QJortipll IGam §^11001 Slibraty Cornell University Library KF6464.M14 A treatise on the federal corporation ta 3 1924 020 012 203 Cornell University Library The original of tliis book is in tlie Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31 92402001 2203 A TREATISE ON THE FEDERAL CORPORATION TAX LAW OF 1909 A TREATISE ON THE FEDERAL CORPORATION TAX LAW OF 1909 TOGETHER WITH APPENDICES CONTAINING THE ACT OF CONGRESS AND TREASURY REGULATIONS WITH ANNOTATIONS AND EXPLANATIONS AND FORMS OF RETURNS By ARTHUR W. MAC HEN, Jr., OF THE BALTIMORE BAB AuTHOB OF " The Modebk Law of Cobpokations " BOSTON LITTLE, BROWN, AND COMPANY 1910 Copyright, 1910, Br Akthur W. Machen, Jb. All rights reserved B 79V/0 Electrotyped and Printed at THE COLONIAL PRESS C. H. Simondsb- Co., Boston, U.S. A . PREFACE The publication of a commentary upon the new federal tax on corporations, companies and associar tions needs no apology. Upon a matter of such importance as this new tax law, corporations should certainly know their rights, — even those which they may not, knowing, dare maintain. All business corporations throughout the country will be called upon within the next few weeks to make returns under this statute; and in order to do so intelligently and without risk to themselves, they and their counsel must ascertain their rights and liabilities much more thoroughly than can be done by a mere perusal of the Act of Congress. In order, however, to be of assistance at this juncture, it is necessary that a treatise should be published speedily. Time is of the essence. The indulgence of the reader is, therefore, asked for any defects in this book which but for the necessity of despatch in its preparation and publication the author might have been able to remedy. Every energy has been bent to the one object of furnishing practical assistance in what may not inappropriately be described as an emergency. The aim has been to explain whatever may be cer- VI PEEFAOE. tain in respect to this statute, and to suggest debat- able questions. The decisions under former federal statutes taxing incomes, or the earnings of corpora- tions, as well as relevant decisions under the English income-tax laws, will be found, it is hoped, to be fully collected. It is believed, therefore, that the book is more than a mere " annotated edition " of the Act of Congress. In respect to points of general law — particularly of general corporation law — which have a bearing upon the new federal statute, it has seemed better usually to refer to text-books where those questions are discussed or to encyclo- pedias where full citations of authorities may be found, rather than to set out the authorities in full with a consequent unreasonable increase in the size of the volume and of a protracted delay in its publication. A. W. M., Jb. Baltimokb, Januaiy 17th, 1910. TABLE OF CONTENTS PAQB Table of Cases ix Table op Federal Statutes Cited .... xxiii CHAPTER I § 1-3. Inthodtjctokt ,1 CHAPTER II I 4-14. What is the Tax on 6 CHAPTER III § 16-29. What Companies ahe Subject to the Tax 17 CHAPTER IV § 30-84. How THE Taxable Income is Calcu- lated 37 CHAPTER V § 85-118. The Return 103 CHAPTER VI § 119-131. The Assessment and Collection . . 139 Viii CONTENTS. PAQB CHAPTER VII § 132-138. Remedies 158 CHAPTER VIII § 139-149. CONSTITUTIONAUTY 170 APPENDIX I Text of the Act op Congress 185 APPENDIX II Regulations op the TRBAStTEY Department, with Annotations 201 APPENDIX III Forms of Returns 227 Index . ." 241 TABLE OF CASES CITED [References are to sections] SECTIOir Adams Express Co. v. Ohio, 166 U. S. 185; 17 Sup. Ct. Rep. 604 5 Agnew V. Haymes, 141 Fed. 631 137 Alexandria Canal Co. v. The District, 5 Maokey (D. C.) 376 . . ... .... 134 AUanza Co. v. Bell, (1906) A. C. 18 . . . . 53, 57 American Sugar Ref. Co. v. Rutan, 123 Fed. 979 . 34, 43 Anthony v. CasweU, 15 R. I. 159; 1 Atl. 290 . . 38 Apthorpe v. Peter Sohoenhofer Brewing Co., 80 L. T. 395 34 Armour v. Roberts, 151 Fed. 846 137 Assessor v. Osbornes, 9 Wall. 567, 574 . . . 137 Attorney-General v. Till, 54 Sol. J. 132; (1909) 1 K. B. 694 . 105 Audenreid v. East Coast Milling Co., 124 Fed. 697 . 28 Bailey v. Clark, 21 Wall. 284 78 Bailey v. Raih-oad Co., 22 Wall. 604 ... 74 Bailey v. Raikoad Co., 106 U. S. 109; 1 Sup. Ct. Rep. 62 . . 74 Baltzell V. Church Home & Infirmary, 110 Md. 244; 73 Atl. 151 ... 26 Bank v. Tennessee, 104 U. S. 493 .... 43 Bank for Savings v. Collector, 3 Wall. 295 67 Bartholomay Brewing Co. v. Wyatt, (1893) 2 Q. B. 499 .37 Blacklock v. United States, 208 U. S. 75 . . . 125 Boardman v. McClure Co., 123 Fed. 614 . ' . . 28 X TABLE OF CASES CITED. [References are to sections] SECTION Borough of Carlisle v. Marshall, 36 Pa. St. 397 38 Boske V. Cominingore, 177 U. S. 459 . 128 Bradfield v. Roberts, 175 U. S. 291; 20 Sup. Ct. Rep 121 Brampton v. Beddoe, 13 C. B. N. S. 538 Braun v. Sauerwein, 10 Wall. 218 . Brickwood & Co. v. Reynolds, (1898) 1 Q. B. 95 Brown v. Watt, 50 J. P. 583 . Burrough v. Abel, 105 Fed. 366 18 28 137 47 81 137 Butterworth v. Hoe, 112 U. S. 50; 5 Sup. Ct. Rep. 25 134 Caesar I). CapeU, 83 Fed. 403 .... .28 California v. Central Pac. R. R. Co., 127 U. S. 1; 8 Sup. Ct. Rep. 1073 .... 145 Carey v. Curtis, 3 How. 236 ... . 137 Carey v. Savings Union, 22 Wall. 38 ... . 74 Carrick v. Lamar, 116 U. S. 423; 6 Sup. Ct. Rep. 424 134 Central of Ga. Ry. Co. v. Wright, 207 U. S. 127 . 107 Central Nat. Bank v. United States, 137 U. S. 355; 11 Sup. Ct. Rep. 126 68 Central Pac. R. R. Co. v. California, 162 U. S. 91; 16 Sup. Ct. Rep. 766 .145 Central R. R. Co. v. Collins, 40 Ga. 582 ... 47 Central Trust Co. v. Treat, 171 Fed. 301 .. . 43 Chadwick, Re, 1 Lowell, 439 108 Chadwick v. Pearl Life Ins. Co., (1905) 2 K. B. 507 . 36 Chamberlain v. Anthony, 21 R. I. 331 . . . 90 Charleston Nat. Bank v. Melton, 171 Fed. 743 40 Cheatham v. United States, 92 U. S. 85 137 Cheeseborough v. United States, 192 U. S. 253; 24 Sup. Ct. Rep. 262 137,137,138 Chicago Distilling Co. v. Stone, 140 U. S. 647; 11 Sup. Ct. Rep. 862 . . .... 137 Chicago, etc., R. R. Co. v. Page, 1 Biss. 461 . . 74 Christie-Street Commission Co. v. United States, 136 Fed. 326 137,137 TABLE OF CASES CITED. [References are to sections] XI City of Lexington v. Pishbaok's Trustee, 60 S. W. 727; 22 Ky. Law. Rep. 1392 38 Clerical, etc.. Ass. Soc. v. Carter, 22 Q. B. D. 444 . 43 Cleveland Trust Co. v. Lauder, 19 Oh. Circ. Ct. 217 . 40 Clews V. Woodstock Iron Co., 44 Fed. 31 . . . 28 Clinkenbeard v. United States, 21 Wall. 65 . . . 137 Colgate V. U. S. Leather Co., 72 Atl. 126 (N. J. Eq.) . 18 Colquhoun v. Brooks, 14 A. C. 493 .... 37 Coltness Iron Co. v. Black, 6 A. C. 315 . . . . 53, 57 Commissioners v. Buckner, 48 Fed. 533 . . 137, 137, 137 Commissioners for Income Tax v. Pemsel, (1891) A. C. 531 ; 26 Commissioner for Taxes v. Eastern Extension etc. Tel. Co., (1906) A. C. 526 77 Commissioners of Taxation v. Kirk, (1900) A. C. 588 77 Commissioner of Patents v. Whitely, 4 Wall. 522 . 134 Commonwealth v. Kelley, 177 Mass. 221; 58 N. E. 691 17 Commonwealth v. Lancaster Sav. Bank, 123 Mass. 493 29 Commonwealth v. Provident Bicycle Ass'n., 178 Pa. 636; 36 L. R. A., 589; 36 Atl. 197 ... . 20 Cooper Mfg. Co. v. Ferguson, 113 U. S. 727; 5 Sup. Ct. Rep. 739 28 Cotton Press Co. v. Collector, 1 Woods, 296 . . . 138 County of Greene v. Daniel, 102 U. S. 187, 195 . . 134 Coimty of Ramsay v. Chicago, etc., Ry. Co., 33 Minn. 637; 24 N. W. 313 43 County of Todd v. St. Paul, etc., Ry. Co., 38 Minn. 163; 36 N. W. 109 ,. .43, 43 Crown Cork & Seal Co. v. State, 40 Atl. 1074;- 87 Md. 687; 53 L. R. A. 417 40 Cummings v. Akron Cement, etc., Co., 6 Blatchf. 509, 511 17 Davenport v. County of Dodge, 105 U. S. 237 . . 134 Davis & Rankin, etc., Co. v. Dix, 64 Fed. 406 . . 28 DeBary v. Dunne, 162 Fed, 96X . . • • 137, 137 xii TABLE OF OASES CITED. [References are to sections] SECTION Decatur v. Paulding, 14 Pet. 497 134 Delage v. Nugget PoHsh Co., 92 L. T. 682 . . .• 36 Delaware R. Co. v. Prettyman, 7 Fed. Cas. 408 . 133, 136 Delaware Railroad Tax, Re, 18 Wall. 206 .. . 4 DeLima v. Bidwell, 182 U. S. 1; 21 Sup. Ct. Rep. 743 27 Detroit v. Lewis, 109 Mich. 155; 66 N. W. 958; 32 L. R. A. 439 38 Dollar Sav. Bk. v. United States, 19 Wall. 227, 240 114, 126 Dooley v. United States, 182 U. S. 222; 21 Sup. Ct. Rep. 762 27, 137 Dooley v. United States, 183 U. S. 151; 22 Sup. Ct. Rep. 62 . . 27 Duke of Norfolk v. Lamarque, 24 Q. B. D. 485 . 47 East Indian Ry. Co. v. Secretary of State, (1905) 2 K. B. 413 .36 Eastern Bldg. Assn. v. Bedford, 88 Fed. 7 . . 28 Edison El. III. Co. v. United States, 38 a. of CI. 208 . 138 Elliott V. Swartwout, 10 Pet. 137 . 137, 137 Empire Milling, etc., Co. v. Tombstone Mill, etc., Co. 100 Fed. 910 .28,28 Equitable Life Ass. Soc. v. Bishop (1900) 1 Q. B. 177 20 Ericksen v. Last, 8 Q. B. D. 414 77 Erie Ry. Co. v. Pennsylvania, 21 Wall. 492-497 . 28 Erskine v. Hohnbach, 14 Wall. 613 ... 136, 136 Erskine v. Van Arsdale, 15 Wall. 75 . . . 137, 137 Ewing ». Burnet, 11 Pet. 41, 54 17 Farrell v. United States, 167 Fed. 639 . . . 114, 137 Foley V. Fletcher, 3 H. & N. 769 36 Ford V. Delta, etc., Co., 164 U. S. 662, 674; 17 Sup. a. Rep. 230 ... ... 17, 43, 69 Forder v. Handyside, 1 Ex. D. 233 .... 53, 57 Fourteen Diamond Rings, 183 U. S. 176; 22 Sup. Ct. Rep. 59 27 TABLE OF OASES CITED. xiii [References are to sections] SECTION Frawley, Bundy & Wilcox v. Pennsylvania Casualty Co., 124 Fed. 259 28, 28 Gaines v. Thompson, 7 Wall. 347 . ... 134 Galveston, Harrisburg, etc., Ry. Co. v. Texas, 210 U. S. 217 6, 6 General Accident, etc., Corp. v. McGowan (1908) A. C. 207 ... ; 58 Gibbons v. Mahon, 136 U. S. 549; 10 Sup. Ct. Rep. 1057 34 Gilchrist V. Helena, etc., R. Co., 47 Fed. 593 . . 28 Gillatt V. Colquhoun, 33 W. R. 258 . . . 52, 57 Gleason v. McKay, 134 Mass. 419 .... 11 Good Hope Co. v. Railway Barb Fencing Co., 22 Fed. 635 .28 Grainger v. Gough (1896), A. C. 325 .. . 28, 28, 28 Gramophone & Typewriter v. Stanley, (1908) 2 K. B. 89 34, 43 Grant v. Hartford, etc., R. R. Co., 93 U. S. 225 . 31, 47 Gray v. Darlington, 15 Wall. 63, 66 . . 31, 35, 35 Greene v. Mumford, 4 R. I. 313; 319-320 ... 38 Greggv. Sanford, 65Fed. 151; 12C. C. A. 525 . 16 Gresham Life Ass. Soc. v. Bishop, (1902) A. C. 287 37, 37 Gresham Life Ass. Soc. v. Styles, (1892) A. C. 309 . 58 Grove v. Young Men's Christian Assn., 88 L. T. 696 . 26 Gulf, etc., R. R. Co. v. Hewes, 183 U. S. 66; 22 Sup. Ct. Rep. 26 11 Guthrie i>. Pittsburg, etc., Ry. Co., 138 Pa. 433 . . 38 Haight & Freese Co. v. McCoach, 135 Fed. 894 . . 137 Hall, John Junior & Co. v. Rickman, (1906) 1 K. B. 311 57 Hamilton Co. v. Massachusetts, 6 Wall. 632 . . .11, 11 Hammock v. Farmers' L. & T. Co., 105 U. S. 77 . 17 Hazeltine v. Mississippi Fire Ins. Co., 55 Fed. 743 28 Head-Money Cases, 112 U. S. 580; 5 Sup. Ct. Rep. 247 146 Hercules Mut. Life Ass. Soc, 12 Fed. Cas. 12 . 20 Herold v. Kahn, 159 Fed. 608; 86 C. C. A. 598 . 137 XIV TABLE OF CASES CITED. [References are to sections] 10 Herold v. Kahn, 163 Fed. 947 . Herold v. Shanley, 146 Fed. 20 . . . Hesketh v. Bray, 21 Q. B. D. 444 . Hicks V. James, 48 Fed. 542 .... Holy Trinity Cliurch v. United States, 143 U. S. 467^ 462 Home Insurance Co. v. New York, 134 U. S. 594; Sup. Ct. Rep. 593 .. . ... Honolulu Transit Co. v. Wilder, 211 U. S. 137, 142 Hubbard v. Collector, 12 Wall. 1 . . . . Hubbard D. Kelley, 8 W. Va. 46 .... Hunter v. Rex, (1904) A. C. 161 . Illinois Central R. R. Co. v. Decatur, 147 U. S. 190; 13 Sup. Ct. Rep. 293 Illinois Central R. R. Co. v. Irwin, 72 111. 452 . Imperial Fire Ins. Co. v. Wilson, 35 L. T. N. S., 271 Independent Ins. Co., 13 Fed. Cas. 13. . Inhabitants of Worcester v. Western Railroad Co. Met. 564 Jackson Lumber Co. v. McCiimmon, 164 Fed. 759 James v. Hicks, 110 U. S. 272; 4 Sup. Ct. Rep. 6 Keams, In Be, 64 Fed. 481 Kendall v. Stokes, 3 How. 87 . Kendall v. United States, 12 Pet. 524 King V. United States, 99 U. S. 229 King's County Sav. Institution v. Blair, 116 U. S 205; 6 Sup. Ct. Rep. 353 . Kinney, Re, 102 Fed. 468 Kinney v. Conant, 166 Fed. 720 137 137 47 137 40 5,11 137 137 49 69 43 58 20 43 129 137 127 134 134 114 200, 137, 137, 137, 138 109, 110, 127 . 137 Knowlton v. Moore, 178 U. S. 41; 20 Sup. Ct. Rep. 747 146, 146 Kodak, Ltd. v. Clark, (1903) 1 K. B. 505 .. . 34 TABLE OF CASES CITED. XV [References are to sections] SECTION Lamar Water, etc., Co. v. Lamar, 32 L. R. A. 157, 165; 128 Mo. 188; 26 S. W. 1025; 31 S. W. 756 69 Last V. London Ass. Co., 10 A. C. 438 20 Latrobe v. Mayor, etc., of Baltimore, 19 Md. 13 . . 38 Lawless v. Sullivan, 6 A. C. 373 33, 53 Leather Mnfrs. Nat. Bank v. Treat, 128 Fed. 262; 62 CCA. 644 . . 78 Lincoln v. United States, 197 U. S. 419; 25 Sup. Ct. Rep. 455 . , 27 Little Miami, etc., R. R. Co. v. United States, 108 U. S. 277; 2 Sup. Ct. Rep. 627 53, 53, 113, 114, 114, 122, 126 Llewellyn's Appeal, 103 Pa. 458 .. . .47 Londoner v. Denver, 210 U. S. 373 .... 107 Lovell & Christmas v. Commissioners of Texas, (1908) A.C. 46 28,28,77 McClain v. Pennsylvania Co., 108 Fed. 618; 47 C C A. 529 137 McClung V. Silliman, 2 Wheat. 369 . . . 134 McClung V. SUliman, 6 Wheat. 598 . 134 McCrary v. United States, 195 U. S. 27; 24 Sup. Ct. Rep. 759 . . 146 McCulloch V. Maryland, 4 Wheat. 316 . . . . 145 McDonald v. Mass. Gen. Hospital, 120 Mass. 432; 21 Am. Rep. 529 26 McGowan v. Larsen, 66 Fed. 910; 14 C C. A. 178 121 Mclntire v. Wood, 7 Cranch, 504 134 McLeod V. Lincoln Medical College, (Neb.) 96 N. W. 265 . .26 Maekay v. San Francisco, 128 Cal. 678; 61 Pac. 382 . 38 Magee v. Denton, 5 Blatchf. 130 37 Magoun v. Illinois Trust, etc., Co., 170 U. S. 283; 18 Sup. Rep. 594 . . 146 Maine v. Grand Trunk Ry. Co., 142 U. S. 217; 12 Sup. Ct. Rep. 121, 163 . . 10, 142 Mandell v. Pierce, 3 Cliff. 135 . . . 29 Xvi TABLE OF OASES CITED. [References are to sections] SECTION Manhattan Co. v. Blake, 148 U. S. 412; 13 Sup. Ct. Rep. 640 40 Mansfield v. Excelsior Refining Co., 135 U. S. 326 125 Marbtiry i>. Madison, 1 Cranch, 137 ... 134, 134 Marshi). Sanders, 110 La. 726; 34 So. 752 ... 116 Memphis City v. Dean, 8 Wall. 64, 73 . . . 133 Merchants Ins. Co. v. McCartney, 1 Lowell, 447 . . 34, 39 Mersey Docks v. Lucas, 8 A. C. 891 .17 Miles V. Johnson, 59 Fed. 38 133 Missouri River, etc., Co. u. United States, 19 Fed. 66 126 Morrill v. Jones, 106 U. S. 466; 1 Sup. Ct. Rep. 423 90 Murdoch v. Ward, 178 U. S. 139; 20 Sup. Ct. Rep. 775 40 Mutual Life Ins. Co. v. Speatley, 172 U. S. 602 . . 28, 28 National Union v. Marlow, 74 Fed. 775; 21 C. C. A. 89 24 New York, Lake Erie, etc., Co. v. Pennsylvania, 158 U.S. 431; 15 Sup. Ct. Rep. 900 . 40 New York Life Ins. Co. i>. Styles, 14 A. C. 381 20 New York State v. Roberts, 171 U. S. 658; 19 Sup. Ct. Rep. 58 4,78 Norton v. Atchison, etc., R. Co., 61 Fed. 618 . 28 Oakland Sugar Mill Co. v. Wolf Co., 118 Fed. 239; 55C. C. A. 193 28 Pacific Ins. Co. v. Soule, 7 Wall. 433 ... . 142 Paddington Burial Board v. Commissioners of Inland Revenue, 13 Q. B. D. 9 26 Palmer v. McMahon, 133 U. S. 660, 669; 18 Sup. Ct. Rep. 324 107 Patton V. Brady, 184 U. S. 608; 22 Sup. a. Rep. 493 144, 146 People V. Am. BeU. Tel. Co., 117 N. Y. 241; 22 N. E. 1057 28, 78, 78 People V. Board of Trade, 80 111. 134, 136 .. . 17 People V. Campbell, 138 N. Y. 543; 34 N. E. 370; 20 L. R. A. 453 . . . . 28,78,78,78 TABLE OF CASES CITED. xvii [References are to sections] SECTION People V. Coleman, 119 N. Y. 137; 23 N. E. 4S8; 7 L. R. A. 407 38 People V. Neff, 34 N. Y. App. Div. 83 . . . .18, 26 People V. Wemple, 117 N. Y. 136; 6 L. R. A. 303; 22 N. E. 1046 16 People V. Wemple, 133 N. Y. 323; 31 N. E. 238 . . 78 People V. Wemple, 148 N. Y. 690; 43 N. E. 176 . 78, 78 People ex rel. Devoe Co. v. Roberts, 51 N. Y. Ap. Div. 77; 64 N. Y. Supp. 494 44 People ex rel. Fort George Realty Co. v. Miller, 179 N. Y. 49 78 People" ex rel. Niagara, etc., Co. v. Roberts, 30 N. Y. App. Div. 180; 157 N. Y. 676 78 People ex rel. Singer Mfg. Co. v. Wemple,, 150 N. Y. 46 78 People ex rel. Union Trust Co. v. Coleman, 126 N. Y. 433; 27 N. E. 818; 12 L. R. A. 762 . . . . 61 People ex rel. Wall, etc., Co. v. Miller, 181 N. Y. 328 . 44, 78 Philadelphia Contributorship v. Commonwealth, 98 Pa. 48 40, 53 Philadelphia, etc., S. S. Co. v. Pennsylvania, 122 U. S. 326; 7 Sup. Ct. Rep. 1118 11, 40 Plummer v. Coler, 178 U. S. 115; 20 Sup. Ct. Rep. 829 4, 40 Pollock V. Farmers' L. & T. Co., 157 U. S. 429; 15 Sup. Ct. Rep. 673; 158 U. S. 601; 15 Sup. Ct. Rep. 912 . ♦ . . 40,41,42,130,130,133,141,143,144,149 Pommery v. Apthorpe, 56 L. J. Q. B. 155 Ponce V. Roman Catholic Church, 210 U. S. 296, 309 Powell V. United States, 135 Fed. 881 . Provident Inst. v. Massachusetts, 6 Wall. 611 Railroad v. Berks County, 6 Pa. St. 70 . Raihroad Co. v. Collector, 100 U. S. 595 Redding, Re, (1897) 1 Ch. 876 Reid's Brewery Co. v. Mole, (1891) 2 Q. B. 1 Rex V. Special Commissioner, 98 L. T. 446 . Reynolds v. Williams, 4 Biss. 108 .... 28 27 90 11 43 4 33 43 26 34 XVIU TABLE OF CASES CITED. [References are to sections] Rhymney Iron Co. v. Fowler, (1896) 2 Q. B. 79 . . 47 Richardson v. Boston, 148 Mass. 508; 20 N. E. 166 . 38 Royal Ins. Co. v. Watson, (1897) A. C. 1 . . . 47 Russell V. Town & County Bank, 13 A. C. 418 . . 45, 47 St. Andrew's Hospital v. Shearsmith, 19 Q. B. D. 624 St. Louis Bldg., etc., Ass'n v. Lightner, 47 Mo. 393 . St. Louis Breweries v. Apthorpe, 79 L. T. 551 St. Louis Wire-Mill Co., 32 Fed. 802 Salt Lake City v. HolUster, 118 U. S. 256; 6 Sup. Ct Rep. 1055 .... Santa Clara Female Academy v. Sullivan, 116 111. 375 6 N. E. 183; 56 Am. Rep. 776 ... . Schafer v. Craft, 144 Fed. 907 Schuylkill Nav. Co. v. ElUott, 21 Fed. Cas. 762 . Sohwarzchild v. Rucker, 143 Fed. 656 . Scott V. Abbott, 160 Fed. 573 Scottish Provident Ass'n v. Allan, (1903) A. C. 129 Scottish Union, etc., Ins. Co. v. Bowland, 196 U. S. 611 Secretary of State v. Scoble, (1903) A. C. 299 Selden v. Equitable Trust Co., 94 U. S. 419 . Sheffield, Re, 64 Fed. 833 Sheridan v. Allen, 153 Fed. 568; 82 C. C. A. 522 Sioux City & Pac. R. R. Co. v. United States, 110 U. S 205; 3 Sup. Ct. Rep. 565 . . . . Smith V. Grayson County, (Texas) 44 S. W. 921, 923 Snyder v. Marks, 109 U. S. 189; 3 Sup. Ct. Rep. 157 Society for Savings v. Coite, 6 Wall. 594 South Carolina v. United States, 199 U. S. 437; 26 Sup. Ct. Rep. 110 ... . SouthweU V. Savill Bros., (1901) \2 K. B. 349 Southwestern R. R. Co. v. Wright, 116 U. S. 231; 6 Sup. Ct. Rep. 375 Speer v. Colbert, 200 U. S. 130; 26 Sup. Ct. Rep. 201 Spreckels Sugar Ref. Co. v. McClain, 192 U. S. 397; 24 26 40 34 28 44 26, 28 127 148 137, 137 63 33,37 78 36 67 145 125 65 47 133 11,40 145 47 43 18 TABLE OF CASES CITED. XIX [References are to sections] SECTION Sup. Ct. 376; 113 Fed. 244; 51 C. C. A. 201 29, 39, 43, 43, 43, 90, 142, 146 Spreokels Sugar Ref. Co. v. McClain, 109 Fed. 76 . 29, 39 Stanley v. Supervisors of Albany, 121 U. S. 535, 550- 551; 7 Sup. Ct. Rep. 1234 137 State V. B. & O. R. R. Co., 48 Md. 49, 80 . . 43, 43, 43 State V. Collector, 25 N. J. Law Rep. 315 . . 43 State V. Commissioners of Mansfield, 23 N. J. Law 510; 57 Am. Dec. 409-n 43 State V. Taylor, (111.) 89 N. E. 271 61 State V. Willard, 77 Minn. 190; 79 N. W. 829 . . 38 Stevens v. Bishop, 20 Q. B. D. 442 . 47 Stockard v. Morgan, 185 U. S. 27; 22 Sup. Ct. Rep. 576 6 Stockdale v. Insurance Co., 20 Wall. 323 .. . 148 Strong & Co. v. Woodifield, (1906) A. C. 448 47, 81 Stutsman County v. Wallace, 142 U. S. 293; 12 Sup. Ct. Rep. 297 .. . 136 Sullivan v. Sheehan, 89 Fed. 247 28 Sully V. Attorney-General, 5 H. & N. 711 . . 77 Swigert, Be, 119 111. 83; 6 N. E. 469 . . 43 Tennant v. Smith, (1892) A. C. 150 .. . 33 Thatcher v. United States, 15 Blatchf. 15 . . 90 Tischler v. Apthorpe, 52 L. T. N. S. 814 .. . 28 Tucker v. Ferguson, 22 Wall. 527, 575 ... . 42 Tucker v. Grier, 160 Fed. 611; 87 C. C. A. 513 . 127, 137 Turner v. Evans, 2 E. & B. 512 28 Tyrrell v. Mayor, etc., of New York, 159 N. Y. 239; 53 N. E. 1111 . . 17 United States v. Am. Bell. Tel. Co., 29 Fed. 17 . 28 United States v. Black, 128 U. S. 40; 9 Sup. Ct. Rep. 12 . . . . 134,134 United States v. Blaine, 139 U. S. 306; 11 Sup. Ct. Rep. 607 134 XX TABLE OF CASES CITED. [References are to sections] SECTION United States v. Central Natl. Bank, 137 U. S. 255; S. C. 10 Fed. 612 53, 54 United States v. Eaton, 144 U. S. 677 . . . 90, 101 United States v. Fisher, 2 Cranch, 358 ... . 3 UnitedStates?;. Frost, 25 Fed. Cas." 1221 ... 37 United States v. Isham, 17 Wall. 496 ... . 17 United States v. Hyams, 146 Fed. 15 ... . 90 United States v. Lacher, 134 U. S. 624; 10 Sup. Ct. Rep. 625 .. "^ 17 United States v. Lamson, 165 Fed. 80 . . . .90, 90 United States v. Lamson, 173 Fed. 673 . . 90, 101 United States v. Little Miami, etc., R. R. Co., 1 Fed. 700 . 113, 114, 114, 122 United States v. Louisville & N. R. Co., 33 Fed. 829 . 49 United States v. Mann, 95 U. S. 580 . . . . 130 United States v. Marion Trust Co., 143 Fed. 301; aff. 205 U. S. 539 . 114 United States v. Marquette, etc., R. Co., 17 Fed. 719 126 United States v. Mayer, Deady, 127 .. . 37, 54 United States v. Morse, 161 Fed. 429 ... . 63 United States v. Palmer, 3 Wheat. 610 ... . 3 United States v. Philadelphia, etc., R. R. Co., 123 U. S. 113; 8 Sup. Ct. Rep. 77 113 United States v. Railroad Co., 17 Wall. 322 .. . 4 United States v. Rindskopf, 105 U. S. 418 . . . 137 United States v. Savings Bank, 104 U. S. 728 137, 138, 138 United States v. Schillinger, 14 Blatchf. 71 . . 37 United States v. Schurz, 102 U. S. 378 . . . . 134 United States v. Smith, 1 Sawy. 277 .. . 35, 37 United States v. Snyder, 149 U. S. 210 . . 125 United States v. Three Railroad Cars, 1 Abb. (U. S.) 196 . .17 United States v. Two Hundred Barrels of Whiskey, 95 U. S. 571 90 United States v. U. S. FideUty & Guaranty Co., 144 Fed. 866 101 TABLE OF OASES CITED. XXI [References are to sections] SECTION United States v. XJ. S. Fidelity & Guaranty Co., 158 Fed. 604 101 United States v. Windom, 137 U. S. 636; 11 Sup. Ct. Rep. 197 134 Van Dresser v. Oregon Ry., etc., Co., 48 Fed. 202 . 28 Veazie Bank v. Fenno, 8 Wall. 533 .... 145 Vermont Central R. Co. v. Burlington, 28 Vermont, 193 43 Watson V. Royal Ins. Co., (1896) 1 Q. B. 41 . . 47 Watson V. Sandie, (1898) 1 Q. B. 326 . . . 28 Webber Hospital Ass'n v. McKenzie, (Me.) 71 Atl. 1062 18 Werle & Co. v. Colquhoun, 20 Q. B. D. 753 28, 28 Western Union Tel. Co. v. Massachusetts, 125 U. S. 530; 8 Sup. Ct. Rep. 961 .. . 142 Westhus V. Union Trust Co., 164 Fed. 795; 90 C. C. A. 441 114 Wright V. Blakeslee, 101 U. S. 174 . . . . 137, 137 TABLE OF FEDERAL STATUTES CITED [References are to sections] REVISED STATUTES Section 1 Section 5 Section 161 Section 251 Section 321 Section 3152 Section 3163 Section 3164 Section 3165 Section 3169 Title 35, Chapter 2 (heading) Section 3172 Section 3173 Section 3174 Section 3175 Section 3176 Section 3177 Section 3179 Section 3180 Section 3182 Section 3183 Section 3184 Sections 3187-3195 Sections 3196-3205 . ISOn. 29 . 128 88, 128 90n., 129 . 104 106, 130 130 88, 130 . 130 . 129n. . 106 . 130 . 130 109, 130 . 130 . 130 . 130 . 130 . 129 . 123 . 130 125 . 125 Xxiv TABLE OF FEDERAL STATUTES CITED. [References are to sections] REVISED STATUTES- Section 3205 Section 3206 Section 3207 Section 3209 Section 3214 Section 3220 Section 3224 Section 3226 Section 3227 Section 3228 Section 3249 ■ Continued 125 125 125 125 126n. 138 132 137 137 138 90n. ACT, Aug. 15, 1876, c. 304 88 ACT, March 1, 1879, c. 125 Section 2 104, 130 Section 3 125 ACT, Aug. 27, 1894, c. 349 (Income Tax Law) Section 28 69 Section 34 130 Section 36 101 ACT, May 28, 1896, c. 252, section 19 .... 