." Act of March 4, 1907 (c. 2919, 34 Stat., 1373). Again, in 1909, the Secretary of the Treasury was directed to pay to those who had duly presented their claims prior to July 1, 1904, the sums paid for stamps used "on foreign bills of exchange" (drawn between July 1, 1898, and June 30, 1901) "against the value of products or merchandise actually exported to foreign countries, such stamps representing taxes which were illegally assessed and collected, said refund to be made whether said stamp taxes were paid under protest or duress or not." Act of February 1, 1909 (c. 53, 35 Stat., 590); see also acts of August 5, 1909 (c. 7, 36 Stat., 120); June 25, 1910 (c. 385, 36 Stat., 779); August 26, 1912 (c. 408, 37 Stat., 626). It thus appears that the act of 1912, upon which the present claim is based, was the culmination of a series of statutes which leave no question as to the intention of Congress to create an obligation on the part of the United States in favor of those holding the described claims, and it follows that these claims must be deemed to be founded upon a "law of Congress" within the meaning of the provisions of the Tucker Act, now incorporated in the Judicial Code. See Medbury v. United States (173 U. S., 492, 497); McLean v. United States (226 U. S., 374, 378). With respect to the refunding of taxes paid on the "contingent interests" described in the act of June 27, 1902, supra, it has been held that upon the rejection of the claim an action lies against the United States in the Court of Claims, or in the District Court (where the amount is within the prescribed limit). Fidelity Trust Co. v. United States (45 C. Cls., 362, s. c. 222 U. S., 158); United States v. Jones (236 U. S., 106); Thacher v. United States (149 Fed., 902); United States v. Shipley (197 Fed., 265). And this is true not only where such taxes were paid before the refunding act was passed but also where subsequently they were wrongfully collected in violation of its provisions. United States v. Jones, supra. The same rule must obtain as to all claims described in the act of 1912, and in this view we are not concerned in the present case with questions arising under the general provisions of the internal-revenue laws. It is urged by the Government that Congress intended to limit the act of 1912 to the refunding of death duties erroneously or illegally assessed under section 29 of the war revenue act. Reference is made to the legislative history of the statute, but the contention lacks adequate support. See House reports, Sixty-second Congress, second session (Report No. 848, June 6, 1912). While the pendency of claims for the refunding of such taxes may have induced the passage of the act, its terms were not confined to these. On the contrary, after providing for the claims arising under section 29, Congress added the further clause making express provision for the presentation of claims for the refunding "of any sums alleged to have been excessive or in any manner wrongfully collected under the provisions of said act"; and the Secretary of the Treasury is directed to pay to those who duly present their claims and establish the erroneous or illegal collection "any sums paid by them * * * to the United States under the provisions of the act aforesaid.” We are not at liberty to read these explicit clauses out of the statute. Another objection to the jurisdiction of the District Court is that under section 5 of the Tucker Act (a provision which was saved from repeal by section 297 of the Judicial Code) the suit was to be brought "in the district where the plaintiff resides." (24 Stat., 506.) The petition alleged that petitioners were the surviving members of a copartnership engaged in business in the city of New York "within the district aforesaid'' and that their "business and partnership residence was and is in the Borough of Manhattan, City of New York, in said district. It is said that the allegation was insufficient to show the residence required by the statute, but it does not appear that any such objection was made in the court below. The general language of the demurrer with respect to jurisdiction had appropriate reference to the general authority of the court to entertain such a suit against the United States and to the jurisdiction of the subject matter of the action. But assuming that the subject matter was within the jurisdiction of the court the requirement as to the particular district within which the suit should be brought was but a modal and formal one which could be waived, and must be deemed to be waived in the absence of specific objection upon this ground before pleading to the merits. St. Louis, etc., Railway Co. v. McBride (141 U. S., 127, 131); Central Trust Co. v. McGeorge (151 U. S., 129, 133); Martin v. Baltimore & Ohio Railroad Co. (151 U. S., 673, 688); Interior Construction Co. v. Gibney (160 U. S., 217, 220); Western Loan Co. v. Butte & Boston Mining Co. (210 U. S., 368); Arizona & New Mexico Railway Co. v. Clark (235 U. S., 669, 674). It is also apparent, in the light of the manifest purpose and scope of the legislation to which we have referred, that the contention based upon the absence of protest can not be sustained. Where taxes have been illegally assessed upon the "contingent interests" described in the refunding act of 1902 it has been held that recovery may be had, although the taxes were paid without protest. United States v. Jones, supra. In the acts of 1907 and 1909, supra, with respect to stamp taxes on "export ships' manifests" and on foreign bills of exchange against exports, Congress expressly provided for refunding whether the taxes had been paid under protest or not. The fact that these express words were not repeated in the act of 1912 can not, in view of the nature of the subject, be regarded as evidencing a different intent; rather must this act receive in this respect the same construction as that which has been given to the ́act of 1902. If it appeared that the sums sought to be recovered were not legally payable, and the claim was duly presented within the time fixed, the right to repayment was established by the express terms of the statute. The question, then, is whether the tax, so far it was laid upon charter parties which were exclusively for the carriage of cargo from State ports to foreign ports, was a valid |