Notes on the Revenue Act of 1918

[This part contains a digest of the decisions of the United States courts under the internal revenue acts from 1909 to 1918, inclusive. The West Publishing Co. and the Bank Law Publishing Co. authorized such use of their syllabi in the preparation of this compilation as the Treasury Department deemed proper. The department desires in this way to acknowledge the valuable assistance rendered by these companies.]

CORPORATION EXCISE TAX.

ACT OF AUGUST 5, 1909, SECTION 38.

Appropriation for collection of tax, June 17, 1910. Provision for refund of penalty tax, March 3, 1913. Repealed by act of October 3, 1913 (Sec. IV, S), containing provision for months of January and February, 1913, and for rights and liabilities accrued under act of August 5, 1909.

DECISIONS UNDER THE CORPORATION EXCISE TAX ACT,
AUGUST 5, 1909.

CONSTITUTIONALITY AND CONSTRUCTION IN GENERAL.

Application.

The corporation tax law applies to mining corporations. (Stratton's Independence v. Howbert, 231 U. S. 399, 1913.)

Constitutionality.

Corporation tax act is not unconstitutional as imposing a direct tax not apportioned according to population, though with reference to mining companies the net income of the corporation is determined by ascertaining the value of ore extracted after deducting the cost of extraction and treatment and the cost of administering the corporation, with a reasonable reservation for contingencies, since such method of determination does not make the tax a tax on the corpus of the estate. (Stratton's Independence v. Howbert, 207 Fed. 419, 1912, 231 U. S. 399, 400, 1913.)

The fact that a statute operates retroactively does not necessarily cause it to be unconstitutional. (Flint v. Stone-Tracy Co., 220 U. S. 107, 1911.)

The tax imposed by section 38, act August 5, 1909, is valid as an excise on the privilege of doing business in a corporate capacity. (Flint v. Stone-Tracy & Co., 220 U. S. 107, 1911, and Blalock v. Georgia Ry. & Elec. Co., 228 Fed. 296, 1916. Also United States v.

Whitridge, and United States v. Joline & Robinson, 231 U. S. 144, 1913.) (McCoach v. Minehill Ry. Co., 228 U. S. 295; Anderson v. Forty-two Broadway Co., 239 U. S. 69.)

"We have noticed such objections as are made to the constitutionality of this law as it is deemed necessary to consider. Finding the statute to be within the constitutional power of the Congress, it follows * * (Flint v. Stone-Tracy Co., 220 U. S. 107, 177.)

It was not an arbitrary classification for Congress to draw the line regarding deduction of interest on bonded indebtedness or other indebtedness at the precise point where the pecuniary interest of creditors overbalanced that of stockholders. (Anderson v. FortyTwo Broadway, 239 U. S. 69, 1915.)

Excise.

The tax imposed by section 38, act August 5, 1909, having been enacted before the ratification of the Sixteenth Amendment was not in any proper sense an income tax law; but was an excise tax upon the conduct of business in a corporate capacity, measured by the income, with certain qualifications prescribed by the act itself. (Stratton's Independence v. Howbert, 231 U. S. 399, 1913; Anderson v. Morris & Essex R. Co., 216 Fed. 83, 1914, National Bank of Commerce in St. Louis v. Allen, 223 Fed. 472, 1915; Anderson v. Forty-Two Broadway Co., 239 U. S. 69, 1915.)

Limitations of Congress.

The only limitation of the power of Congress in the imposition of excise taxes, such as those imposed on corporations, is that they be uniform throughout the United States, and by that is meant a geographical uniformity. (Camp Bird Ltd. v. Howbert, 249 Fed. 27, 1918, C. C. A. affirming the decision of the district court; case taken to the Supreme Court and reversed in 248 U. S., 590.)

Measurement of the tax.

The measurement of the corporation tax by net income is not beyond the power of Congress as arbitrary and baseless. (Flint v. Stone-Tracy Co., 220 U. S., 107, 1911.)

Statutory construction.

Tax laws should be given the same construction by all courts throughout the territorial limits within which the tax is levied. (Northern Tr. Co. v. McCoach, 215 Fed. 991, 1914.)

The excise-tax law of August 5, 1909, must be construed in favor of taxation. (United States v. Guggenheim Exploration Co., 238 Fed. 231, 1917.)

Purpose of the act.

The purpose of the act is not to tax property as such, or the mere conversion of property, but to tax the conduct of the business of corporations organized for profit by a measure based upon the gainful returns from their business operations and property from the time the act took effect. (Doyle v. Mitchell Bros. Co., 247 U. S. 179, 1918.)

Repealing provisions of the act of October 3, 1913.

Corporation excise-tax act August 5, 1909, which embraced no tax upon dividends received by corporations from stock of other corporations subject to the tax, was repealed by income-tax act October 3, 1913, section 4-S, which contained a proviso that the repeal of existing laws or modifications thereof embraced in the act should not affect any act done or right accruing, or any suit or proceeding had or commenced in any civil case before such repeal or modification, but all rights and liabilities under such laws should continue and might be enforced in the same manner as if such repeal or modification had not been made. Held, that such saving clause was intended to relate only to rights and liabilities in respect to taxes which had accrued under the act of 1909, and was not intended to cover excise taxes upon corporations for the months of January and February, 1913, which were imposed by the income-tax act, as the constitutional amendment of March 1, 1913, designed to permit taxation of incomes without apportionment, was not adopted until March 1, this being apparent from the provision in that act that excise taxes for two months shall be ascertained in accordance with the provisions of section 2-G. Consequently exemptions in the corporation excisetax act are not applicable to taxes imposed for those two months. (Butterick Co. v. United States and Federal Pub. Co. v. same, 240 Fed. 539, 1917.) Dismissed on motion of U. S. (248 U. S. 587.)

SUBDIVISION I, SECTION 38.

SEC. 38. That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any State or Territory of the United States or under the acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States or in Alaska or in the District of Columbia, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed; or if organized under the laws of any foreign country, upon the amount of net income over and above five thousand dollars received by it from business transacted and capital invested within the United States and its Territories, Alaska, and the District of Columbia during such year, exclusive of amounts so received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed: Provided, however, That nothing in this section contained shall apply to labor, agricultural or horticultural organizations, or to fraternal beneficiary societies, orders, or associations operating under the lodge system, and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders or associations, and dependents of such members, nor to domestic building and loan associations, organized and operated exclusively for the mutual benefit of their members, nor to any cor

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Notes on the Revenue Act of 1918, Volumes 1-2