88 ACT, June 13, 1898, c. 448 (War Revenue Act), sec- tion 28 43 ACT, March 2, 1901, c. 814 88 ACT, May 9, 1902, c. 784 (Oleomargarine Act), sec- tion 6 lOln. ACT, Aug. 5, 1909, c. 6 Title 3 Section 1 27 Section 5 27 Section 38 Par. 1 . 5, 6, 9, 10, 15, 17, 19, 21, 22, 23, 24, 25, 26, 27, 28, 29, 37, 38, 44A, 45, 84A, 121 Par. 2 . 10, 27, 31, 33, 45, 46, 49, 50, 53, 55, 57, TABLE OF FEDERAL STAIUTES CITED. XXV [References are to sections] SECTION ACT, Aug. 5, 1909, Par. 2 — Continued 58, 59, 60, 61, 62, 63, 65, 67, 68, 71, 72, 74, 78, 80, 81, 82, 83, 84, 84A Par. 3 . 27, 45, 50, 84A, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 99A, 101, 102 Par. 4 . . . 104, 106, 107, 108, 109, 110, 112 Par. 6 . .86, 103, 112, 113, 119, 121, 122,123 Par. 6 102, 116 Par. 7 117 Par. 8 . 104, 109, 115, 118, 121, 123, 125, 127, 132 Section 42 29, 39 FEDERAL CORPORATION TAX LAW CHAPTER I INTRODUCTORY § 1 Origin of the tax. § 2 Its form. § 3 Purpose of the law — general rule of construction. § 1. Origin of the Tax. — The new federal tax on corporations and companies is the resultant of several political forces which were brought into play during the discussion of the Tariff Act of 1909. Congress, it will be remembered, had convened upon the call of the President in extraordinary- session for the purpose, as many people hoped and as a few believed, of reducing the tariff duties upon imports. A bill for that purpose, in accord- ance with the constitutional requirement, could only originate in the House of Representatives. Accordingly, a comprehensive tariff bill was intro- duced in that body, and under its expeditious rules 2 FEDERAL COKPORATION TAX LAW. was speedily passed. When this bill reached the Senate, however, it was subjected to considerable discussion. A large number of Senators, for one reason or another, were in favor of incorporating in the bill a provision for a tax upon incomes, both of individuals and of corporations. The dominant party, or faction, was opposed to this measure, for reasons which it is not now material to inquire into. They were obliged to admit, however, that the scale of duties on imports which they were desirous of maintaining and which the bill provided for, would not, in all probability, raise .sufiGicient revenue to supply the needs of the government. Possibly, had the tariff duties been reduced, so as to remove the virtual embargo which they imposed on many articles of foreign commerce, this pros- pective deficit might have been averted; but that remedy was regarded as even worse than an income tax. Yet so long as the proposed income tax was the only suggested source of additional revenue, as an alternative to the inadmissible plan of reducing duties on imports, there was a strong probability that an income tax would be adopted. In vain the powers-that-be argued that an unap- portioned income tax would certainly be pro- nounced unconstitutional by the Supreme Court, and that the government would thus be left with- out adequate revenue, as was the case when the Income Tax of 1894 met a similar fate. In spite of all these arguments, the adoption of an income -tax by the Senate seemed imminent. INTEODUOTOHT. 3 At this point, a plan was devised — by whom we need not stop to inquire — which, it was supposed, would raise sufficient revenue, would avoid the constitutional objections to a general income tax, and would at the same time enable the leaders of the Senate to escape the humiliation of a defeat upon the proposed income-tax amendment to the tariff bill. This plan was a so-called excise tax on corporations and companies in proportion to their income. This plan was incorporated in an amendment to the tariff bill, which was adopted in the Senate, and concurred in by the House of Representatives. The bill including this feature was signed by the President on August 5th, 1909. § 2. Its Form. — Thus it comes about that the so-called corporation tax is embodied in a single section of the Tariff Act — numbered Section Thirty-eight. This Section embraces substantially all of the provisions of the very voluminous statute (which appears as Chapter Six of the Acts of the Sixty-first Congress) that in any way relate to the corporation tax. The other provisions relate to duties on imports, to the creation of a Court of Customs Appeals, and to some other more or less connected topics. Section Thirty-eight, which will be found in the Appendix, is of considerable length, and is itself divided into several numbered sub- sections, — themselves of no inconsiderable length — which in this book will be referred to as Para- graphs. As these Paragraphs are, some of them, so long that a mere reference to Paragraph One, 4 FEDERAL CORPORATION TAX LAW. Two, Three or Four, as the case might be, would often require the reader to search through an involved mass of print in order to discover the particular passage intended, it has seemed desirable to number the lines of these paragraphs. Accord- ingly, the lines of each numbered Paragraph of Sec- tion Thirty-eight will be found in the Appendix to be numbered by numerals in the margin. It is to those lines as printed in this Appendix, and not to the numbers of the lines in the official text of the Act as printed in the Statutes at Large, that references are made throughout this book.* § 3. Purpose of the Law — General Rule of Con- struction. — It is perhaps not superfluous to say that the primary object of the law, as a revenue law, is to produce revenue. Nevertheless, it is pertinent to mention that the title of the Act sets out as one of its objects to " encourage the indus- tries of the United States." ^ There is no reason to confine this object to so much of the Act as levies duties on imports. On the contrary, it may well indicate that no unnecessary burdens were intended to be imposed on " the industries of the United States," and may properly induce the courts in any doubtful case to incline towards a construction which will " encourage " those * The method of citation is on this order, " Act, Par. 1, line 1." Wherever the word "Act" is used in citations without mentioning date or chapter, it is to be understood that reference is had to the Act of Aug. 5th, 1909, c. 6, § 38. ' See infra Appx. I. INTRODUCTORY. 5 industries, or at least will not discourage them by the imposition of unduly grievous burdens.' " The industries o^ the United States " are, to a vastly preponderating extent, carried on by corporations which are subject to this tax, and it would be a poor way to " encourage " them to impose on them such heavy burdens and to subject them on mere suspicion to such inquisitorial examination and ruinous publicity, as to compel many of them to quit business. Such a method of encouragement would be that of the French captain who hanged a number of his men from the yard-arms " pour encourager les autres." Especially in view of the title of the Act, the courts should lean against a construction that would produce such results. * That in construing an Act of Congress the courts may properly be influenced by its title, see Holy Trinity Church V. United States, 143 U. S. 457, 462; United States v. Fisher, 2 Cranch 358, 386; United States v. Pahner, 3 Wheat. 610, 631. CHAPTER II WHAT THE TAX IS ON § 4 How to determine what property or rights a tax is levied upon — in general. §§ 5-10 Is this tax levied upon the business or upon the in- come? § 5 Discordant provisions of the Act. § 6 Name of tax not conclusive. § 7 Statement of question — ■ Is the income a mere meas- ure of the business? § 8 Tax not laid on all who do business. § 9 Is the tax laid on companies which do no business? § 10 Tax not gauged by amount of business but by amount of income from all sources. § 11 Tax not laid on franchise to be a corporation. § 12 On privilege of having a share-capital? § 13 Not a tax on dividends. § 14 Differences from an income tax. § 4. How to Determine what Property or Rights a Tax is Levied upon — In General. — A question the determination of which will control many sub- ordinate questions as to the construction of the Act is, " Upon what is the tax laid? " Is it a tax upon the property of the companies, or upon their income, or upon their " franchise " or business? WttAt THE TAX IS ON. 7 Now, prima facie a tax is laid upon that in pro- portion to which its amount is gauged. It is true that a tax upon one right or privilege, particularly some intangible right or privilege, may be laid in proportion to the value of some other property without being a tax upon that property; ^ but this is only true where the value of the property by which the tax is gauged is a reasonable measure of the value of the in- tangible right or privilege, or where the intangible right. might be altogether taken away by the tax- ing government and may therefore be conceded on such conditions as that government pleases.^ ' For example, an excise tax on the business of a corpora- tion may be proportioned to the amount paid out by the company for dividends on its stock and interest on its bonded debt: Railroad Co. v. Collector, 100 U. 8. 595 (to be com- pared with United States v. Railroad Co., 17 Wall. 322). So, a tax on the privilege of taking property by will may be proportioned to the value of the property so passing, and is not on that account converted into a tax on the property: Plummer v. Coler; 178 U. S. 115. And a tax on corporations on the amount of " capital employed " in the state is not invahd because some of that capital may consist of articles of interstate commerce in the original packages: New York State V. Roberts, 171 U. S. 658, 664; 19 Sup. Ct. Rep. 58. Moreover, a tax may be laid on an interstate railway company graduated according to the cash value of so many of its shares of stock as bear to the whole number of shares the same proportion that its length of railway within the state bears to its total length; and such a tax though proportioned to the value of the shares is not a tax on the shares: Delaware Raikoad Tax, 18 Wall. 206. 2 Cf . infra § 40. 8 FEDERAL COEPOEATIOKT TAX LAW. For instance, if a tax were laid on corporations in proportion to the value of the real estate owned by them, few persons would deny the tax to be a tax on land, although it might not be so denomi- nated by the legislature. § 5. Is this Tax Levied upon the Business or upon the Income? — Discordant Provisions of the Act. — Now, the present tax is expressed to be laid on the companies " with respect to the carrying on or doing business." * This would apparently indicate that the tax is laid on the intangible right sometimes designated as goodwill — that pecul- iar value which springs into being when tangible property is joined together by unity of use as " a single producing plant." ^ The tax is not, however, directly proportioned to the amount of business done, nor to the amount of income derived there- from, but to the net income received by the com- pany " from all sources," ' including income from invested property as well as from the transaction of the company's business. § 6. Name of Tax not Conclusive. — Now, the legislative declaration that the tax is laid " with respect to the carrying on or doing business " is not conclusive, if the courts can see that notwith- standing its name the tax is in fact laid upon in- * Act, Par. 1, lines 14-15 (infra Appx. I). ' Adams Express Co. v. Ohio, 166 U. S. 185; 17 Sup. Ct. Rep. 604; Honolulu Transit Co. v. Wilder, 211 U.S. 137, 142. ^ Act, Par. 1, line 19 (infra Appx. I). WHAT THE TAX IS OIT. 9 come,* although undoubtedly a very high degree of deference will be paid to the designation of the tax by Congress as an excise tax on the transaction of business. So also, there is no difference between a tax " equal to," or as this Act says " equivalent to," ^ so much per cent of the income, and a tax on the income, of so much per cent.' § 7. Statement of Question — Is the Income a Mere Measure of the Business? — The question in the last analysis is this: Is the tax really though not nominally a tax on income, or is the income merely used as a convenient and proper index to the value or amount of the business? It should be remembered that a tax on the business is what is often designated — though in the writer's opin- ion inappropriately designated — as a franchise tax.* § 8. Tax not Laid on all who do Business. — The fact that the tax is not laid upon all persons who do business, but only upon companies, is not conclusive to show that it is not a tax on the business. There may be a tax on the transaction of business without subjecting to the tax everybody who transacts business. The exemptions may con- * Galveston, Harrisburg, etc., Ry. Co. v. Texas, 210 U. S. 217. Cf. Stookard v. Morgan, 185 U. S. 27, 37; 22 Sup. Ct. Rep. 576. ^ Act, Par. 1, line 17 (infra Appx. I). ' Galveston, Harrisburg, etc., Ry. Co. v. Texas, 210 U. S. 217, 227-228; 20 Sup. Ct. Rep. 829. *See infra § 11. 10 FEDERAL COKPORATION TAX LAW. ceivably destroy the uniformity of the tax, and render the act obnoxious to constitutional objec- tions on the score of inequality; but they do not show that the tax is other than what it is denom- inated by the legislature — a tax on business. Indeed, if the tax is to be deemed an income tax, it must still be acknowledged that it is not laid upon all persons who enjoy incomes. § 9. Is the Tax laid on Companies which do no Business? — If, however, the tax is laid upon companies which do no business, it cannot be a tax on business. You cannot tax a company on a business which it has not. Now, in the case of domestic companies, there is no express exemption of those companies which are not carrying on business: the language is genevsl — " every cor- poration, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance com- pany, 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, . . . shall be subject to pay annually a special excise tax."* If, however, the tax is a tax on business, then it must be held that domestic companies which do no business shall pay no tax, even though they may derive an income from invested property. In this aspect, it is as if a law should provide that every corporation shall be subject to pay a tax on its real estate; for in ' Act, Par. 1, lines 1-14 (infra Appx. I). WHAT THE TAX IS OK. H that case nobody would claim that a corporation owning no land should nevertheless pay a tax. In truth, in respect to the question whether domestic companies which are doing no business but which derive an annual income exceeding five thousand dollars from invested capital are liable to tax, two clauses of the Act are in conflict. On the one hand, if effect is to be given to the provision that the tax is laid " with respect to the carrying on or doing business," then such companies are not liable to the tax; but if, on the other hand, effect is to be given to the other provision of the same section that all domestic companies having a capital stock divided into shares shall pay a tax equal to one per cent of the net income over and above five thousand dollars received during the year from all sources, the tax in the case suggested would be payable. The question is whether the apparent intention to exact a tax if any of the companies described in the Act receives an income, from any source, in excess of five thousand dollars is overbalanced by the express provision that the tax is laid on the transaction of business. In order to determine this, we must look at other portions of the Act. In respect to foreign companies, the Act ex- plicitly states that only such companies as are " engaged in business in any State or Territory, of the United States or in Alaska or in the District of Columbia," are liable to the tax.* It is, therefore, * Act, Par. 1, lines 9-12 (infra Appx. I). 12 FEDERAL COKPOKATION TAX LAW. clear that a foreign company which does no busi- ness ' is not subject to tax, although it may derive an income from capital invested in the United States. § 10. Tax not Gauged by Amount of Business but by Amount of Income from all Sources. — It is quite clear that the tax with respect both to domestic and to foreign companies is not at all graduated according to the amount of business done, and that a diminution in the amount of business does not necessarily work any correspond- ing diminution in the amount of the tax. This is clear enough even in the case of a domestic com- pany; for the Act expressively provides that the amount of the tax shall be one per cent of the income " received by it from all sources," ' and not merely from its business. Though the business were carried on at a loss, yet if the losses were overbalanced to the extent of five thousand dollars by income from investments, the tax would be payable. As to foreign companies, the Act is if possible still more express, for it provides that the tax shall be one per cent on the net income in excess of five thousand dollars received " from business transacted and capital invested within the United States." ^ These circumstances cer- ^ As to what is " doing business," see infra § 28. ' Act, Par. 1, line 19 (Appx. I). ' Act, Par. 1, lines 27-28 (infra Appx. I). So, Paragraph 2 provides that the net income of a foreign company subject to the tax shall be calculated by making certain deductions WHAT THE TAX IS ON. 13 tainly tend to show that the tax is really laid on income and not, as it purports to be, on the carrying on of business. For while a tax on business may appropriately be measured by the amount of income received from that business,' yet it is difficult to see how it can be affected by the amount of income received from other sources without losing its character as a tax on business.^ Moreover, as will be explained below, there is on the face of the Act a doubt whether income received by the company as trustee is to be included in the assessment. If so, that fact certainly goes a long way towards showing that the tax is really laid on income and not on business. § 11. Tax not laid on Franchise to be a Cor- poration. — The tax certainly cannot be regarded as laid upon the so-called " franchise " or privilege of being a corporation; for the Act is expressly applicable not only to corporations but also to many unincorporated bodies, namely, " every joint from " the gross amount of its income received within the year from business transacted and capital invested within the United States." See infra § 78. So the return on behalf of a foreign company must state the gross income received from " business transacted and capital invested " in the United States. See infra § 93. 1 Maine v. Grand Trunk Ry. Co., 142 U. S. 217, 228-229; 12 Sup. Ct. Rep. 121,. 163. ^ Compare cases cited infra § 40. See also an elaborate and valuable note in 57 L. R. A. 48-53, where a full collection will be found of the then existing authorities upon the dis- tinction between a property tax and a franchise tax, or tax on the business. 14 FEDERAL CORPOKATIOIT TAX LAW. stock company or association organized for profit and having a capital represented by shares." * This is sufficient to dispose of any contention that the tax is laid on any corporate franchise or privilege, if there be any such thing under modern liberal incorporation laws.^ Taxes on the business of corporations are often spoken of, even by the best authorities, as franchise taxes; ' but those ' Cf. Gleason v. McKay, 134 Mass. 419 (where a statute purporting to extend to unincorporated companies a tax laid by a previous statute on- the " franchises " of certain corporations — substantially the same statute which was held constitutional in Hamilton Co. v. Massachusetts, 6 Wall. 632 — was held unconstitutional because the unincor- porated companies had no " franchises "); Philadelphia, etc., S. S. Co. V. Pennsylvania, 122 U. S. 326, 342; 7 Sup. Ct. Rep. 1118 (where the court reasoned that a certain tax " certainly could not have been intended as a tax on the corporate franchise, because, by the terms of the act, it was laid equally on the corporations of other states doing business in Pennsylvania"). ^ See 1 Machen, Modem Law of Corps., § 19, § 20. Al- though there may not be any " franchise to be a corporation," in the proper sense of those words, under modern incorpora- tion laws; yet there is certainly a rigM to be a corporation, although that right is free to everybody. And the exercise of this right may be taxed, just as, for example, the exercise of the right to execute a conveyance of land may be taxed. 'Provident Inst. v. Massachusetts, 6 Wall. 611; Society for Savings v. Coite, 6 Wall. 594; Honolulu Transit Co. v. Wilder, 211 U. S. 137. A so-called " privilege tax " on corporations is a tax on property; Gulf, etc., R. R. Co. v. Hewes, 183 tJ. S. 66; 22 Sup. Ct. Rep. 26; but not of course on the tangible property of the corporation. Hamilton Co. V. Massachusetts, 6 Wall. 632. WHAT THE TAX IS ON. 15 expressions can hardly be taken as conclusive of the propriety of that terminology.^ Still less can they properly be used as a basis for the deduction that such a tax, if laid by Congress, would be an unconstitutional burden on a state franchise or agency.'' § 12. On Privilege of Having a Share-Capital? — It may be said, however, that the tax is upon the privilege of having a capital stock represented by shares. This can hardly be, however; for the Act applies to all insurance companies, even those which have no capital stock.^ Moreover, although the right to have a capital stock divided into shares is of some value, yet it is hardly reasonable to say that it bears any relation to the total amount of net income from all sources received by the company, in proportion to which this tax is graduated. § 13. Not a Tax on Dividends. — This tax is certainly not a tax on dividends; for the tax is payable although no dividends are declared. The company may choose to accumulate its earnings as a surplus or reserve; and yet the tax would be payable on the net income in excess of $5,000. Moreover, as shown below, in some circumstances where dividends may be declared and paid, even to an amount exceeding five thousand dollars, yet * It is submitted that a more accurate, though more cumbrous, name is " tax on business transacted," or, more briefly, " business tax." ^ See infra § 145. 3 See infra § 20. 16 FEDERAL CORPORATION TAX LAW. the tax would not be payable.' A tax on dividends paid to shareholders is doubtless an excise; but this is not such a tax. § 14. Differences from an Income Tax. — If the tax is not a tax on income, it has all the appearances of such a tax. Its amount is to be calculated for all the world like the amount of an income tax. It differs from an income tax in but two respects at most — (1) in name, and (2) in that it is not, perhaps, payable unless the company in question is doing some business of some kind.^ ' Infra § 31. ' Whether in such a case the tax would be payable, see supra 1 8. CHAPTER III WHAT COMPANIES ARE SUBJECT TO THE TAX § 15 In general. § 16 Unincorporated companies. § 17 " Organized for profit." § 18 How objects of company determined for purposes of the Act. § 19 " Having a capital stock represented by shares," § 20 Insurance companies. §§ 21-26 Expressly excepted classes of companies. § 21 In general. § 22 Labor organizations. § 23 Agricultural or horticultural organizations. § 24 Fraternal beneficiary societies. § 25 Building and loan associations. § 26 Religious, charitable or educational corporations. §§ 27-29 Foreign companies. § 27 Line of demarkation between foreign and domestic companies. § 28 What is " engaged in business in the United States." § 29 Corporations organized or dissolved with the year, etc. § 15. In General. — The class of companies subject to the Act is thus defined: " Every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance 18 TEDEEAL CORPORATION TAX LAW. company, now or hereafter organized under the laws of the United States or of any State or Terri- tory 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. . . . Pro- vided, however, that nothing in this section con- tained shall apply to labor, agricultural, or horti- cultural 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 mem- bers of such societies, orders or associations, and dependents of such members, nor to domestic build- ing and loan associations, organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which enures to the benefit of any private stockholder or indi- vidual." § 16. Unincorporated Companies. — It will be observed that the Act applies not only to corpora- tions, but also to unincorporated companies or- ganized for profit, and having a capital represented by shares. The word " companies " is undoubtedly suflBcient to cover unincorporated concerns,' and the same is true of the word " associations." ^ 'As to the meaning of the word, see 1 Machen, Mod. Law of Corps., § 30. The word " corporation," of coiirse, does not include unincorporated joint-stock companies: Gregg V. Sanford, 65 Fed. 151; 12 C. C. A. 525. ^ See People v. Wemple, 6 L. R. A. 303; 117 N. Y. 136 (where the very words, " corporation, joint stock company or association," in a tax law were held applicable to a volun- WHAT COMPANIES ARE SUBJECT TO THE TAX. 19 § 17. " Organized for Profit." — These words/ together with the adjective clause by which they are followed, namely, " having a capital stock represented by shares," probably apply to " cor- poration " as well as to " joint stock company or association," and therefore only such corporations as are " organized for profit " are subject to the tax. Such at any. rate must be the interpretation, unless the comma which follows the word " as- sociation " is to be disregarded; and the punctua- tion of a statute, although entitled to but slight consideration, and sometimes treated as no part of the statute at all,^ yet may be looked at for guidance where the words unpunctuated are ambiguous.^ The only argument against reading/^- the words " organized for profit " as applicable to tary association formed by articles of agreement which con- tained no reference to any statute but which purported to confer certain quasi-corporate powers which would only be lawful under certain enabling statutes). * Act, Par. 1, lines 2-3 (infra Appx. 1). ^ United States v. Isham, 17 Wall. 496; Hammock u. Farmers L. & T. Co., 105 U. S. 77; United States v. Lacher, 134 U. S. 624; 10 Sup. Ct. Rep. 625; Ford v. Delta, etc., Co., 164 U. S. 662, 674; 17 Sup. Ct. Rep. 230; MaxweU, Interpretation of Statutes, 4th ed., 61-62. * United States v. Three Railroad Cars, 1 Abb. (U. S.), 196, 210; Cummings v. Akron Cement, etc. Co., 6 Blatchf., 509, 511 (headnote inadequate); Commonwealth v. Kelley, 177 Mass., 221; 58 N. E., 691; Tyrrell v. Mayor, etc. of New York, 159 N. Y., 239; 63 N. E., 1111; 26 Am. & Eng. Enc. of Law, 2nd ed., 630; Cf. Ewing v. Burnet, 11 Pet. 41, 54 (as to the construction of a charge to a jury). 20 FEDERAL CORPORATION TAX LAW. " corporation " is found in the fact that the classes of corporations which are expressly excepted from the operation of the Act,' are, most of them, cor- porations which are not " organized for profit," so that if those words qualify " corporation " as well as " joint stock company or association," the express exceptions become largely surplusage. It would seem that a corporation " organized for profit," is another name for what is often desig- nated as a " business corporation." * § 18. How Objects of Company Determined for Purposes of the Act. — In all cases in this Act, as well as elsewhere, where corporations are classi- fied with respect to their objects, or the character of their business, there is apt to be an ambiguity whether the objects of the company and the char- acter of its business are to be determined for pur- poses of the classification by its ostensible objects and business as defined in its charter or incorpora- tion paper, or by the real objects of its promoters, ' See infra § 21-§ 26. ^ See 1 Machen, Mod. Law of Corps., § 28, where authori- ties will also be found as to the meaning of " corporations formed for profit." These words would not jnclude a Board of Trade: People v. Board of Trade, 80 111., 134, 136. But of. Mersey Docks v. Lucas, 8 A. C, 891 (corporation formed for management of public docks, whose revenues were required to be applied to expenses, interest on debt, construction and management, and accumulation of a sinking fund for ex- tinguishment of the principal of the debt, after which ex- tinguishment the rates should be reduced, held assessable for income tax on its " profits "). WHAT COMPANIES ARE SUBJECT TO THE TAX. 21 and by the character of business which they actually carry on.' This question repeatedly recurs in the interpretation of the present Act, and is here mentioned once for all. In most cases the objects of a company and the character of its business are to be determined for purposes of the Act by the charter or incorporation paper, rather than by the business which the company actually transacts. Thus, the expression, corporations organized for profit, evidently refers to corporations which by their charters are created for that object, and would not include a corporation formed ostensibly for a different object, but actually operated for purposes of profit. This is made clearer by the expression which is found a few lines below in the same para- graph of the statute, " organized and operated exclusively for religious, charitable, or educational purposes," ^ thus drawing a distinction between the purposes for which a corporation is ostensibly " organized," and those for which it is actually " operated." ' See 1 Machen, Mod. Law of Corps., § 27. In addition to cases there cited, see in support of the view that the classification of a corporation is to be determined exclusively with reference to its objects as expressed in its charter or incorporation paper, Speer v. Colbert, 200 U. S., 130; 26 Sup. Ct., 201; Bradfield ii. Roberts, 175 U. S., 291; 20 Sup. Ct. Rep. 121; Colgate v. IT. S. Leather Co., 72 Atl. 126 (N. J. Eq.); Webber Hospital Ass'n v. McKenzie, 71 Atl. 1062 (Me.); People v. Neff, 34 N. Y. App., Div. 83 (not exempt from taxation as a charitable corporation, though funds in fact devoted to charity). * Act, Par. 1, lines 46-48 (infra Appx. I). 22 SEDEEAL CORPORATION TAX LAW. § 19. " Having a Capital Stock Represented by Shares." — These words, * like the words " or- ganized for profit," should be read with " cor- poration," as well as witli " joint stock company or association."^ No corporations except such as have a capital stock represented by shares are subject to the Act. In this circumstance lurks a possible method for evading the tax. For, in England, companies sometimes issue stock which is not divided into indivisible shares, but is infinitely subdivisible." Although this form of security may not at present be authorized by the statutes of any American State, yet there is nothing to prevent some state legislature from conforming its laws in this respect to the British Companies Acts. A corporation organized under such laws, with stock, in the English sense of the word, and not shares, would not be subject to this federal tax, or be bound to make any returns under the Act; for its capital stock would not be " represented by shares." The device is as simple as it is efficacious. § 20. Insurance Companies. — Inasmuch as in- surance companies would undoubtedly fall within the class of corporations organized for profit,' the * Act, Par. 1, lines 3-4 (infra Appx. I). ^ The same consideration mentioned above with respect ■to the words " organized for profit " apply to these words. See supra § 17. ' 1 Machen, Mod. Law of Corps., § 494, § 495. See also Companies (Consolidation) Act, 1908, Sec. 41. * Hercules Mut. Life Ass. Soc, 12 Fed. Cas. 12; Inde- pendent Ins. Co., 13 Fed. Caa. 13. Cf. Equitable Life Ass. WHAT COMPANIES AEE SUBJECT TO THE TAX. 23 only effect of expressly mentioning " every insur- ance company " ' is to include mutual companies, which would otherwise be excluded by force of the words, " having a capital stock represented by shares." The meaning of insurance in this con- nection is perhaps not easy accurately to define.^ The days when all insurance could be divided into the three classes of life, fire, and marine, have long since passed; and we are now familiar with bur- glary insurance, fidelity insurance, guaranty insur- ance, and indeed still other forms of insurance. Yet, certainly guaranty companies are not usually included within the term " insurance companies "; and the same is true with respect to companies formed for some other kinds of insurance in the broadest meaning of that term. Until the courts have construed this Act, one cannot say whether the word insurance, as therein used, refers to any Soc. V. Bishop (1900), 1 Q. B. 177; New York Life Ins. Co. v. Styles, 14 A. C. 381 (income of mutual insurance company received as premiums froin members not assessable as profits); Last V. London Ass. Co., 10 A. C, 438 (secus as to income derived from premiums on participating policies issued by a joint stock insurance company). ' Act, Par. 1, line 4 (infra Appx. I). ^ For judicial definitions of " insurance " and " itisur- ance companies," see those titles in 4 Words and Phrases Judicially Defined, pp. 3674, 3679, and also 22 Cyc, 1384, tit. " Insurance." A corporation which for a membership fee agrees to clean a member's bicycle, repair the machine, and replace it if stolen, is not to be incorporated as an " insur- ance company": Commonwealth v. Provident Bicycle Ass'n, 178 Pa. 636; 36 L. R. A. 589; 36 Atl. 197. 24 FEDERAL CORPORATION TAX LAW. contract whereby money is to be paid to a person upon the occurrence of a specified form of loss or disaster, so that " insurance companies " would include any company engaged in the business of making any kind of such contracts, or whether the expression is used in a narrower and more popular sense. The question is not important in construing the words in this paragraph of the Act, because the great majority of such companies (with the excep- tion of mutual companies for insurance upon life and against fire, which are indisputably embraced within the heading of insurance companies) are formed upon the ordinary joint"" stock plan, and would therefore be embraced by the words " cor- porations . . . organized for profit and having a capital represented by shares," so that it becomes unnecessary to determine whether they would also be subject to the Act as insurance companies. The same question, however, will recur, because certain special allowances are permitted to " insur- ance companies " in calculating their net income for purposes of the tax.' § 21. Expressly Excepted Classes of Companies — In General. — The express exceptions of certain classes of organizations from the operation of the Act ^ would seem to have been inserted out of abun- dant caution. Few of the excepted classes of organ- izations are ever formed upon the joint stock * See infra, § 58, § 59. ^Act, Par. 1, lines 34-50 (infra Appx. I). WHAT COMPANIES ARE SUBJECT TO THE TAX. 25 plan, and almost none of them could be regarded as " organized for profit," or as having any " busi- ness," with respect to the carrying on or doing of which the tax is expressed to be levied. The chief effect, therefore, of the insertion of these express exceptions is to becloud the interpretation of the Act, and to cause some doubt whether the words " organized for profit and having a capital stock represented by shares " should not be held to qualify merely the words " joint stock company or association," and not the preceding word, " corporation." ' § 22. " Labor Organizations." — It seems that this exception ^ was intended in favor of trade- unions, and similar organizations of laboring men for the purpose of promoting the welfare of their class.' As a rule, they could not be said to be " organized for profit "; and they certainly rarely or never have a " capital stock represented by shares." Hence if only such corporations as are organized for profit with a capital stock divided into shares are subject to the Act, the express exception of labor organizations seems quite unnecessary. § 23. " Agricultural or Horticultural Organiza- ' See supra, § 17. 2 Act, Par. 1, lines 36-37 (infra Appx. I). 'See 18 Am. & Eng. Enc. of Law, 2nd ed., 80-81, tit. " Labor Organizations "; 24 CYC. 816-817. In neither place are any references given to any judicial decisions on the point, which seem to be wholly lacking. 26 FEDERAL CORPORATION TAX LAW. tions." — These words ' are probably intended to exclude from the operation of the Act any organiza- tion of farmers for the purpose of mutual con- sultation and assistance.* Perhaps, also, they have the effect of exempting corporations formed for the purpose of promoting agriculture by means of countyf airs, and thelike. The collocation withlabor organizations would seem to indicate that Congress had in mind organizations of farmers and horti- culturists similar in character to labor organizations. § 24. Fraternal Beneficiary Societies Operating, under the Lodge System, and Providing for the Payment of Life, Sick, Accident, and other Benefits to Members or Dependents of Members. -^ The classes of corporations here intended ' are d/Bsig- nated with clearness;* but as they are ^ never formed with a capital stock, they would not', even without the express exception, be subject to the Act, unless the narrower application of the words " having a capital stock represented by shares " is the true meaning. ' Act, Par. 1, lines 36-37 (infra Appx. I). * For judicial definitions of an agricultural society, see 1 Words and Phrases Judicially Defined, 288, tit., " Agricul- tural Societies." ^ Act, Par. 1, lines 37-43 (infra Appx. I). *Cf. National Union v. Marlow, 74 Fed. 775; 21 C. C. A. 89; 13 Am. & Eng. Enc. of Law, 2nd ed., 1043-1045, tit. " Benevolent or Beneficial Associations "; Bacon on Benefit Societies, 3rd ed., § 1 e« seq.; 29 CYC. 7-11, tit., " Mutual Benefit Insurance"; 1 Words and Phrases Judicially De- fined, 748, tit. " Beneficial Associations." WHAT COMPANIES AEB SUBJECT TO ^gHE TAX. 27 § 25. Building and Loan Associations. — Only " domestic " building and loan associations are expressly excepted.* That word is evidently used, not as opposed to " foreign," but as confining the exception to such associations as have for their chief, if not their only, object, the lending of money for the purpose of enabling the borrower to acquire a home. The meaning of the words, " building and loan associations," is suflBciently well understood in the law as to call for no com- ment. ^ In order, however, to be within the express exception, a building and loan association must be organized and operated exclusively for the mutual benefit' of members. § 26. Religious, Charitable, or Educational Cor- porations. — In order to be within this exception,^ it is necessary that a corporation be organized exclusively for the purposes mentioned. No such corporation could be regarded as " organized for profit"; and few such corporations have a capi- tal stock. The necessity of the express exception is, therefore, not easy to see. However, it per- haps removes a doubt — probably unfounded,* — ' Act, Par. 1, lines 43-45 (infra Appx. I). 2 For definitions see 6 CYC. 120. tit. " Building and Loan Societies." ^Act, Par. 1, lines 46-50. * See McLeod v. Lincoln Medical College, (Neb), 96 N. W., 265, 266; Santa Clara Female Academy v. Sullivan, 116 111., 375, 387-388; 6 N. E. 183; 56 Am. Rep. 776; McDonald V. Mass. Gen. Hospital 120 Mass. 432; 21 Am. Rep. 529 28 FE]3i;RAL CORPOKATION TAX LAW. whether an educational corporation is converted iito a business corporation merely because it makes a charge for tuition. " Charitable " in such a connection is not used in the popular mean- ing of relief from poverty, but in the broader signification it has acquired in English law.' A religious corporation is one formed for the purpose of worshipping God, and propagating the faith. ^ § 27. Line of Demarkation between Foreign Companies and Domestic Companies. — The line drawn in the Act between foreign and domestic companies is between companies " organized under the laws of any foreign country " on the one hand,' and companies " organized under the laws of the United States, or of any State or Territory of the (hospital requiring its patients to pay for their board); Rex V. Special Commissioners, 98 L. T. 446. ' Commissioners for Income Tax v. Pemsel (1891), A. C. 531; Rex v. Special Commissioners, 98 L. T. 446. As to what are charitable purposes, see further, St. Andrew's Hospital V. Shearsmith, 19 Q. B. D. 624; Paddington Burial Board v. Commissioners of Inland Revenue, 13 Q. B. D. 9; People v. Neff, 34 N. Y. App. Div. 83; 12 Am. & Eng. Enc. of Law, 2nd ed., 337, tit., " Exemptions from Taxation "; 2 Words and Phrases Judicially Defined, 1074, et seq., titles, "Charitable Institutions" and "Charity"; Grove v. Young Men's Christian Ass'n, 88 L. T. 696 (Y.M.C. A. main- taining a restaurant liable to tax on profits thereof). ^ Baltzell V. Church Home and Infirmary, 73 Atl. 151; 110 Md. 244. See also 7 Words and Phrases Judicially De- fined, 6063-6068, titles, " Religion " to " Religious Worship," inclusive. 'Act, Par. 1, lines 9-10 (infra Appx. I). WHAT COMPANIES ARE SUBJECT TO THE TAX. 29 United States, or under the Acts of Congress applicable to Alaska or the District of Columbia," on the other hand.' Do these two classes together embrace all conceivable companies, or may there be a tertium quid, which is included in neither? It is clear that a corporation formed under the laws of Porto Rico, or of the Philippine Islands, is not " organized under the laws of any foreign country";^ but on the other hand, is it within the class of domestic companies as defined in the Act? The express mention of Alaska and the District of Columbia would seem by inference at least to exclude the Insular Possessions,^ and indeed they can hardly be regarded as " terri- tories " of the United States. The same question as to the meaning of the words, " the United States and its Territories, Alaska and the District of Columbia," which are • Act, Par. 1, lines 5-8 (infra Appx. I). 2 Dooley v. United States, 182 U. S. 222; 21 Sup. Ct. Rep. 762; DeLima v. BidweU, 182 U. S. 1; 21 Sup. Ct. Rep. 743; Ponce V. Roman Catholic Church, 210 U. S. 296, 309; Dooley V. United States, 183 U. S. 151; 22 Sup. Ct. Rep. 62; Four- teen Diamond Rings, 183 U. S. 176; 22 Sup. Ct. Rep. 59; Lincoln v. United States, 197 U. S. 419; 25 Sup. Ct. Rep. 455. ^ The first section of the Act of Aug. 5, 1909, c. 6, of which the corporation tax provisions constitute the thirty-eighth section, refers to articles " imported from any foreign country into the United States, or any of its possessions, except the PhiUppine Islands, and the Islands of Guam and Tutuila." Section 5 refers to " articles coming into the United States from the Philippine Islands." 30 FEDEEAL CORPORATION' TAX LAW. frequently repeated/ will constantly recur. It is now mentioned once for all, and will not again be referred to. § 28. What is " Engaged in Business in the United States." — No foreign company is subject to the tax unless it is " engaged in business " in the United States, including the territories, Alaska and the District of Columbia; ^ it is not enough that it may have " capital invested " in this country,^ although if it be doing business, the Act purports to tax it upon the income derived from capital invested in the United States, as well as from business transacted therein. The meaning of these words, " engaged in business," is almost certainly the same as that of the words, " doing or carrying on business," in statutes regulating service of process on foreign corporations doing business in a state,* or prohibiting foreign corpora- tions from doing business in the state, except upon compliance with certain conditions. Although there is some conflict of authority as to the con- struction of such statutes, yet in the main there is a substantial agreement between the various ' Act, Par. 1, lines 28-30; Par. 2, lines 48-50, 53-55, 60- 62, 77-79; Par. 3, Unes 48-50, 68-70, 84-86, 112-114. Com- pare also the expression, ''of the United States or of any state or territory thereof." Act, Par. 2, lines 32-34, 83-84. 2 Act, Par. 1, lines 10-12 (Appx. I). ^ Cf. People V. Campbell, 138 N. Y. 543, 546; 34 N. E. 370; 20 L.'R. A. 453; People v. Am. Bell Tel. Co., 117 N. Y. 241; 22 N. E. 1057. * Cf. Mutual Life Ins. Co. v. Speatley, 172 U. S. 602. WHAT COMPANIES ARE SUBJECT TO THE TAX. 31 courts of this country.* It must be remembered, however, that inasmuch as the federal courts follow the state courts as to the construction to be given to the words " doing business within the state " in a state statute,^ decisions of the federal courts construing those words in a state statute must not too readily be accepted as controlling authority as to the construction of this Act of Congress. Almost precisely the same question that arises under this statute has come up in England under a statute subjecting to income tax any person who ' exercises a trade ' in the United Kingdom.^ ' When the facts are disputed, the question must, of course, in actions at law, be left to the jury, under proper instructions by the Court: Audenried v. East Coast Milling Co., 124 Fed. 697; Oakland Sugar Mill Co. v. Wolf Co., 118 Fed. 239; 55 C. C. A. 193. 2 Erie Ry. Co. v. Pennsylvania, 21 Wall. 492, 497 (head- note inadequate). ^ Grainger v. Gough (1896), A. C. 325; Lovell & Christmas V. Commissioner of Taxes (1908), A. C. 46 (as to a similar New Zealand statute, the court saying: " The trade or business in question in such cases ordinarily consists in making certain classes of contracts and in carrying those contracts into operation with a view to profit, and the rule seems to be that where such contracts, forming as they do the essence of the business or trade, are habitually made, there a trade or business is carried on within the meaning of the Income Tax Acts, so as to render the profits Uable to income tax.") Watson V. Sandie (1898), 1 Q. B. 326 (goods sold in his own name by agent for foreign principal, who was held liable to income tax on the profits of the transaction as exercising a trade in the United Kingdom); Werle & Co. v. Colquhoun, 20 Q. B. D. 753 ; Pommery v. Apthorpe, 56 L. J. 32 FEDERAL COKPOEATION TAX LAW. A mere isolated transaction is not doing business within the state: there must be some course of action, or repeated action within the state, in order to constitute doing business/ The mere ownership of property within the state is certainly not doing business.^ So it would seem clear that the acquisition of property in the state, as an investment, is not doing business.'' Mere soliciting Q. B. 155 (French wine merchant held to be taxable as exercising a trade in England) ; Tischler v. Apthorpe, 52 L. T. N. S. 814 (a similar decision to last case). '■ Cooper Mfg. Co. v. Ferguson, 113 U. S. 727; 5 Sup. Ct. Rep. 739; Empire Milling, etc., Co. v. Tombstone Mill, etc., Co., 100 Fed. 910 (simple contract to pay a third person for exploiting and developing land owned by the company within the state not doing business); Frawley, Bundy & Wilcox V. Pennsylvania Casualty Co., 124 Fed. 259 (writing four policies in the state for residents thereof, and collecting a single premium through a bank therein, not doing business by an insurance company); Clews v. Woodstock Iron Co., 44 Fed. 31 (executing mortgage, and procuring listing of its securities on the stock exchange); St. Louis Wire-Mill Co., 32 Fed. 802 (occasional purchases of material); Good Hope Co. V. Railway Barb Fencing Co., 22 Fed. 635 (president going into state to adjust controversy growing out of occasional purchases of materials); Grainger v. Gough (1896), A. C. 325, 343 (per Lord Morris, in respect to Uability to income tax). ' Empire Milling, etc., Co. v. Tombstone Mill, etc., Co., 100 Fed. 910 (stated supra); United States v. Am. Bell Tel. Co., 29 Fed. 17. 'SulUvan v. Sheehan, 89 Fed. 247 (lending money on security of property in the state not doing business therein) ; Caesar v. Capell, 83 Fed. 403 (similar point) ; Eastern Bldg. Ass'n. V. Bedford, 88 Fed. 7 (similar point); Gilchrist v. Helena, etc., R. Co., 47 Fed. 593 (foreign trust company pur- WHAT COMPANIES ARE SUBJECT TO THE TAX. 33 of contracts by travelling agents has been held not to be doing business.' Making of contracts by- correspondence with a resident of a state and relating to property therein is not doing business in that state.^ On the other hand, it seems that the collection of premiums upon policies previously written in the state amounts to doing business therein.^ Maintenance of ticket-office by a railway company, especially when coupled with the running of through trains over the tracks of another com- pany, is doing business.* When a company by a chasing mortgage bonds of domestic railway, and acting as trustee of the mortgage) . But see Santa Clara Female Academy v. Sullivan, 116 111. 375, 384; 6 N. E. 183; 56 Am. Rep. 776 (semble). ' Boardman v. McClure Co., 123 Fed. 614; Davis & Rankin etc. Co. V. Dix, 64 Fed. 406 (sales through travelUng salesmen) ; Grainger v. Gough (1896), A. C. 325 (foreign wine-merchant not liable to income tax as exercising a trade in the United Kingdom where an agent solicits orders which are transmitted to the principal's foreign residence and there accepted — a decision with which Werle & Co. v. Colquhoun, 20 Q. B. D. 753, should be compared). * But see Turner v. Evans, 2 E. & B. 512 (wirie merchant systematically soliciting orders in a certain county held to have violated a contract not to carry on business therein); Brampton v. Beddoes, 13 C. B. N. S. 538 (a similar decision, where defendant had sold to customers within the prohibited territory at their own solicitation). ^ Hazeltine v. Mississippi Val. Fire Ins. Co., 55 Fed. 743. ' Mutual Life Ins. Co. v. Spratly, 172 U. S. 602. But see Frawley, Bundy & Wilcox v. Pennsylvania Casualty Co., 124 Fed. 259 (stated supra). * Norton v. Atchison etc. R. Co., 61 Fed. 618; Van Dresser V. Oregon Ry. etc. Co., 48 Fed. 202. 34 FEDERAL OORPOEATIOIT TAX LAW. salaried representative in New Zealand solicited and obtained consignments of goods to it in Lon- don to be sold on commission, it was held that no business was transacted in New Zealand, or that at all events, the profits made as commission on the sales in London could not be deemed to have arisen from business carried on in New Zealand.* But for a full discussion of this question, the reader is referred to> treatises on the law of foreign corporations.^ § 29. Corporations Organized or Dissolved within the Year, etc. — The First Paragraph of the Act imposes the tax on all domestic corporations and companies of the classes specified, " now or hereafter organized," ^ and on foreign companies " now or hereafter organized and engaged in business " in the United States.* It would seem therefore that a corporation which had been dis- solved before the Act took effect, — that is, before August 5th, 1909,° — would not be subject to tax, even though it might have transacted some business, and earned some income prior to that date." So, too, a foreign company which had ceased to do business in this country before August 5th, 'LovelI"& Christmas v. Commissioner of Taxes (1908), A. C. 46. ^ Beale on Foreign Corps., § 204-§ 209. 'Act, Par. 1, lines 4-5 (infra Appx. I). * Act, Par. 1, lines 10-12 (infra Appx. I). ' See Act, § 42 (infra Appx. I). ° It is to be observed that by § 42 of the Act (infra Appx. I) WHAT COMPANIES ARE SUBJECT TO THE TAX. 35 1909, would escape all the burdens of the Act. On the other hand, if a domestic corporation is in existence for even a day after August 5th, 1909, or if a foreign company does business in this country for even a day after that date, perhaps it becomes liable to the tax imposed on its net income for the entire year 1909,^ and cannot escape the tax by dissolving, or ceasing to do business before the end of the year.^ On the other hand, the Act furnishes no machinery for assessment of the tax against dissolved corporations. For in- stance, a dissolved corporation can have no chief officer and no treasurer or assistant treasurer; and without such officers, who is to make the it is expressly provided that the " Act shall take effect on the day following its passage." Note, however, that by Rev. Stats. § 5 (1 U. S. Comp. Stats. p. 4), the word " company " or " association," when used in an Act of Congress in reference to a corporation, shall be deemed to embrace the words " successors and assigns of such company or association," in Uke manner as if these last-named words, or words of similar import, were expressed. ' But see Spreckels Sugar Ref. Co. v. McClain, 109 Fed., 76, 79, reversed on other points, 113 Fed. 244; 192 U. S. 397; Commonwealth v. Lancaster Sav. Bank, 123 Mass. 493 (banking corporation which is in hands of receiver and per- petually enjoined from transacting business on November 1st not Uable to a franchise or business tax for the preceding six months, rneasured by its average deposits during that period, although it had transacted business within that term). 2 Cf. Mandell v. Pierce, 3 Cliff. 135 (as to the HabiUty of an executor for income tax, when the testator dies within the year). As to the constitutionality of this feature of the Act, see infra § 148. See also infra § 39. 36 PEDEEAL COEPORATION TAX LAW. return on its behalf? And without a return, how is the tax to be assessed? For it would seem difficult to hold that a corporation which had ceased to exist, and therefore could not make the return, is to be treated as in default for not doing so; and unless it is in default, the Commissioner of Internal Revenue has no authority to prepare a return on its behalf. Corporations which are organized after the Act goes into effect, and within the year, and foreign companies which within that period begin business in this country, are clearly subject to the tax. The Commissioner of Internal Revenue has ruled that, " Corporations organized during the year, or going into liquidation during the year, should nevertheless render a sworn return on the prescribed form." ' >U. S. Int. Rev. Regs., No. 31, Dec. 3rd, 1909 (Infra Appx. II). CHAPTER IV HOW THE TAXABLE INCOME IS CALCULATED § 30 In general. § 31 Income distinguished from profits. § 32 Statutory provisions as to method of calculation mandatory. §§ 33-44A What to be included as " the gross amount of the iacome." § 33 In general. § 34 Dividends on stock held in other companies. § 35 Increase in value of property — sale of capital sets. § 36 Purchase price payable by instalments. § 37 Force of the word " received " in " gross amount of income received " in Paragraph 2 of the Act. § 38 Income received as trustee. § 39 Income received before passage of the Act. § 40 Income derived from property exempt from tajtation. § 41 Income derived from land. § 42 Income from invested personal property. § 43 What is income from business as distinguished from investments. § 44 Income from ultra vires business. § 44A Income from foreign business and property. § 45-74 Deductions to be made from gross income. § 45 Is statutory hst of deductions exhaustive? § 46-52 Maintenance and operation. § 46 The provision in general. § 47 What is maintenance and operation, — in gen- eral. § 48 Maintenance of property. 38 FEDEEAL COEPORATION TAX LAW. §49 Expenses "actually paid" — meaning of the expression. § 50 Necessity that expenses should have been paid " out of income " in order to be deducted. § 51 Meaning of " ordinary and necessary " expenses. § 52 Charges such as rentals and franchise payments. §§ 53-69 Deductions for losses. § 53 Necessity for an express provision of law allowing such deductions. § 54 Meaning of " losses." § 55 Loss must be " sustained within the year." § 56 Must be " not compensated by insurance or other- wise." § 57 Depreciation of property. §§ 58-59 Deductions by insurance companies. § 58 " Sums other than dividends paid with the year on policy and annuity contracts." § 59 Additions to reserve fimds. §§ 60-67 Deductions for indebtednessor interest thereon. § 60 The provision in general. § 61 Limitation on amount of indebtedness — what is " the paid-up capital stock." § 62 As of what date amount of capital stock and of indebtedness is to be taken. § 63 Force of the word " Outstanding " in capital stock outstanding at the close of the year. § 64 Indebtedness of non-stock corporations. § 65 Indebtedness in excess of the paid-up capital. § 66 Money used in paying principal of debts — Mo- neys added to sinking funds. § 67 Interest on bank deposits. §§ 68-70 Deductions for taxes. § 68 In general. § 69 Special assessments for betterments. § 70 Foreign taxes. §§ 71-74 Dividends on shares in other companies. § 71 In general. HOW THE TAXABLE INCOME IS CALCULATED. 39 § 72 On shares in companies whose net income is less than five thousand dollars. § 73 On shares in foreign companies. § 74 Meaning of " Dividends " in this connection. § 75-84 Method of calculating taxable income of foreign companies. § 75 In general. § 76 Gross income " from business transacted and capi- tal invested in the United States." § 77 How to apportion profits between that part of busi- ness transacted in the United States and that part transacted abroad. § 78 ^ What is income from " capital invested in the United States." §§ 79-84 Deductions from gross income by foreign com- panies. § 79 In general. § 80 Operating expenses of foreign companies. § 81 Losses by foreign companies. § 82 Interest on indebtedness paid by foreign com- panies. § 83 Taxes paid by foreign companies. ■ § 84 Dividends on shares in other companies held by foreign companies. § 84A For what period income is calculated. § 30. In General. — Inasmuch as the tax is either a tax upon income or at any rate is graduated with reference to income, it is next pertinent to inquire how the income is to be calculated for the purposes of the tax. The Act of Congress contains full, though perhaps not exhaustive nor exclusive, directions as to the method to be followed in this process of calculation. § 31. Income Distinguished from Profits. — The 40 FEDERAL COKPOKATION TAX LAW. matter to be ascertained by this process is net income, not profits. The two terms are not synonymous.* For instance, where the company's fixed capital ^ has increased in value, the increment may be regarded as profits and may be distributed as dividends; ' but it is not income and would not be liable to tax under the present law.* Even if there were no directions in the Act as to the mode of ascertaining profits, this would be true. A for- tiori the mere fact that the company's assets may exceed in value the sum of its liabilities and out- standing paid-up capital, although the excess is deemed profits and as such is distributable as divi- dends, has no tendency to show the existence of " net income " in proportion to which this tax is * It is submitted that the Commissioner of Internal Revenue is mistaken in his statement that " gross income is practically the same as gross profits, the only difference being that gross income is more inclusive, embracing as it does not only gross profits of the corporation, joint stock company and association itself, but also all amounts of in- come received from all other sources." U. S. Int. Rev. Regs. No. 31, Dec. 3d, 1909, Art. 2, § 5 (Infra Appx. II). So, " earnings " is not synonymous with " profits "; Grant v. Hartford, etc., R. R. Co., 93 U. S. 225, 228. ^ As to the meaning of " fixed capital," see 2 Machen Mod. Law of Corps., § 1323. ^ 2 Machen, Mod. Law of Corps., § 1314, § 1320. * Gray v. Darlington, 15 Wall. 63, 66 (" Mere advance in value in no sense constitutes the gains, profits or income specified by the statute. It constitutes and can be treated merely as an increase of capital "). Cf . infra § SsT HOW THE TAXABLE INCOME IS CALOtfLATED. 41 assessed. In other words, in order to ascertain the amount of net income for purposes of the tax, the so-called single-account or balance-sheet method of ascertaining the amount of profits available for dividends * must be rejected, and in lieu thereof something resembling the double-account method of calculating profits ^ must be adopted. The Act of Congress recognizes this fact, and the method prescribed in Paragraph 2 of the Act for ascer- taining net income will be found to follow the general plan of the so-called double-account method of ascertaining profits. § 32. Statutory Provisions as to Method of Calculation Mandatory. — The Second Paragraph of the Act prescribes the method of calculating net income for purposes of the tax. These statu- tory regulations are evidently, so far as they go, mandatory. The language is, " Such net income shall he ascertained " by the method particularly set out in the statute. The statutory rules may not be exhaustive, but they are certainly obliga- tory and not merely directory. There are certain differences between the rules applicable to domestic companies and those prescribed for foreign com- panies. These differences spring from the fact that in the case of domestic companies the entire net income in excess of five thousand dollars is ' As to this method, see 2 Machen, Mod. Law of Corps., § 1314-§ 1319. ^ As to this method, see 2 Machen, Mod. Law o£ Corps., § 1320-§1337. 42 FEDEEAL CORPORATION TAX LAW. taxed, while in, the case of foreign companies it is only so much thereof as is derived from business transacted and capital invested in this country. It will, therefore, be simplest to discuss the method of calculating net profits in the case of domestic companies, and afterwards to consider the peculiar questions arising with respect to the similar calcula- tion in the case of foreign companies. § 33. What is " the Gross Amount of the In- come." — In General. — Congress has provided that the net income shall be ascertained by making certain deductions from " the gross amount of the income." ' The first question is, what is gross income. Upon this point the Act is silent, so that resort must be had to the general principles of law. Income means primarily that which comes in,^ and gross income is therefore the gross amount which is received by the company during the year, without, deduction for the outlay necessary to bring it in. For a further statement of what income is, refer- ence must be made to the treatises on the general law of corporations.^ In the absence of affirmative statutory authority an assessment for income tax must not include the rental value of premises owned and actually occupied by the taxpayer, ' Act, Par. 2, lines 1-3 (infra Appx. I). ^ For full citlition of authorities defining " income," see 22 CYC. 63 et seq., tit. " Income." Cf. also Re Redding (1897), 1 Ch. 876; Lawless v. Sullivan, 6 A. C. 373. ' See particularly, 2 Machen, Mod. Law of Corps., § 1330, §1334-§1336. HOW THE TAXABLE INCOME IS CALCULATED. 43 or even of premises which he is permitted to occupy rent free.' The mere fact that a remittance to the company from an agent is described, or, as Lord Halsbury said, nicknamed, a return of capital is obviously not conclusive, and it seems is not even sufficient to relieve the company of the burden of proving how much, if any, of the sum so received is capital.' As Lord Halsbury put it, the company virtually say to their agents, " ' Whenever you send money to this country, do not find out what in strictness is the difference between capital and income, but describe whatever you send back to us as repayment of capital — take care you do not describe it as interest.' " ^ § 34. Dividends on Stock Held in Other Com- panies. — Dividends on stock of other companies held by the tax-paying company may or may not be income; this question often arises as between a tenant for life and a remainderman, where shares are held in trust,^ and it would seem that no dividend should be held to be taxable as income of a shareholding company unless it would be payable to a tenant for life of the shares.^ In * Tennant v. Smith (1892), A. C. 150. 2 Scottish Provident Ass'n v. Allan (1903), A. C. 129. '(1903), A. C. 135. *See 2 Machen, Mod. Law of Corps., § 1377-§1396. ' Of. Merchants' Ins. Co. v. McCartney, 1 Lowell 447 (holding that so much of a dividend as represented profits earned before the income-tax law went into effect was not taxable as income of the holding company; but to be com- 44 FEDERAL COSPORATION TAX LAW. connection with the present Act, the question cannot arise except where a domestic company holds stock in a foreign company, for all dividends on stock of domestic companies are exempt.' The fact that a domestic company owns shares, even all the shares, of a foreign company does not make the business of the foreign company the business of the domestic company, so as to subject the domestic company to tax on the income of the foreign company unless it be used to declare and pay a dividend.' The Act, contemplates, however, that dividends on the stock of all other companies — at any rate such dividends as amount to income rather than capital — shall be returned as part of the gross income although they are to be off-set, in the case of other companies which are subject to the tax, by a credit or deduction of an equal amount.' § 35. Increase in Value of Property. — Sale of Capital Assets. — It has been shown above that pared with Gibbons v. Mahon, 136 U. S. S49; 10 Sup. Ct. 1057); Reynolds v. Williams, 4 Bias. 108 (a somewhat similar case in principle to Merchants' Ins. Co. v. McCartney, vbi supra) . ' Cf. infra § 71, et seq. ' Gramophone & Typewriter v. Stanley (1908), 2 K. B. 89; Kodak, Ltd. v. Clark (1903), 1 K. B. 505. See also 2 Machen, Mod. Law of Corps., § 1080. But see American Sugar Ref. Co. v. Rutan, 123 Fed. 979; Apthorpe v. Peter Schoenhofen Brewing Co., 80 L. T. 395; St. Louis Breweries v. Apthorpe, 79 L. T, 551. 3 See infra § 71-§ 74, HOW THE TAXABLE INCOME IS CALCULATED. 45 an increase in the value of a company's fixed capi- tal is not to be regarded as income for the purpose of the Act.' But what if the capital is actually- sold during the year? On principle, it is difficult to see why that fact should make any difference, or should convert any part of the proceeds of sale, representing fixed capital sold, into income. Of course, a sale of circulating capital — capital which is acquired for the purpose of making a profit by a sale thereof — would stand on a wholly different footing; for in such a case the difference between the purchasing price and the selling price is undoubtedly income. But where a company for reasons of convenience, or for liquidation, or for any other reason, makes a sale of fixed capital, the case is wholly different. For example, suppose a mercantile company should desire to move its store from one location to another, and with that object in view should sell its old store. It is sub- mitted that in such a case the fact that a good price may be realized — more than the company paid for the property, or more than it was worth at the beginning of the year, — is no reason what- ever for treating that excess as income.^ Nevertheless, the Commissioner of Internal Revenue in his regulations recently promulgated has laid down the rule broadly that in the case of a sale of capital assets, the excess of the selling 'Supra §31. ' Gray v. Darlington, 15 Wall. 63. But see United States V. Smith, 1 Sawy. 277. 46 FEDERAL COEPOKATION TAX LAW. price over the value at the beginning of the yeaf, or, if the property was bought after the beginning of the year, over the buying price, is to be treated as income.' It would seem, however, that for the reasons just indicated, this ruling disregards the distinction between different kinds of capital, and ought to be revised by the Commissioner. It is also believed that if the question shall be taken to court, this ruling, if it shall be adhered to by the Commissioner, would be reversed; for he seems to have overlooked an express decision of the Supreme Court.2 § 36. Purchase Price Payable by Instalments. — Under the British income-tax statutes, the courts will, in any case of a sale, or ostensible sale, of capital assets, where the purchase price is payable by instalments, look through the form of the transaction and ascertain how much of each instal- ment is in substance interest and therefore liable to income tax, and how much is in substance a mere deferred payment of principal and as such free of tax.' In one case of an ostensible purchase of a lease by a sub-lessee, it was even held that the full amount of the deferred payments represented, in substance, rent reserved on the sub-lease and ' U. S. Int. Rev. Regs. No. 31, Deo. 3d, 1909, Art. 2, § 5 (infra Appx. II). ^ Gray v. Darlington, 15 Wall. 63. ' East Indian Ry. Co. v. Secretary of State (1905), 2 K. B. 413; Secretary of State v. Scoble (1903), A. C. 299. Cf. Foley V. Fletcher, 3 H. & N. 769 (income tax held not payable on the deferred instalments). HOW THE TAXABLE INCOME IS CALCULATED. 47 was therefore liable to tax.' The phraseology of the British statutes, on which these cases turn, is very different from that of the Act of Congress; but nevertheless our courts would probably, like the English courts, look through the form of the transaction, and apply the same or a similar dis- tinction between interest, or income, and deferred payments of principal. § 37. Force of Word " Received " in " Gross Amount of Income Received " in Paragraph 2 of the Act. — It should be observed that the tax is proportioned to income " received " ^ during the year. This word would seem to exclude income to which the company may be entitled but which has not been collected.^ Perhaps, it would be too 1 Chadwick v. Pearl Life Ins. Co. (1905), 2 K. B. 507. Cf. Delage v. Nugget Polish Co., 92 L. T. 682. ^ Act, Par. 1, line 19; Par. 2, line 5; Par. 3, line 43 (infra Appx. I). As to the force of this word in an income-tax law, see Gresham Life Ass. Soc. v. Bishop (1902), A. C. 287; Colquhoun v. Brooks, 14 A. C. 493; Bartholomay Brewing Co. V. Wyatt (1893), 2 Q. B. 499; Scottish Provident Inst. v. Allan (1903), A. C. 129. This word " received " was not contained in the Income-Tax Law of 1862 and, therefore, Magee v. Denton, 5 Blatchf. 130, which was decided under that statute, is distinguishable. Cf. United States v. Schil- linger, 14 Blatchf. 71 (promissory note not yet mature not taxable as income, the court saying, " In the absence of any special provision of law to the contrary income must be taken to mean money "); United States «. Smith, 1 Sawy. 277; United States v. Frost, 25 Fed. Cas. 1221 (debts not believed to be good not returnable as income, — a decision to be compared with United States v. Mayer, Deady 127). ^ Cf. 2 Machen, Mod. Law of Corps., § 1335. 48 FEDERAL COEPOKATION TAX LAW. broad a statement that the Act contemplates only income collected in cash; but at any rate it does seem to distinguish between estimated income and actual receipts. An analogous construction has been given to a regulation that dividends shall be payable only out of " realised profits." ' In an English case, in overruling a contention that income had been " constructively " received for purposes of income tax by an entry in the company's books without actual transmission of money, Lord Brampton said, " I confess I do not like that expression, nor do I quite understand what it means. If a ' constructive ' receipt is the same thing as an actual receipt, I see no reason for the use of the word ' constructive ' at all. If it means something different from or short of actual receipt, then it seems to me that a constructive receipt is not recognized by the statute, which in using the word ' received ' alone, must be taken to have used it having regard to its ordinary acceptation." ^ It would seem that the Commis- sioner of Internal Revenue has overlooked the force of this word " received " in his promulgated regulations wherein he declares that, " It is im- material whether any item of gross income is evidenced by cash receipts during the year or in such other manner as to entitle it to proper entry on the books of the corporation from January 1 ' 2 Machen, Mod. Law of Corps., § 1343. * Gresham Life Ass. Soc, v. Bishop (1902), A. C. 287, 294. HOW THE TAXABLE INCOME IS CALCULATED. 49 to December 31 for the year in which the return is made." * § 38. Income Received as Trustee. — An im- portant question is whether income received by the company as trustee must be included. The general principle is incontrovertible that in the absence of express provision to the contrary, a trustee is to be regarded for purposes of taxation as though he were the absolute owner of the property/ as indeed he is in a court of law. The trust relation is a matter between him and his cestuis que trust: as between himself and the government he is the absolute owner of the prop- erty. There is no provision in the Act of Congress expressly excluding the application of this prin- ciple, and yet if it is to be applied the consequences would be so unjust as perhaps to affect the consti- tutionality of the law. Take the case of a trust company receiving on 1 U. S. Int. Rev. Regs., No. 31, Dec. 3d, 1909, Art. 2, § 5 (infra Appx. II). ^ Latrobe v. Mayor etc. of Baltimore, 19 Md. 13; Richard- son V. Boston, 148 Mass. 508; 20 N. E. 166; Anthony o. Caswell, 15 R. I. 159, 161; 1 Atl. 290; Greene v. Mumford, 4 R. I. 313, 319-320; Mackay v. San Francisco, 128 Cal. 678; 61 Pac. 382; Detroit v. Lewis, 109 Mich. 155; 66 N. W. 958; 32 L. R. A. 439; Guthrie v. Pittsburgh etc. Ry. Co., 158 Pa. 433; State v. Willard, 77 Minn. 190, 195; 79 N. W. 829; City of Lexington v. Fishback's Trustee, 60 S. W. 727; 22 Ky. Law Rep. 1392; Cooley on Taxation, 3d ed., 660. But see People v. Coleman, 119 N. Y. 137; 23 N. E. 488; 7 L. R. A. 407; Borough of Carlisle v. Marshall, 36 Pa. St. 397. 50 FEDERAL COKPOKATION TAX LAW. behalf of trust estates thousands or even millions of dollars each year. Is all of this income taxable as income of the trustee? If so, of course the company has a right to be reimbursed out of the trust property in its hands, and the result would be that every person whose estate is in the hands of a corporate trustee would be obliged to pay an income tax to the United States, on the whole amount of his income, although individuals who hold the legal title to their property, and also persons whose property is in the hands of individual trustees, pay no similar tax. It may be said, indeed, that this injustice is but little if any greater than the injustice which results inevitably from the ordinary operation of the law; for a person who is so unfortunate as to have his prop- erty invested in shares of stock in corporations must pay an income tax while a person who has an equal or greater amount in real estate or other forms of personal property goes entirely free. The only specific clause in the Act which can be seized upon to exempt income received by cor- porations as trustees is the statement that the tax is laid " with respect to the carrying on or doing business." ' Now, obviously the business of a trust company is acting as trustee, but the anfount of its income from its business is not fairly meas- ured by the amount of income collected for its cestuis que trust, but by the amount of its com- missions. Possibly, therefore, an intent can be * Act, Par. 1, lines 14-15 (infra Appx. I). HOW THE TASABLE INCOME IS CALCULATED. 51 spelled out to exempt income collected as trustee, and to include only income derived from the business of acting as trustee; and so the courts may, it is believed, be confidently relied on to decide. Certainly, if income received as trustee is to be included in making the assessment, that fact is persuasive to show that the tax is laid but colorably on the business, the real intent being to tax incomes. § 39. Income Received before Passage of Act. — It would appear that the Act intends to tax income received in the year 1909 prior to its passage on August 5th of that year; ^ but in regard to a similar point as to the excise tax of 1898 on gross receipts from sugar refining, it was held that re- ceipts prior to the passage of the Act were not to be included.^ The question is, therefore, worth considering.' If the Act is to be construed as pros- pective merely, the words " the year," which are constantly recurring in the Act,* must, as applied to the year ending December 31st, 1909, be con- strued to mean so much thereof as has elapsed since the Act took effect. ' As to the constitutionality of this feature, see infra § 149. Compare also supra § 29. ^'Spreckels Sugar Ref. Co. v. McClain, 109 Fed. 76, 79 (reversed on other points, 113 Fed. 244; 192 U. S. 397). Cf. Merchants' Ins. Co. v. McCartney, 1 Lowell 447 (under Income Tax of 1862). ' The Act provides that it " shall take effect on the day following its passage." Act, §42 (infra Appx. I). * See infra § 84A. 52 FEDERAL CORPORATION TAX LAW. § 40. Income Derived from Property Exempt from Federal Taxation. — Income derived from property which Congress has no power to tax, either directly or indirectly, such as state and municipal bonds, should not, it is submitted, be included in the amount of the gross income for purposes of this tax. The statute does not so provide, but on the contrary apparently contem- plates that such income shall be included in the assessment. It is, however, submitted that in so far as the Act attempts to include such income in the assessment, it is unconstitutional and void. By the unanimous judgment of the Supreme Court, Congress has no power to tax income derived from State and municipal securities.' It may be claimed, however, that this tax is not laid upon income but upon the business, and that although Congress cannot tax the income derived from state or municipal securities, yet it may tax a business as a whole although the business is supported in whole or in part by income derived from exempt securities. Thus, a bank may be taxed on the amount of its deposits although the money deposited is invested in exempt securities; '^ and so a tax may be laid on shares of stock in proportion to their value ascertained by dividing the total assets of the corporation by the number of its shares outstanding, although some of the » Pollock V. Farmers' L. & T. Co., 157 U. S. 429; 15 Sup. Ct. Rep. 673; 158U. S. 601; 15 Sup. Ct. Rep. 912. ^ Society for Savings v. Coite, 6 Wall. 594. HOW THE TAXABLE INCOME IS CALCULATED. 53 property of the company may be invested in securities which are constitutionally exempt from taxation.' So, a state tax may be laid on the privilege of taking property by will although the tax is proportioned to the value of the property so passing and although the property consist of United States bonds; ' but this is because the privilege of willing property, even United States bonds, might be wholly taken away by the States. On the same principle, a state may levy a tax on the right to exist as a corporation'^and may pro- portion the tax to the amount of dividends de- clared by the company although some of the income used to pay the dividends comes from interest on United States bonds; ' but this is » Crown Cork & Seal Co. v. State, 40 Atl. 1074; 87 Md. 687; 53 L. R. A. 417; St. Louis Bldg. etc. Ass'n v. Lightner, 47 Mo. 393; Cleveland Trust Co. v. Lander, 19 Oh. Circ. Ct. 217; Charleston Nat. Bank v. Melton, 171 Fed. 743. 2 Murdoch v. Ward, 178 U. S. 139; 20 Sup. Ct. Rep. 775; Plummer v. Coler, 178 U. S. 115; 20 Sup. Ct. Rep. 829. ^Home Insurance Co. v. New York, 134 U. S. 594; 10 Sup. Ct. Rep. 593. Cf. Philadelphia Cohtributionship v. Commonwealth, 98 Pa. 48 (upholding state statute levying a tax on certain corporations measiured by their annual " net earnings or income from all sources " although some of the income was derived from United States bonds, but to be compared with Philadelphia etc. S. S. Co. v. Pennsylvania, 122 TJ. S. 326; 7 Sup. Ct. Rep. 1118, where the same statute was held unconstitutional as appUed to corporations engaged in interstate commerce, and with New York, Lake Erie etc. Co. V. Pennsylvania, 158 U. S. 431; 15 Sup. Ct. Rep. 900, where one provision of the statute was held valid). 54 FEDEKAL COEPOEATIOlir TAX LAW. because the state might altogether withhold the right to exist as a corporation and may therefore exact such taxes or payments as it pleases in exchange for conceding that right. Similar reasoning cannot be used to sustain the present tax, because the federal government has no power to take away from companies existing under state laws the privilege of acquiring income from state and municipal securities. Hence, even if we assume that the present tax is laid, techni- cally, on the business, nevertheless it is certainly proportioned to the income derived from all sources, so that if income from exempt securities is included, the same practical result is reached, so far as this point is concerned, as if the tax were laid, nominally and technically as well as substantially, upon that income. State and municipal securities are exempt because of the rule of constitutional policy which prevents the federal government from taxing the instrumentalities of the states. It is a practical and not a mere technical rule. It forbids a tax laid indirectly, as well as directly, upon the exempted property. Surely, therefore, the income for • purposes of this federal tax must be estimated without including income derived from state and municipal securi- ties. It would seem to follow that the earnings of a corporation on a contract with the state — for example, the profits of a construction company on a contract for the erection of a public biiild- HOW THE TAXABLE INCOME IS CALCULATED. 55 ing — should be exempt from this federal tax.* § 41. Income Derived from Land. — It is also to be doubted whether, even if the whole Act is not unconstitutional as laying an unapportioned direct tax, income derived from real estate should be included in making up the assessment.^ In the Income Tax Cases,^ although the court at the first hearing was equally divided upon the question whether a general tax on the income of all personal property was a direct tax, yet six out of the eight judges who were then sitting concurred in holding a tax on the income of land to be a direct tax. Of those six judges, one * seems to have changed his opinion on this point on the rehearing, and the minority was reinforced by the ninth judge who had not been present at the first hearing. Upon the rehearing, therefore, the court decided by a vote of five judges to four that a tax on income derived from land is a direct tax. If, then, the present tax is to be regarded as a tax on income, the income from real estate must be deducted 'But see Manhattan Co. v. Blake, 148 U. S. 412; 13 Sup. Ct. Rep. 640 (holding that a federal tax may be levied against a bank proportioned to the average amount of its deposits, although some of the deposits represented money deposited by the state treasurer to be disbursed by the bank in pajrment of debts of the state). => See mfra § 141-§ 144. ' Pollock V. Farmers' L. & T. Co., 157 U. S. 429; 15 Sup. Ct. Rep. 673; 158U. S. 601; 15 Sup. Ct. Rep. 912. * Mr. Justice Brown. 56 FEDERAL CORPORATION TAX LAW. unless the Income Tax Cases are to be over- ruled. § 42. Income from Invested Personal Property. — At the rehearing of Pollock v. Farmers' Loan and Trust Co./ the Supreme Court decided, by the same bare majority of five judges to four, that a tax on the income of invested personal property is a direct tax. If that decision stands, and if the present law is a tax on income, it follows that although it expressly includes income derived " from all sources," including investments, yet it is unconstitutional, because, not apportioned among the states in the ratio of population, so far as income from investments is concerned If that be so, unless the Act is to be held void in toto, the assessment of this tax should be made solely with reference to income from business and excluding all income derived from investments. § 43. What is Income from Business as Dis- tinguished from Income from Investments. — Hence, it becomes necessary to inquire what should be included as income from the business as distinguished from income from invested capital.^ ' 158 U. S. 601; 15 Sup. Ct. Rep. 912; 157 U. S. 429; 15 Sup. Ct. Rep. 673. ^ Cf. Clerical, etc. Ass. Soc. v. Carter, 22 Q. B. D. 444 (where it was contended unsuccessfully that interest arising from investments by a life insurance company, whose busi- ness it is to deal in money, was to be taxed merely in ascer- taining the profits of the business and not as " interest of money " invested) ; Reid's Brewery Co. v. Male (1891), 2 HOW THE TAXABLE INCOME 13 CALCULATED. 57 This precise question has been raised a few times in connection with the War Revenue Act of 1898 which expressly levied an excise tax on the net income derived from certain specified occupations, notably that of refining sugar.' The Supreme Court held that rentals of- a wharf which was chiefly used by a sugar-refining company for the unloading of vessels transporting raw sugar to its refinery should be regarded, not as income from invested real estate, but as part of the income derived from the business.^ On the other hand, it was held that interest paid to the company on money in bank was not part of the income of its business.' So also, receipts from stevedoring done in unloading cargoes of sugar consigned to the company are not to be included when they are properly chargeable to the vessels.^ It was also held by a Circuit Court that dividends on stock Q. B. 1 (where a distinction was taken by the Court between money lent in the business and money lent as an investment) ; Central Trust Co. v. Treat, 171 Fed. 301 (where invested accumulated profits were held not taxable as " capital and surplus " of a bank, because not used in the banking busi- ness). ' Act, June 13th, 1898, c. 448, § 28 (2 U. S. Comp. Stats. p. 2306). ^Spreckels Sugar Ref. Co. v. McClain, 192 TJ. S. 397; 24 Sup. Ct. Rep. 376; 113 Fed. 244; 51 C. C. A. 201. 'Spreckels Sugar Ref. Co. v. McClain, 192 U. S. 397; 24 Sup. Ct. Rep. 376. ■•Spreckels Sugar Ref. Co. v. McClain, 109 Fed. 76, 79; (reversed on other points, 113 Fed. 244; 51 C. C. A. 201; 192 U. S. 397; 24 Sup. Ct. Rep. 376). 58 FEDERAL CORPORATION TAX LAW. of another corporation of which the taxpaying company was the sole shareholder were taxable; ^ but this decision seems inconsistent with the opinion of the Supreme Court in the Spreckels Case and other authorities,^ and moreover that precise question cannot well arise under the present Act, because dividends on stock in other companies subject to the Act are exempt. A class of cases which may perhaps throw some light on this question, relate to exemptions from taxation. When, for instance, a railway company is exempted from taxation, it is held that only such property is exempted as it uses in connection with its business, and not property which it holds merely as an investment.^ Applying this distinc- tion, it has been held that the exemption did not extend to the following property: property acquired under a statute amendatory of the charter;* lands held for sale and not for use; ^ portions of bank- ing house let to tenants; " real estate in excess • American Sugar Ref. Co. v. Rutan, 123 Fed. 979. ' Gramophone & Typewriter v. Stanley (1908), 2 K. B. 89. See also 2 Machen, Mod. Law of Corps., § 1080, and supra § 34. ^See 1 Cooley on Taxation, 3d ed., 375 et seq.; 12 Am. & Eng. Enc. of Law, 2d ed., 359, 362-366, tit. " Exemptions from Taxation." * Ford V. Delta & Pine Land Co., 164 U. S. 662; 17 Sup. Gt.Rep. 230; Southwestern R. R. Co. v. Wright, 116 U. S. 231; 6 Sup. Ct. Rep. 375; State v. B. & O. R. R. Co., 48 Md. 49, 80. ° Tucker v. Ferguson, 22 Wall. 527, 574. » Bank v. Tennessee, 104 U. S. 493. HOW THE TAXABLE INCOME IS CALCULATED. 59 of the quantity the company could acquire by condemnation; ^ lands vacant or let at a rental to tenants; ^ timber lands acquired by railway company in order to convert the timber into cross- ties and lumber for its own use; ' lands acquired by railway company for dwellings for employees, for car or locomotive factories, coal mines, etc. ; * steamboats acquired by a railway company; ° grain elevator leased to private persons by railway corporation; ° and hotels constructed on the land of a railway company as summer resorts.' § 44. Income from Ultra Vires Business. — A corporation would be taxable in respect of income ' Vermont Central R. Co. v. Burlington, 28 Vt. 193. ^ County of Ramsey v. Chicago etc. Ry. Co., 33 Minn. 537; 24 N. W. 313; State v. Collectors, 25 N. J. Law 315. ' County of Todd v. St. Paul etc. Ry. Co., 38 Minn. 163; 36 N. W. 109. * State V. Commissioners of Mansfield, 23 N. J. Law 510; 57 Am. Dec. 409n (but holding that stations, car and engine-houses, tanks and repair-shops are covered by the exemption). Cf. RaUroad v. Berks County, 6 Pa. St. 70 (taking a similar line of distinction); Inhabitants of Worcester v. Western Raiboad Co., 4 Met. 564 (strip five rods in width held exempt though not covered by tracks but used for stations, engine- houses, etc.). = Illinois Central R. R. Co. v. Irwin, 72 lU. 452. » Re Swigert, 119 lU. 83; 6 N. E. 469. Cf. State v. B. & O. R. R. Co., 48 Md. 49, 76-77. ' State V. B. & O. R. R. Co., 48 Md. 49, 77-78 (secus as to hotels constructed mainly for the accommodation of pas- .60 FEDERAL CORPORATION TAX LAW. derived from an ultra vires business to the same extent as if it were intra mres.' § 44A. Income from Foreign Business and Property, — It is quite clear that in the case of domestic companies the Act intends to include within the tax income from foreign property and business to the same extent as income from business car4ed on and property existing within the United States. This is the necessary force of the unquali- fied expressions used — particularly, of the ex- pression " from all sources." ^ To this effect, also, are the regulations of the Commissioner of Internal Revenue.' It seems, therefore, that even income from foreign real estate is included — a curious result, in view of the principle of the Income Tax Cases that a tax on income is equiva- lent to a tax on the property from which it is derived. § 45. Deductions to be Made from Gross Income — Is Statutory List of Deductions Exhaustive? — After the gross income has been determined, the next step is to ascertain the deductions which are to be made therefrom in order to arrive at the net income. The Act expressly enacts that certain 'Salt Lake City v. HoUister, 118 U. S. 256; 6 Sup. Ct. Rep. 1055; People ex rel. Devoe Co. v. Roberts, 51 N. Y. App. Div. 77; 64 N. Y. Supp. 494. But see People ex rel. Wall etc. Co. v. Miller, 181 N. Y. 328, 334. ^ Act, Par. 1, line 19; Par. 2, line 5; Par. 3, line 44 (infra Appx. I). 3 Int. Rev. Regs. No. 31, Dec. 3d, 1909, Art. I (infra Appx. II). HOW THE TAXABLE INCOME IS CALCULATED. 61 classes of deductions shall be made, some of which deductions would not be proper in esti- mating net income if they had not been expressly- allowed by law. ' It does not say in so many words that no other deductions are to be permitted.? Accordingly, it is submitted that if there are any additional kinds of deductions which ought to be made from gross income in order to ascertain the net income, then the statutory list of required deductions ought not to be taken as exhaustive, so as to forbid by implication any such additional deductions. It is true that Paragraph 3 provides that " there shall be deducted from the amount of the net income of each of such corporations, etc., ascer- tained as provided in the foregoing paragraphs of this section the sum of five thousand dollars, and said tax shall be computed upon th£ remainder of said net income." ^ If any other deductions are made in addition to those enumerated in Paragraph 2, it may be contended that the net income is not " ascertained as provided " in that paragraph, although Paragraph 3 provides in language just quoted that the tax shall be computed upon net income " ascertained as provided in the foregoing ' See, for example, infra § 53. ^ It differs in this respect from the British Income-Tax Act which expressly provides that net income shall be es- timated " without other deduction than is hereinafter al- lowed ": Russell v. Town and County Bank, 13 A. C. 418. ' Act, Par. 3, lines 1-8 (infra Appx. I). 62 FEDEKAL CORPORATION TAX LAW. paragraphs." This contention, however, begs the question; for if Paragraph 2 does "not forbid any additional deductions that may be proper accord- ing to general principles of law, and that are impliedly allowed by the provision of Paragraph 1 that the tax shall be proportioned to " net income," * then the net income is ascertained as pro- vided in Paragraphs 1 and 2 although such deduc- tions be made. Paragraph 3 does not declare that the tax shall be computed upon the net income ascer- tained by making from the gross income the deduc- tions enumerated in Paragraph 2 and no others. The general question what expenses should be charged to capital and what to income has received consideration in the law of corporations in con- nection with dividends^ and with income bonds. ^ § 46. Deductions Expressly Required — Main- tenance and Operation — The Provision in General. — We proceed, therefore, to the examination of the deductions which are expressly allowed. The first of these is,* " All the ordinary and necessary expenses actually paid out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property." * Act, Par. 1, lines 17-18 (infra Appx. I). ^ See 2 Machen, Mod. Law of Corps., § 1330-§1337. ^ See 2 Machen, Mod. Law of Corps., § 2107. * Act, Par. 2, lines 6-12 (infra Appx. I). HOW THE TAXABLE INCOME IS CALCULATED. 63 This class of deductions would have been proper even if there had been no express requirement to that effect. In order to ascertain net income, it is clearly necessary to deduct the expenses of main- tenance and operation. ' It is, however, necessary to examine this clause of the Act somewhat minutely in order to see exactly what is directed to be deducted. § 47. What is " Maintenance and Operation " — In General. — The statute gives no definition of " maintenance and operation." This must be determined by dictionaries and general principles of law.^ Observe that the Act does not confine the deduction to the expense of maintaining and operating the business and property during the » Cf . 2 Machen, Mod. Law of Corps., § 1331, § 1332. ^ Compare the authorities as to what claims are entitled to priority as "' operating expenses " in a receivership of a railway or other company. 2 Machen, Mod. Law of Corps., § 1941-§ 1943, § 2048. See also Llewellyn's Appeal, 103 Pa. 458. For a Hberal construction of the word " maintenance," see Smith v. Grayson Coimty (Texas), 44 S. W. 921, 923. Cf. Hesketh v. Bray, 21 Q. B. B. 444 (expense of construct- ing a sea-wall for reclamation of a salt-marsh held not proper to be deducted from income under a statute allowing deduc- tion of the expense of constructing sea-walls " necessary for the preservation or protection of such lands against the encroachment or overflowing of the sea or any tidal river ") ; Central R. R. Co. v. Collins, 40 Ga. 582 (as to construction of a charter power of " maintaining and sustaining " a railway). As to deduction of sums necessary to be expended in collecting debts, etc., see Stevens v. Bishop, 20 Q. B. D. 442 (distiuguished in Duke of Norfolk v. Lamarque, 24 Q. B. D. 485). 64 FEDERAL CORPORATION TAX %AW. year, but that a payment made during the year for maintaining or operating the company during some previous year is also to be deducted. ^ Where a payment is made for a new improvement replac- ing an old structure, so much of the expenditure as would be necessary as repairs to keep the old structure up to its normal condition is properly chargeable to maintenance.^ It may be ques- tioned whether damages paid for torts committed in the course of the business are to be treated as expense of maintenance or are more properly classified as a " loss." ' A gross payment to an officer in commutation of his salary is a capital charge where the payment is made in pursuance of a stipulation in a contract whereby the company bought the business of a former concern and agreed as part of the consideration to pay a salary to this officer during life.* It has been held in England that money paid to an association of employers which indemnified subscribers against strikes was not to be deducted from gross income under the British Income Tax Acts as " money wholly and exclusively laid out for the purposes of the trade; " ° but nevertheless it is submitted that a fair construction of the words " maintenance iCf. infra §96. * Grant v. Hartford etc. R. R. Co., 93 U. S. 225, 228. ' Cf. Strong & Co. v. Woodifield (1906), A. C. 448. * Royal Ins. Co. v. Watson (1897), A. C. 1, affirming Watson V. Royal Ins. Co. (1896), 1 Q. B. 41, on somewhat different grounds. ' Rhymney Iron Co. v. Fowler (1896), 2 Q. B. 79. HOW THE TAXABLE INCOME IS CALCULATED. 65 and operation " in the present law would entitle the company to deduct any such payments in the nature of premiums for insurance. Other English cases take a similar narrow view of the expenses which may be allowed as trade expenses.' § 48. Maintenance of Property. — The deduc- tion required is of the expense of maintenance and operation of the " business and properties." In the parallel clause with respect to foreign com- panies, the language is " business and property " in the singular number.^ It would seem that no significance attaches to this slight variation. The insertion of the word " property " or " prop- erties " is significant, however; for while the Act professes to lay a tax on business so as to obviate constitutional objections, yet in almost every ' See Southwell v. Savill Bros. (1901), 2 K. B. 349 (mowey spent by brewery in procuring licenses for houses in which it might be interested held not a mere operating expense); Brickwood & Co. v. Reynolds (1898) 1 Q. B. 95 (repairs to premises rented by a brewery to retail dealers contracting to buy from no other brewers held not deductible from gross income of brewery). But see Russell v. Town and County Bank, 13 A. C. 418 (tending towards a more liberal view, and allowing a banking company to deduct the full rental value of its business premises including the part thereof occupied by their manager as a dwelling house); Smith v. Lion Brewery Co. (1909), 2 K. B. 912 (cost of liquor licenses of retailers renting premises from brewery and covenanting to sell only that company's beer may, when deducted from the rent, be treated as a trade expense of the brewery). " See infra § 80. 66 FEDERAL CORPORATION TAX LAW. paragraph a distinction is drawn between the business and the property of the company. The income from both is to be included in the assess- ment; and the expenses of maintaining both are to be deducted. § 49. Expenses " Actually Paid " — Meaning of the Expression. — It is only expenses " actually paid " ' which are required to be deducted: a liability which has been incurred but not dis- charged is not to be included. This is no serious hardship because the deduction could in that case be made the next, or any subsequent, year; for as already stated the deduction is not confined to the expense incurred for maintenance and operation during the year for which the tax is levied.^ The force of the words " actually paid " should not be pressed too far.^ It is not as if the Act had said " actually paid in cash," although even in that case a set-off by mutual agreement of an existing debt owing to the company would be ' Act, Par. 2, line 7 (infra Appx. I). ^ Supra § 47. ' The Regulations of the Treasury Department give them a very liberal interpretation in favor of the corporations, and indeed practically deprive them of all meaning. U. S. Int. Rev. Regs. No. 31, Dec. 3d, 1909, Art. 4 (infra Appx. II). Cf. U. S. V. Louisville & N. R. Co., 33 Fed. 829 (holding that a consoUdation of two railway companies amounts to a pay- ment of interest due by one to the other within the meaning of an Act of Congress taxing interest paid, but is presumably not paid from the " earnings " of the debtor within the mean- ing of that statute). HOW THE TAXABLE INCOME IS CALCULATED. 67 equivalent to payment.* As it is, it would seem that according to the fair meaning of the words used, they are equivalent to actually discharged or satisfied. However, it has been held in England that where an insurance company advances a part of the premiums to the insurer as a loan on the security of the policy, giving him a receipt for the full premium, the amount so advanced can- not be treated by the insurer as " paid by him " within the meaning of the British income-tax laws, and therefore deductible from his gross in- come.^ § 50. Necessity that Expenses Should Have Been Paid " out of Income " in Order to be De- ducted. — In order to come within the clause now under consideration the expenses must not merely be paid but must be paid " out of income." ' In the corresponding clause as to foreign companies, the words are " out of earnings "; * and in the Third Paragraph of the Act domestic as well as foreign companies are required to make a return to the collector of the amounts expended for maintenance and operation " out of earnings," instead of income. ^ It would seem, therefore, that 1 Cf. 1 Machen, Mod. Law of Corps., § 794, § 797, as to the construction which has been given to statutes requiring " payment in cash '' for shares. 2 Hunter v. Rex (1904), A. C. 161. ^ Act, Par. 2, line 7 (infra Appx. I). * Act, Par. 2, Unes 51-52 (infra Appx. I). 8 Act, Par. 3, line 58 (infra Appx. I). 68 FEDERAL CORPORATION TAX LAW. Congress used the words " earnings " and " in- come " in this connection as synonymous and interchangeable. Nevertheless, they are not prop- erly identical in meaning; for " income " includes receipts from invested capital whereas " earn- ings " should be confined to profits from the transaction of business. However, Congress must have intended in this place to use earnings in the broader sense more properly attached to the other word. By the general principles of law, if a revenue charge is paid out of capital, it may properly, and perhaps must, be carried over to the revenue account and deducted from the balance of profit shown thereby before any part thereof can be treated as profit applicable to dividends.^ Do the words " out of income " prohibit a similar action in calculating net income for the purpose of the tax? So to hold would be a narrow, technical and unjust construction; for it is difficult to see what reason could actuate the legislature in pro- hibiting recoupment out of gross income for main- tenance expenses which have been borne in the first instance by capital. And yet unless that construction is given to the words " out of income," they seem to have no meaning whatsoever. Even if the words referred to should be held to prohibit the inclusion under this head of main- tenance charges borne by capital, the amount of capital so consumed might be treated as a " loss " ' 2 Machen, Mod. Law of Corps., § 1331, § 1328. HOW THE TAXABLE INCOME IS CALCULATED. 69 and included under the second class of deductions prescribed in the Act. ' § 51. Meaning of " Ordinary and Necessary " Expenses. — The language of the Act is that " the ordinary and necessary expenses " of main- tenance and operation shall be deducted. Must an expense be both ordinary and necessary in order to fall within this clause? It would seem not. The intent was to include both all the ordi- nary expenses, and also all extraordinary but necessary expenses. The meaning would perhaps have been a little clearer if the word " the " had been repeated before the word " necessary." It would seem that under the head of extraordinary necessary expenses might come expenditures made during the year 1909 or some succeeding year for the purpose of making good a depreciation of fixed capital which occurred prior to 1909 and which therefore could not be credited as a deduc- tion under Class 2 of the prescribed deductions.^ § 52. Charges such as Rentals or Franchise Payments. — The Act expressly provides that " all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property " shall be included as operating expenses. This would seem to be mere surplusage; ^ for such expenditures would ' As to which see infra § 53-§ 59. 2 U. S. Int. Rev. Regs., No. 31, Dec. 3d, 1909, Art. 4 (Infra Appx. II). ' As to the case where in addition to an annual rental 70 FEDERAL CORPORATION TAX LAW. seem to be a typical example of expenses for operation and maintenance.^ § 53. Deductions for Losses — Necessity for an Express Provision of Law Allowing such Deduc- tions. — The second class of deductions required to be made ^ embrace: " All losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds." This is a very important class of the prescribed deductions; for it is possible that if deductions of this class had not been specifically directed some of them at least would have been held not proper to be allowed in calculating net income.^ For a large premium or bonus is paid for a lease, see Gillatt v. Colquhoun, 33 W. R. 258. ■ As to a suggested case which might fall imder this head, see infra § 70. ^ Act, Par. 2, lines 12-21 (infra Appx. I). ' Philadelphia Contributionship v. Commonwealth, 98 Pa. 48 (loss of capital by payment of bonds purchased at a premium not proper to be deducted in estimating taxable annual income). But see Little Miami etc. R. R. Co. v. United States, 108 U. S. 277, 280; 2 Sup. Ct. Rep. 627 (holding that without express authorisation losses by depreciation of investments should be deducted in calculating taxable income); United States V. Central Nat. Bank, 10 Fed. 612 (holding that losses by embezzlement during the period covered by the tax HOW THE TAXABtE lifCOME is CAtCULATED. .71 example, depreciation of fixed property may be disregarded in calculating profits for the purpose of dividends; '■ and it is quite possible that the courts might have held that it should be disregarded in calculating net profits for the purpose of this tax, if the law had not expressly declared the contrary.^ Of course, even without any express statutory authority it would have been necessary in order to ascertain the net income to deduct all losses of circulating capital incurred within the year.' § 54. Meaning of " Losses." — The Act gives no general definition of " losses," but leaves the meaning to be ascertained by general principles of law. The thing itself is common enough, and perhaps the meaning of the word is correspondingly well understood. Loss by embezzlement would be included.* So, loss by insolvency of debtors.' § 55. Loss must be " Actually Sustained within the Year." — In order to be within this provision the loss must be " actually sustained within the should be deducted, but to be compared with S. C. on error to review judgment on an amended complaint, 137 U. S. 255). V2 Machen, Mod. Law of Corps., § 1325-§ 1328. ^ Alianza Co. v. Bell (1906), A. C. 18; Coltness Iron Co. v. Black, 6 A. C. 315; Forder v. Handyside, 1 Ex. D. 233. But see Little Miami etc. R. R. Co. v. United States, 108 U. S. 277; 2 Sup. Ct. Rep. 627 (stated supra). See also infra § 57. ^ Lawless v. Sullivan, 6 A. C. 373. * United States v. Central Nat. Bank, 10 Fed. 612 (to be compared with S. C. at a subsequent stage, 137 U. S. 255). ' United States v. Mayer, Deady 127. 72 FEDEEAL COEPOEATION TAX LAW. year " ' — that is within the calendar year * for which the tax is assessed. It may not always be easy to determine the precise moment of time when a loss is " sustained "; but in general little difficulty will be encountered. § 56. Must be " Not Compensated by Insurance or Otherwise." — To be within the statute, the loss must be " not compensated by insurance or otherwise." ' Suppose a loss is covered by insur- ance in a company which denies its liability, or suppose the insurance has not been collected: is the loss in such cases " compensated by insurance " within the meaning of the Act? Perhaps in such cases, the loss should be taken to be " compen- sated by insurance "; and if it should subsequently prove impossible to collect the loss, either by a judgment in favor of the insurance company in a suit on the policy, or because of the supervening insolvency of the insurance company, then the amount of the original loss covered by the policy might be treated as a loss occurring in the year in which the impossibility of collecting the insurance became established. The meaning of the words " or otherwise " is very obscure. They certainly must be confined to cases in which the loss is compensated either by insurance or something ejusdem generis — e. g. by a^guarantor. Certainly those words could have ' Act, Par. 2, line 13 (infra Appx. I). ^ See infra § 84A. ' Act, Par. 2, lines 13-14 (infra Appx. I). HOW THE TAXABLE INCOME IS CALCULATED. 73 no application where the loss is made good by voluntary contributions by the shareholders, or by assessments upon them; or where the loss is counterbalanced by profits. § 57. Depreciation of Property. — The im- portance of the provision as to depreciation of property ^ has been already adverted to.^ It evidently covers depreciation of all kinds — by wear and tear, by the diminution in value of wast- ing assets, such as mines, leases or patents, or in consequence of supersession by improved ap- paratus, and in fact diminution in value of all kinds. But for this express provision, it might have been plausibly argued, and perhaps would have been held, that a depreciation in the value of a company's fixed capital does not in any way diminish the net income.^ It is only depreciation occurring within the year that is required to be deducted; this is the only reasonable meaning of the statute, and is expressly declared by the Commissioner of Internal Revenue in his published regulations.* However, all depreciation within the year must be allowed notwithstanding the fact that in previous years allowances for depreciation ' Act, Par. 2, lines 14-16 (infra Appx. I). == Supra §53. ^ This is true under the Enghsh Income Tax Laws: Gillatt V. Colquhoun, 33 W. R. 258; Coltness Iron Co. u. Blaclc, 6 A. C. 315; Alianza Co. v. Bell (1906), A. C. 18; Forder v. Handyside, 1 Ex. D. 233. Supra § 53. *U. S. Int. Rev. Regs., No. 31, Deo. 3d, 1909, Art. 4 (infra Appx. II). 74 FEDERAL OOEPOEATION TAX LAW. or wear and tear aggregating the full value of the property may have been made to the company.' § 58. Deductions by Insurance Companies — " Sums other than Dividends Paid within the Year on Policy and Annuity Contracts." — The Act prescribes two peculiar deductions in the case of insurance companies.^ The first of these is " the sums other than dividends paid within the year on policy and annuity contracts." ' This may mean that insurance companies shall be allowed to deduct all losses paid by them within the year. As such losses constitute debts of the companies, they would fall under the general head of deduc- tions for indebtedness, which will be considered under the next heading. It may, however, be said here that the net income of an insurance company certainly could not be ascertained without deducting losses paid by the corporation; and accordingly the same deductions would have been necessary if the Act had merely laid a tax in pro- portion to the company's net income without fixing any regulations for its ascertainment.* Any other rule would be grossly unjust. As this express provision applies only to insurance companies, and as many similar cases in respect » John Hall, Junior, & Co. v. Rickman (1906), 1 K. B. 311. ^Act, Par. 2, lines 16-21 (infra Appx. I). As to what is an insurance company within the meaning of the Act, see supra § 20. ^ Act, Par. 2, lines 17-19 (infra Appx. I). * Cf . Gresham Life Ass. Soc. v. Styles (1892), A. C. 309. HOW THE TAXABLE INCOME IS CALCULATED, 75 to other companies may arise, one can readily understand the injustice which might result from holding the statutory list of deductions to be exclusive. Perhaps, however, even if the statutory list should be held to be exclusive, payments similar to payments of losses by insurance com- panies might be regarded as operating expenses, and deductible as such. In England, it is held that an insurance company in calculating its taxable income cannot make any allowance for unearned premiums paid for risks outstanding at the close of the year, but that the income should be ascertained by deducting the total expenditures during the year from the total receipts during that period, leaving outstand- ing risks to be deducted, in case of loss, as an expense during the next year. * § 59. Insurance Companies (Continued) — Ad- ditions to Reserve Funds. — The second kind of peculiar deductions prescribed in the case of insur- ance companies is " the net addition, if any, required by law to be made within the year to reserve funds." "^ This would hardly be proper as an item to be deducted in ascertaining net income if the statute had not expressly so provided; for an addition to a reserve fund is simply an 'Imperial Fire Ins. Co. v. WUson, 35 L. T. N. S. 271; General Accident etc. Corp. v. McGowan (1908), A. C. 207 (where, however, the Lord Chancellor admitted that method approved by the court was " not scientifically unassailable ")■ ^ Act, Par. 2, Jines 19-21 (infra Appx. I). 76 FEDERAL CORPORATION TAX LAW. accretion to the company's capital moneys. Consequently, in order that such a deduction should be allowed it must be brought strictly within the statute. And in order to be within the Act, the addition to the reserve must be, in the first place, " required." A voluntary addition is not to be deducted, except, indeed, that the last clause of the Second Paragraph of the Act provides that " in assessment insurance companies the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guaranty or reserve funds shall be treated as being payments required by law to reserve funds." Secondly, it must be " required by law." If the company is incorporated by special act, it would be sufficient if the addition to the reserve were required by that act, which of course is a law. But a requirement in the company's by-laws, or in the incorporation paper of a company incorporated under general laws, would not come within the Act of Congress. Thirdly, the addition to the reserve must be " required by law to be made within the year." ' It is not enough that it is actually made within the year; and conversely, perhaps, the deduction may be allowed even though the addition to the reserve is not made within the year if it is required so to be. § 60. Indebtedness — The Provision in General. — The next deduction relates to indebtedness.' • Act, Par. 2, lines 20-21 (infra Appx. I). ^ Act, Par. 2, lines 21-30 (infra Appx. I). HOW THE TAXABLE INCOME IS CALCULATED. ^^ The provisioii is that there shall be deducted: " Interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the paid-up capital stock of such corporation, joint stock company or association, or insurance company, outstanding at the close of the year, and in the case of a bank, banking association or trust com- pany, all interest actually paid by it within the year on deposits." It may be urged that in accordance with the ejusdem generis rule of construction the words " or other " in the phrase " bonded or other indebtedness " should be construed as referring only to indebtedness of the same general character as bonded indebtedness ' — in other words funded as distinguished from floating indebtedness. Prob- ably this construction should be adopted; for floating indebtedness should ordinarily be paid outright, principal and interest, out of income,' so that payments made for that purpose may be regarded as necessary operating expenses and as such deductible from the gross income under the first class of deductions specified in this law. Moreover, the phrase we are now considering apparently contemplates not an indebtedness of fluctuating amount, but an indebtedness whose amount can be ascertained with accuracy and can ' As to the meaning of " bonded indebtedness," see 2 Machen, Mod. Law of Corps., § 1679. ^ 2 Machen, Mod. Law of Corps., § 1333, § 2107. 78 FEDERAL COKPOKATION TAX LAW. be compared in respect to stability with the amount of the capital stock. It is only interest " actually paid within the year " ' that is directed to be deducted. The meaning of those words has been already discussed in another connection.^ § 61. Limitation on Amount of Indebtedness — What is the Paid-up Capital Stock. — The statute directs that there shall be deducted all interest actually paid within the year on an amount of indebtedness " not exceeding the paid-up capital stock . . . outstanding at the close of the year." ^ Now, the words " capital stock " are usually am- biguous, and may refer either to the company's nominal capital or to its actual capital or assets,* and in a tax law they are usually construed to apply to the company's actual assets rather than its nominal capital.* Nevertheless, in this case, it would seem to refer to the nominal capital; for although " capital stock " alone may refer either to the nominal capital or to the actual capital or assets, yet " paid-up capital stock " cannot well refer to anything but the nominal capital stock. To speak of the " paid-up assets " of the company ' Act, Par. 2, lines 21-22 (infra Appx. I). 2 Supra §49. ' Act, Par. 2, lines 24-28 (infra Appx. I). * 1 Machen, Mod. Law of Corps. § 497. 5 State V. Taylor (111.), 89 N. E. 271; People ex rel. Union Trust Co. V. Coleman, 126 N. Y. 433; 27 N. E. 818; 12 L. R. A. 762 (with annotation and citation of additional authorities). HOW THE TAXABLE INCOME IS CALCULATED. 79 would be absurd. In case the stock is illegally watered, perhaps only so much of the nominal capital should be taken into account for this pur- pose as is legally paid up. ' If, however, the stock is lawfully credited as paid up though without actual payment — for example, in case of a mis- taken but bona fide overvaluation of property accepted as payment — under such circumstances, the full amount of the capital credited as paid up, and not merely the amount represented by the actual value of the property accepted in payment, should be regarded as "paid-up capital stock" within the meaning of this Act of Congress. Thus an additional inducement is added to the practice of stock-watering — rather a curious result of a statute most of whose advocates pfofess to regard that practice with abhorrence. § 62. As of what Date Amount of Capital Stock and of Indebtedness is to be Taken. — The amount of the paid-up capital stock is to be estimated at the close of the year; for the language is, " not exceeding the paid-up capital stock . . . outstand- ing at the close of the year." ^ It would seem that the amount of indebtedness is to be estimated at the same time; for Paragraph Three requires the ' But compare the prevalent American doctrine that shares issued at a discount in violation of law are never- theless to be taken as paid-up as against all the world except subsequent creditors of the company: 1 Machen, Mod. Law of Corps., § 776. 2 Act, Par. 2, lines 27-28 (infra Appx. I). 80 FEDERAL COEPOEATION TAX LAW. company to make a return of " the amount of the bonded and other indebtedness ... at the close of the year." If, however, the indebtedness during the earlier part of the year exceeded the capital stock, is the interest paid on the whole amount to be deducted merely because the indebtedness has been reduced below the capital stock before the end of the year? In truth, the linyt upon the amount of interest deductible is without any justification in reason; for surely the larger the indebtedness on which a company is obliged to pay interest, the smaller is its income. The provision seems intended as a penalty on a corporation for contracting an indebtedness in excess of its capital stock, and in that aspect is an encroachment on the reserved rights of the states. § 63. Force of Word " Outstanding " in " Capi- tal Stock Outstanding at Close of the Year." — The reference is to the amount of the paid-up capital stock " outstanding " ' at the close of the year. " Outstanding," of course, means issued,' and not validly surrendered. Stock which has been acquired by the company itself in any lawful way — by forfeiture, by surrender as " treasury stock," or (where a purchase by a company of its own stock is deemed lawful) by purchase, — is of course not to be taken as outstanding; ' but on * Act, Par. 2, line 27 (infra Appx. I). ' As to when stock can be deemed " issued," see 1 Machen, Mod. Law of Corps., § 170-§174. In addition to cases there cited, see Scott v. Abbot, 160 Fed. 573, 577. ^ 1 Machen, Mod. Law of Corps., § 633. HOW THE TAXABLE INCOME IS CALCULATED. 81 the other hand shares purchased by the company ultra vires are to be deemed still outstanding.' § 64. Indebtedness of Non-Stock Corporations. — In the case of companies which have no capital stock there is no limit to the amount of indebted- ness interest upon which may be deducted from the gross income. But as the only non-stock corporations which are subject to the Act are, probably, insurance companies, and as insurance companies do not usually have a large funded debt, this absence of any limitation will not often be very important. § 65. Interest on Indebtedness in Excess of the Paid-up Capital. — If the indebtedness exceeds the paid-up capital stock, can interest paid on the excess be deducted from the gross income in ascer- taining the net income on which tax is to be paid? ^ The doctrine has been advocated above that the statutory list of deductions is not necessarily exhaustive; ' but even if that doctrine is accepted as sound, it is hardly applicable here, because of the negative expression " not exceeding." ' If the statute had provided that interest on indebted- ness up to a given amount should be deducted, ' 1 Machen, Mod. Law of Corps., §631. But see United States V. Morse, 161 Fed. 429. ^ As to the general question whether interest on funded debt should be deducted in estimating net income for pur- poses of taxation, compare Sioux City & Pac. R. R. Co. v. United States, 110 U. S. 205; 3 Sup. Ct. Rep. 565. ' Supra § 45. * Act, Par. 2, line 24 (infra Appx. I). 82 FEDEKAL COKPORATION TAX LAW. the argument might have been made that while a deduction of interest paid on that amount of indebtedness was commanded, interest paid on a larger amount was not forbidden. But when the statute says that interest paid on debts " not exceeding " a certain amount, shall be deducted, there seems to be a direct prohibition of a deduc- tion of interest paid on a greater debt. § 66. Money Used in Pasring Principal of Debts — Moneys Added to Sinking Funds. — The Act makes no express provision for deduction from gross income of amounts devoted to payment of debts. Nevertheless, as already indicated, it is submitted that sums used in paying floating in- debtedness should be deducted, either as part of the operating expenses or because the statutory list of deductions is not intended to be exhaustive. * Money used in paying the funded debt should be charged to capital,^ and therefore should not be deducted from the gross income in order to arrive at the net income. The Act of Congress, accord- ingly, quite properly contains no provision that money used for payment of the company's bonded indebtedness shall be deducted from the gross income. But although the payment of the funded debt ought not to be paid outright as an income charge, yet it is quite proper to lay by a reasonable sum from the gross income to go towards a sinking fund to pay the debt at maturity. May sums so ' Supra § 60. ^ 2 Machen, Mod. Law of Corps., § 1333, § 2107. HOW THE TAXABLE INCOME IS CALCULATED. 83 laid by be deducted from the gross income for the purposes of this tax? The Act does not expressly so provide. If the deduction is permissible it must be either because the statutory list of deduc- tions is not exclusive, or because reasonable con- tributions to a sinking fund for paying the funded debt at maturity may be held to fall within the class of operating expenses. § 67. Interest on Bank Deposits. — In the case of a banking or trust company/ the Act makes express provision that " all interest actually paid by it within the year on deposits," even though their amount may exceed the paid-up capital stock, shall be deducted from the gross income. The expression " actually paid " should be par- ticularly noted. ^ The meaning of the same words in other parts of the Act has already been con- sidered.^ They would seem to indicate that in- terest credited to the depositor but not actually paid to him cannot be deducted, — a queer result. However, the provision is that interest " paid within the year," and not interest accruing within the year, shall be deducted. Hence, if it should be ' As to what is a banking company, see Bank for Savings v. Collector, 3 Wall. 295 (savings bank held to be " engaged in the business of banking " within the meaning of a tax law) ; Selden v. Equitable Trust Co., 94 U. S. 419 (a company engaged in business of investing its capital in bonds and selling same with its guaranty held not to be a bank). ^ The word " actually " is omitted in the corresponding clause of the Third Paragraph. See infra § 98. 3 Supra § 49. 84 FEDEEAL COEPOEATION TAX LAW. held that interest accruing on deposits should not be deducted from the income of the year within which it accrued, because although credited to the despositor it was not actually paid to him in that year, still it can be deducted from the income of any subsequent year in which it may be actually paid. § 68. Deduction for Taxes — In General — The next deduction expressly directed* is: " All sums paid by it," — i. e., the company, — " within the year for taxes imposed under the authority of the United States, or any State or Territory thereof, or imposed by the government of any foreign country as a condition to carry on business therein." Taxes imposed under the authority of any state clearly include municipal taxes as well as state taxes properly so called. The tax, in order to be deducted under this clause, must be paid within the year. It is not, however, necessary that it should have been assessed for that year, but it may be deducted although it had been allowed to fall into arrears before the beginning of the year. The Act does not expressly require that the taxes shall have been assessed against the company, or that either the company or its property should be liable therefor. But presumably, a purely volun- tary payment of taxes, for which neither the com- pany nor its property is in any way liable, would not be within the purview of the clause. On the ' Act, Par. 2, lines 31-36. HOW THE TAXABLE INCOME IS CALCULATED. 85 other hand, taxes which are assessed upon the several shares to the holders thereof, but which the law may require the corporation to pay, would seem to be included. ' The fact that the company may have a right of reimbursement against its several shareholders, does not, under this statute, affect the right to deduct the tax from the gross income. If the Act assesses income received by the company as trustee, — and as shown above, at least on the face of its language, it is a debatable question whether it does so,^ — then certainly taxes assessed against the company as trustee, and paid by it in that capacity, should be deducted; otherwise it is more than doubtful whether any deduction for such taxes should be allowed. § 69. Special Assessments for Betterments. — Although the clause evidently applies to all forms of taxes, — on real estate and on personal property, direct and indirect, customs, duties, excises, licenses, and all other kinds of taxes, — neverthe- less it is very questionable whether special assess- ments, or local betterment assessments, are in- cluded. The law is settled that an exemption from taxation does not carry an exemption from such local assessments; ^ but in view of the strict- ' Of course, without express statutory authority, a cor- poration would not be entitled to deduct such taxes, in cal- culating its income for purposes of a law taxing its " earnings, income or gains" : Central Nat. Bank v. United States, 137 U. S. 355; 11 Sup. Ct. Rep. 126. 2 Supra § 38. ^ Ford V. Delta etc. Co., 164 U. S. 662; 17 Sup. Ct. Rep. 86 FEDERAL CORPORATION TAX LAW. ness with which exemptions from taxation are included, those decisions are not in point. Other authorities, however, which cannot be thus dis- tinguished, hold that the word " tax " prima facie exdudes special assessments.' The Income Tax Law of 1894 expressly declared that special assessments should not be deducted in estimating net income for purposes of the tax.^ On the other hand, such assessments are levied in exer- cise of the power of taxation,' and are there- fore " taxes " in the broadest sense of that word.* The conclusive argument against allowing deductions to be made on accoimt of such assess- ments is that they are levied in supposed partial compensation for an enhancement in the value of property caused by a local improvement, and are therefore in the nature of an expense for per- manent improvements, which are properly charge- able to capital rather than income. § 70. Foreign Taxes. — The only foreign taxes which are required to be deducted are those which are " imposed by the government of any foreign country as a condition to carrying on business therein." Other taxes, such as ordinary taxes on 230; Illinois Central R. R. Co. v. Deoatvir, 147 IT. S. 190; 13 Sup. Ct. Rep. 293. ' Lamar Water etc. Co. v. Lamar, 32 L. R. A. 157, 165; 128 Mo. 188; 26 S. W. 1025; 31 S. W. 756; Page & Jones on Taxation by Assessment, § 39. 2 Act, Aug. 27, 1894, c. 349, § 28. _ * Page & Jones on Taxation by Assessment, § 8. *Id., §40, §41. HOW THE TAXABLE INCOME IS CALCULATED. 87 foreign real estate owned by the company are not required to be deducted under this head. It is possible, however, that foreign taxes of this latter kind might be allowed to be (deducted under the first head as operating expenses, or more particularly, as " charges such as rentals or fran- chise payments required to be made as a condition to the continued use or possession of property." ' § 71. Dividends on Shares in Other Companies — In General. — The last class of the statutory deductions to be made by the company comprises: ^ " All amounts received by it within the year as dividends upon the stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed." The evident general intent of this clause is to prevent double taxation, — a laudable purpose. The deduction which it directs would not have been permissible if the Act had merely proportioned the tax to the net income, without directing how that net income should be ascertained. Nevertheless the clause is not very happily drawn, and will probably accomplish some rather surprising results. Most of these could be avoided if the words " sub- ject to the tax hereby imposed " could be read with " dividends " instead of with " corporations, joint stock companies or associations, or insurance companies." The clause would then read, " All » Supra § 52. 2 Act, Par. 2, lines 36-40 (infra Appx. I). 88 FEDERAL CORPORATION TAX LAW. amounts received by it from dividends subject to the tax hereby imposed." This, however, not merely involves an awkward twisting of the words, but is also quite inadmissible because, as we have seen, this tax is not laid upon dividends at all.' In order to have accomplished its purpose, the clause ought to have read, " All amounts received from dividends paid out of income subject to the tax hereby imposed." As it is, very unequal results may be accomplished. § 72. Dividends on Shares in Companies Whose Net Income is less than Five Thousand Dollars. — The first question is whether a corporation whose net annual income is less than five thousand dollars is " subject to the tax," * so that dividends paid by such a company to another corporation should be deducted from the latter's net income. It seems that this question should be answered in the affirmative.' If so, a double exemption of five thousand dollars is allowed, and a door is opened for an evasion of the tax. For instance, a corpora- tion whose annual income is twenty-five thousand dollars, desiring to avoid the tax, may organize five subsidiary corporations, and divide its business among them, taking their stock in exchange. Each company would then have an income of but five thousand dollars, and no tax at all would be payable. Of course, the exemption of five thousand 'Supra, §13. ' Act, Par. 2, line 40 (intra Appx. I). 'Infra §87. HOW THE TAXABLE INCOME IS CALCULATED. 89 dollars is so small that this process of subdivision is not likely to be resorted to by any considerable number of corporations. The increase of expenses caused by subdivision into such small corporations, to say nothing of the resulting inconvenience, would be greater than the tax. § 73. Dividends on Shares in Foreign Com- panies. — A similar question is whether dividends paid to a domestic company on shares in a foreign company are to be deducted from the income of the domestic company for purposes of the tax, merely because the foreign company may transact a small portion of its business in this country, and may thus become " subject to the tax." It would seem that this question should be answered in the affirmative: for the language of the statute is quite clear, that all dividends on stock of companies which are " subject to the tax " are exempt; and surely a foreign company which is compelled to pay, and actually does pay a tax under this law is " subject to the tax." § 74. Meaning of " Dividends " in this Con- nection. — The last question in connection with this clause of the Statute is as to the meaning of the word " dividends." * Although it may be * Act, Par. 2, line 37 (infra Appx. I). As to the meaning of the word in a tax law, see Bailey v. Railroad Co., 22 Wall. 604; Gary v. Savings Union, 22 Wall. 38; Bailey v. Railroad Co., 106 U. S. 109; 1 Sup. Ct. Rep. 62. As to whether the word includes stock dividends, see 1 Machen, Mod. Law of Corps., p. 495, note 5; and also Chicago etc. R. R. Co. «. Page, 1 Biss. 461 (statute taxing " dividends in scrip or 90 FEDERAL COEPOEATIOIT TAX LAW. true that oaly such dividends as constitute income, as distinguished from an accretion to the share- holder's capital, are intended to be deducted under this head, yet the vexed questions that arise between a tenant for life and a remainderman, when an extraordinary dividend is claimed by the one as income and by the other as capital, ' cannot become very material here; ^ for if we assume that an extraordinary dividend is capital and therefore ought not to be deducted from the gross income as " dividends " on the stock of another company subject to the tax, then it must follow that the amount thereof ought not to be included in the estimate of gross income. It is therefore as broad as it is long; anything that ought to be included in the gross income ought, if it was received in respect of ownership of shares in a company subject to the tax, to be deducted as a dividend. Thus it would seem clear that dividends in liquidation are not deductible as dividends; for they are paid out of capital, and not income; but if that be true, neither ought they to be included in the esti- mate of gross income. It may be urged that the word " amounts " in the expression " all amounts money " held not to apply to stock issued to shareholders to represent their interest in property acquired by the com- pany with accumulated profits prior to the passage of the statute). The expression " amounts received " as dividends in this statute might seem to indicate that Congress had only cash dividends, and not stock dividends, in mind. * See 2 Machen, Mod. Law of Corps., § 1377-§1395. ' See also supra § 34. HOW THE TAXABLE INCOME IS CALCULATED. 91 received by it within the year as dividends " ' should be taken to imply that .only cash dividends, as distinguished from stock or scrip dividends, or dividends payable in property, are intended; but that construction would be very narrow. § 75. Method of Calculating Taxable Income of Foreign Companies — In General. — We next con- sider the method of ascertaining the amount of income upon which foreign companies are taxed. As already stated, no foreign company is subject to the tax, unless it is " engaged in business " in the United States; ^ and the meaning of the words " engaged in business " in this connection have already been discussed.' If, however, a foreign company is engaged in business in this country, it is taxable not merely upon the net income of that business, but also upon the income derived from " capital invested " within the United States, including Alaska. The method prescribed in the Act for ascertaining the net income upon which foreign corporations are taxable does not differ from that which is prescribed with respect to domestic companies, except in so far as may be rendered necessary by the fact that foreign com- panies are not taxable upon their total net income, but only upon so much thereof as is derived from business transacted and capital invested in this country. * Act, Par. 2, lines 36-37 (infra Appx. I). => Supra §28. » Supra §28. 92 FEDEEAL CORPOEATIOIf TAX LAW. § 76. Gross Income " From Business Trans- acted and Capital Invested in the United States." — The first step prescribed in the statute towards ascertaining the taxable net income of foreign companies is to find the gross income from business transacted and capital invested within the United States, received within the year.* We have already considered the question, what is " gross income,'"^ and what is meant by the word "'re- ceived." ' As these questions are precisely the same in the case of foreign companies as in the case of domestic companies, a repetition of that discussion would be superfluous. More- over, the question, what is " business transacted within the United States " is necessarily answered by the discussion which has been already had as to the meaning of the words " engaged in business " in the United States.* As, therefore, we are en- abled from what has gone before to understand what is meant by " gross income received within the year," and by " business " which is trans- acted, or in which the company may be engaged, within the United States, little further discussion is necessary in order to determine the meaning of " gross income received from business transacted within the United States." § 77. How to Apportion Profits Between that Part of Business Transacted in the United States, ' Act, Par. 2, lines 41-50 (infra Appx. I). ^ Supra § 33- §36, § 38-§ 44. * Supra § 37. * Supra § 28. HOW THE TAXABLE INCOME IS CALCULATED. 93 and that Part Transacted Abroad. — The question, however, of the apportionment of the company's profits between that part of its business which is carried on in the United States, and that part which is carried on abroad, is not always easy of solution.' The same or a similar question has repeatedly arisen under the British and Colonial income-tax laws. Where a telegraph company operated a cable from Australia to India, it was held that so much of its receipts as- represented its portion of the price charged for telegraphic messages from New Zealand to Europe,' were not derived from business ■ done in New Zealand, al- though the company maintained an office in that colony; ^ but on the other hand, where a telegraph company maintained and operated a cable from England to the continent, it was held that all profits made by the company on messages from England to foreign countries were to be taken as derived from trade exercised within the United Kingdom.' Where a company operated a mine in New South Wales, and refined its ores there, it was held that some part at least of the profit made on sales of the completed product in other colonies or countries arose from business carried ' As to the general question, what amounts to income from business as distinguished from income from other sources, see supra § 43. ^ Commissioner for Taxes v. Eastern Extension etc. Tel. Co. (1906), A. C. 526. ' Ericksen >. Last, 8. Q. B. D. 414. 94 FEDEHAL COHPOEATION TAX LAW. on in New South Wales, and as such was assessable there for income tax; ' but whether some part of the profit should be exempt as not having been earned in New South Wales, does not appear to have been decided. Profits in the shape of com- missions on sales made in London upon consign- ments solicited and made in New Zealand do not arise out of business transacted in that colony.' When an English member of an American firm purchased goods in England and shipped them to New York, where they were sold at a profit, it was held that no part of that profit should be deemed to arise from the business carried on in England, and that therefore no part thereof was liable to income tax in England.' § 78. What is Income from Capital Invested in United States. — The expression " capital invested within the United States " * introduces a new term.^ When may capital be said to be invested '■ Commissioners of Taxation v. Kirk (1900), A. C. 588. ' Lovell & Christmas v. Commissioner of Taxes (1908), A. C. 46 (more fully stated supra § 28, and note). » SuUy V. Attorney General, 5 H. & N. 711. * Act, Par. 2, lines 47-48 (infra Appx. I). ^ It has been held that a tax on the " capital " of in- corporated and private bankers does not include deposits and money temporarily borrowed: Bailey v. Clark, 21 Wall. 284. On the other hand, it does include profits accumulated and retained throughout a period of years as part of the com- pany's working capital, though carried on its books under the head of " profit and loss ": Leather Mnfrs. Nat. Bank v. Treat, 128 Fed. 262; 62 C. C. A. 644. New York has taxed the " capital employed " by corpor HOW THE TAXABLE INCOME IS CALCULATED. ' 95 in this country? Of course, land in the United States owned by a foreign company is capital invested in this country. So also, tangible personal property permanently located in America probably falls within the same category. The difficulty arises with respect to intangible property. When a foreign corporation owns shares in a domestic company, can it be said that the shares so owned constitute " capital invested in the United States." * This question is immaterial; because the domestic company would be liable to the tax, and therefore income derived by the rations within the state: New York State v. Roberts, 171 U. S. 658; 19 Sup. Ct. Rep. 58. These words in the New York statute have been construed in the following cases, among others: People v. Campbell, 138 N. Y. 543; 34 N. E. 370; 20 L. R. A. 453; People v. Wemple, 148 N. Y. 690; 43 N. E. 176; People v. Wemple, 133 N. Y. 323; People v. Am. Bell Tel. Co., 117 N. Y. 241; 22 N. E. 1057. But the New York cases decided under this statute expressly draw a distinction between " capital employed " in the state and capital which is merely " invested " therein. People ex rel. Wall. etc. Co. v. Miller, 181 N. Y. 328, 331; People ex. rel. Fort George Realty Co. v. Miller, 179 N. Y. 49, 52-53; People ex rel. Singer Mfg. Co. v. Wemple, 150 N. Y. 46, 49; People ex rel. Niagara etc. Co. v. Roberts, 30 N. Y. App. Div. 180, 182, affirmed on opinion below, 157 N. Y. 676. Hence, New York cases decided under that statute bear only in- directly upon the construction of the words " capital in- vested " in the federal law. 1 Cf. People V. CampbeU, 138 N. Y. 543; 34 N. E. 370; 20 L. R. A. 453; People v. Wemple, 148 N. Y. 690; 43 N.E.176; People V.Am. Bell Tel. Co., 117 N.Y. 241; 22N.E. 1057. 96 FEDERAL COKPOKATION TAX LAW. foreign company from its shares would be exempt, even though those shares should be held to be capital invested in the United States. But suppose a foreign company holds a mortgage upon land or tangible personal property situated in this country. For example, suppose a foreign corporation holds mortgage bonds of a domestic company, can it be said that these bonds represent capital invested in this country? * The problem is not easy of solution. If the domestic company is also transacting business abroad, and if the bonds are secured by mortgage of its foreign property as well as of its property situated in this country, the question becomes still more complex. It seems that bonds deposited by a foreign insurance company with a state ofi&cial to secure local policy-holders are capital of the company in that state.^ § 79. Deductions from Gross Income by Foreign Companies — In General. — The deductions ex- pressly directed to be made are the same as in the case of domestic companies, with certain differences arising out of an attempt by Congress to apportion the company's expenses between its business in this country and in its own domicile. 1 Cf. People V. CampbeU, 138 N. Y. 543; 34 N. E. 370; 20 L. R. A. 453 (bonds of a foreign corporation owned by a New York company and presumed to be at its home office, held to be taxable to the New York company as " capital employed " in New York). 2 Scottish Union etc. Ins. Co. v. Bowland, 196 U. S. 611, 630. HOW THE TAXABLE INCOME IS CALCULATED. 97 §80. Operating Expenses of Foreign Com- panies. — With respect to what thus may be deducted as operating expenses, the rules pre- scribed by the Act ' are almost word for word the same as those with respect to domestic com- panies,^ except that they are confined to the opera- tion and maintenance of business and property within the United States. Two verbal varia- tions, — namely, the use of the word property in the singular instead of the plural number, and the substitution of " earnings " for " income," in the expression " paid out of income," — have been already considered and shown to be immate- rial.^ As we have just considered the meaning of " business transacted " and " capital invested " in the United States, this class of deductions calls for little further comment. In tiie corresponding clause with respect to the return required to be made by foreign companies, the Act, apparently, per incuriam, omits the word " property," * so that foreign companies are not required to state in their return the expense of maintaining their property in this country; but as they are entitled to a deduction therefor, they should certainly be permitted to do so. § 81. Losses by Foreign Companies. — The clause respecting deductions for losses by foreign ' Act, Par. 2, lines 50-58 (infra Appx. I). ^ As to which see supra § 46- § 52. 3 Supra § 48 and § 50. ^See infra §96. 98 FEDERAL COEPOHATION TAX LAW. companies ' is confined, so far as express language goes, to losses sustained in " business conducted " ^ in the United States, and does not expressly include losses of capital invested in this country. It would seem, however, that this omission is an inadvertence, for if the foreign company is to.be taxed on income derived from capital invested in this country, there would be no justice in refusing to it the privilege which is allowed to domestic companies, of deducting from income received the amount of invested capital lost. This conclusion is fortified by the express pro- vision applicable to foreign as well as to domestic companies, that losses shall include " a reasonable allowance for depreciation of property, if any." ' Although this expression must be confined by construction to losses by depreciation of property situated in this country, it would seem to be broad enough to include losses of invested capital as well as losses in business. In aU other respects, the clause respecting deductions for losses is word for word the same as the corresponding clause applicable to domestic companies.* The pro- visions as to deductions by insurance companies ' * Act, Par. 2, lines 58-69 (infra Appx. I). ' As to what is a loss in a given business, as distinguished from a loss in another business conducted by the same in- dividual, compare Brown v. Watt, 50 J. P. 683. ' Act, Par. 2, lines 63-65 (infra Appx. I). * As to the construction of which see supra, § 53- § 57. 'Act, Par. 2, lines 65-69 (infra Appx. I). Cf. supra §58, §59. HOW THE TAXiBLE INCOME IS CAICDLATED. 99 for sums other than dividends paid within the year on policy and annuity contracts, and for additions required by law to be made to reserve funds, is not expressly confined to losses incurred in policies written in the United States, or to additions to reserve funds required to be' made by the laws of the United States or any of them; but such will probably, — and rightly, — be its con- struction. It has been held in England that damages paid by a brewing company to a customer in an inn, which was carried on by a manager as part of the com- pany's business, for damages sustained in conse- quence of negligence of a servant, is not a loss " connected with or arising out of the company's trade." » § S2. Interest on Indebtedness Paid by Foreign Companies. — The clause respecting deductions for interest paid by the foreign company on its bonded and other indebtedness * is the same as the corresponding provision with respect to do- mestic companies,^ except that the limit of the amount of indebtedness interest paid upon which may be deducted, instead of being the total amount of outstanding paid-up capital stock of the company, as in the case of domestic companies, is an amount " not exceeding the proportion of its paid-up capital stock outstanding at the close * Strong & Co. v. Woodifield (1906), A. C. 448. ^ Act, Par. 2, lines 70-81 (infra Appx. I). ' As to whicli, see supra § 60- § 67. 100 FEDERAL COEPOEATION TAX LAW. of the year which the gross amount of its income for the year from business transacted and capital invested in the United States and any of its Terri- tories, Alaska, and the District of Columbia, bears to the gross amount of its income derived from all sources within and without the United States; " and except that foreign banking companies, if there be any such doing business in the United States, are not allowed to deduct interest paid on their deposits in excess of the limit of indebtedness as just stated. ' It will be observed that this indebtedness, interest upon which may, if paid within the year, be deducted from the gross income of foreign companies from business transacted and capital invested in the United States, is not confined to debts contracted in the course of the business carried on in this country. But the fact that the limit is fixed by the proportion between the income received from American business and property, and its total income from all sources, casts upon it, as will presently be more fuUy explained, the heavy burden of making a return of the total amount of its income from all sources. It is sub- mitted that this is an unjust burden to put upon foreign companies, and that the law ought to be amended so as to obviate the necessity for it. § 83. Taxes Paid by Foreign Companies. — With respect to the deduction for taxes, the pro- * Act, Par. 2, lines 71-81 (infra Appx. I). HOW THE TAXABLE INCOME IS CALCULATED, vision ' is the same as that applicable to dodjes^c companies, except that it is confined to " ta imposed under the authority of the United State!" or of any State or Territory thereof," and does nof" include any taxes whatsoever imposed by the laws of any foreign country. In all other respects the same considerations stated above with refer- ence to domestic companies are applicable.^ § 84. Dividends on Shares in Other Companies held by Foreign Corporations. — As to deductions for dividends received by the company within the year on stock of other companies,' the provision is in all respects precisely identical with the cor- responding provision as to domestic companies, and should therefore receive the same interpre- tation.* § 84A. For what Period Income is Calculated. — Throughout the First and Second Paragraphs, the Act repeatedly uses the expression " within the year," and other equivalent words. Every com- pany shall be subject to pay " annually " ' the tax in question, equivalent to one per cent of its net income " during such year " ; " and that income is to be ascertained by taking the gross income received " within the year," ' and deducting ' Act, Par. 2, lines 81-84 (infra Appx. I). ' Supra § 68, § 69. ' Act, Par. 2, lines 85-89 (infra Appx. I). * As to which, see supra § 71- § 74. ° Act, Par. 1, line 13 (infra Appx. I). " Act, Par. 1, lines 19-20 and line 30 (infra Appx. I). ' Act, Par. 2, line 5, lines 46-47 (infra Appx. I). 102 FEDEEAL COEPOEATION TAX LAW. therefrom certain expenses incurred " within the year." * But nowhere in those two paragraphs does it appear when the year is to begin and end. This appears for the first time in the Third Para- graph,^ at the commencement of which it is stated that the tax is to be computed for the first year on the income of the year ending December 31st, 1909,* and so on for each calendar year thereafter. > Act, Par. 2, lifles 7, 13, 18, 20-21, 22, 30, 31-32, 37, 51, 59, 66-67, 69, 70, 82, 85-86 (infra Appx. I). Note also the recurring expression " at the close of the year." Act, lines 27-28, 74-75. ^ Act, Par. 3, lines 10-12 (infra Appx. I). * As to whether this includes the portion of the year which had elapsed when the Act took effect, see supra § 29, § 39. CHAPTER V THE KETUEN § 85 Importance. § 86 When to be made. § 87 By what companies to be made. § 88 By whom and how to be sworn to. § 89 To whom to be made. § 90 Control of Commissioner of Internal Revenue over. § 91-100 What the return should contain. § 91 Amount of capital stock. § 92 Amount of indebtedness. § 93 Gross income. § 94 Dividends received from other companies. § 95-99 Amount claimed as deductions. § 95 In general. § 96 (1) Expenses of maintenance and operation, etc. § 97 (2) Losses sustained. § 98 (3) Interest paid on indebtedness. § 99 (4) Taxes paid. § 99A Net income. § 100 Additional matters not required by the Act to be stated. § 101 Puty of company where an accurate return is im- possible. § 102 Disposition of the return. § 103 Effect of the return. § lOi Failure to make return. § 105 Returns incomplete on their face. 104 FEDERAL CORPORATION TAX LAW. §§ 106-114 Correcting the return. § 106 Preliminary proceedings before Commissioner of Internal Revenue. § 107 Further proceedings — requiring additional infor- mation from the company. § 108 Examination of books and taking of testimony. § 109 Coxirt proceedings. § 110 Defences. § 111 Costs. § 112 Decision of Commissioner on evidence so acquired. § 113 Period of limitations. § 114 Correcting return by action of debt for taxes due. § 115 Penalties for erroneous returns. § 116 Returns as public records. § 117 Protection against disclosure of secrets. § 118 Returns not affected by other statutes. § 85. Importance. — Nothing connected with the Act is more important than the matter of the preparation and correction of the return. For while the amount of the tax is not very heavy, being only one per cent of the net income in excess of five thousand dollars, yet the fact that the return is required to state, as matter of public record open to inspection by all comers, many facts in regard to the business which most purely private corporations would be very loth to reveal, and the further fact that the correction of the return may involve an inquisitorial inspection of the company's books and examination of its officers, and that the President may direct all the information so acquired to be" published, — these facts make the law very onerous. § 86. When to be Made. — The return is re- f1SM feEftTElif. 105 quired to be made on or before the first day of March in each year.* The companies subject to the tax must at their peril inform themselves of this fact. It is not made the duty of any govern- ment officer or employee to give them notice, or to warn them of their obligation, or to furnish them with forms, blanks, or instructions for their guidance in making up the returns; and failure to receive the usual blanks is no excuse for failing to make the return.^ In case of the absence or illness of an officer, or for any other good reason, the collector may allow such further time, not exceeding thirty days, after March 1st, as he may think proper.^ § 87. By What Companies to be Made. — A return must be made by every corporation " sub- ject to the tax." * It seems that these words include all companies which would be liable to the tax if their income were sufiicient; and there- fore include companies whose net income is less than five thousand dollars a year or whose net income is derived from exempted sources. ° Such at least is the interpretation of the Act by the Commissioner of Internal Revenue." § 88. By Whom and How to be Sworn to. — • Act, Par. 3, Knes 12-15 (infra Appx. I). " U. S. Int. Rev. Regs. No. 31, Dec. 3d, 1909, Art. 6 (infra Appx. II). ^ Act, Par. 5, lines 8-16. * Act, Par. 3, lines 20-21 (infra Appx. I). = See supra § 72, § 73. ' U. S. Int. Rev. Regs. No. 31, Dec. 3d, 1909, Art. 1 (infra Appx. II). 106 FEDERAL COEPOKATION TAX LAW. The return is required to be sworn to by the " president, vice-president or other principal offi- cer " of the company, and also by its " treasurer or assistant treasurer." ' Any person performing the duties of a treasurer would probably be deemed a treasurer quoad hoc. Doubtless, it is sufficient for the officers mentioned to make oath to the best of their knowledge, information and belief; ' for since the Act specifies the officers who are to swear to the report and does not require that it shall be sworn to by a person having personal knowledge of the facts stated therein, no other rule would be possible. The Act does not specify the officers by whom the oath is to be administered. It may, therefore, be administered by any officer empowered to do so by general law — a clerk or deputy clerk of a United States Court or a United States Commis- sioner,^ or by a notary public,* or by the collector or deputy collector.® ' Act, Par. 3, lines 15-18 (infra Appx. I). ^ The form of oath may be prescribed by the Secretary of the Treasury. See Rev. Stats. §251 (1 U. S. Comp. Stats, p. 138), and infra § 128. The affidavits appended to the printed forms of returns sent out by the Treasury De- partment are to be made to the best of the affiant's " knowl- edge and belief and from such information as he has been able to obtain.'" See infra Appx. III. ' Act March 2, 1901, c. 814, amending Act May 28, 1896, c. 252, § 19 ( 1 U. S. Comp. Stats. 499). * Act Aug. 15, 1876, c. 304 (1 U. S. Comp. Stats. 662-663). ■^ Rev. Stats. § 3i65 (2 U. S. Comp. Stats, p. 2057), infra 5130. THE RETURN. 107 § 89. To Whom to be Made. — The return must be made to the collector of internal revenue for the revenue district in which the company in question has its " principal place of business," * or in the case of a foreign company to the collector of the district in which is situated " the place where its principal business is carried on in the United States." ^ In the case of domestic com- panies, does " principal place of business " refer to its home office, or place, designated in its charter or incorporation paper as its chief office or place of business, or to the place where in fact its most important business may be transacted? The question is not, theoretically, easy of solution; ' but in practice nobody is likely to complain because the return is made to the collector of a wrong district. § 90. Control of Commissioner of Internal Revenue over. — The return must be " in such form as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe." * This is the only power vested in the Commissioner of Internal Revenue or in the Secretary of the Treasury in connection with the original preparation of the return. It is im- portant to emphasize the fact that the power does not extend to any direction as to the svbstance ' Act, Par. 3, lines 21-25 (infra Appx. I). ^ Act, Par. 3, lines 25-30 (infra Appx. I). ' Cf. 1 Machen, Mod. Laiw of Corps. § 114. * Act, Par. 3, lines 30-33 (infra Appx. I). 108 FEDERAL OOEPOEATION TAX LAW. of the return or its contents, but is strictly con- fined to form.* The Commissioner may require the return to be on paper of a certain size or quality, to be printed or typewritten, to be in numbered paragraphs, or to be upon blank forms to be supplied by the Treasury Department. All such matters are within his power. ^ But he has no authority to order the return to set out any matter not required by the Act of Congress to be stated therein. He cannot lawfully require any more detailed information than the legislature has commanded the company to furnish him.^ ' Under some other statutes, the Commissioner is au- thorized to prescribe the contents as well as the form of the returns: United States v. Lamson, 165 Fed. 80. ^ Power to prescribe " form '' of administ;ration bonds includes power to require from co-executors either a joint bond or several bonds. Chamberlain v. Anthony, 21 R. I. 331. ^Cf. Morrill v. Jones, 106 U. S. 466; 1 Sup. Ct. Rep. 423 (" The Secretary of the Treasury cannot by his regulations alter or amend a revenue law ") ; United States v. Two Hundred Barrels of Whiskey, 95 U. S. 571; Spreokels Sugar Ref. Co. V. McClain, 113 Fed. 244; 51 C. C. A. 201 (re- versed on other points, 192 U. S. 397; 24 Sup. Ct. Rep. 376); United States v. Lamson, 165 Fed. 80 (doubting whether under a statute providing that dealers in oleo- margarine shall keep such books and render such returns in relation thereto as the Commissioner may prescribe, he may require the return to be under oath); United States V. Eaton, 144 U. S. 677 (holding that a person who fails to comply with a treasury regulation is not punishable criminally under a statute for omitting to do anything " re- THE EBTDKN. 109 § 91. What the Return Should Contain — Amount of Capital Stock. — We proceed, therefore, to an examination of the statutory provisions as to what the return must state. Except where a difference is specially noted, the requirements for returns by foreign companies are the same as those for domestic companies. In the first place, it must state " the total amount of the paid-up capital stock " of the com- pany " outstanding at the close of the year." ' The meaning of the same words in a similar con- nection in the Second Paragraph have been fully considered above, ^ and it is sufficient to refer to that discussion without repeating what was there said. This requirement cannot be applied to mutual insurance companies; for although they are subject to the tax, yet they have no capital stock, so that it must be sufficient to state that fact.=' quired by law " to be done, even if the regulation is author- ized by law) ; United States v. Hyams, 146 Fed. 15. But see Powell v. United States, 135 Fed. 881 (regulations of Commissioner as to rebate of taxes on manufactured tobacco held not void as unreasonable); Thacher v. United States, 15 Blatch. 15 (regulation of Commissioner held valid under Rev. Stats. §321, and §3249); United States v. Lamson, 173 Fed. 673 (regulations of Commissioner as to keeping books and making returns of oleomargarine, re- quiring names and addresses of purchasers, held not un- reasonable under the broad terms of the Oleomargarine Act). ' Act, Par. 3, lines 33-37 (infra Appendix I). ^ Supra §61- §63. ^Cf. supra §64. 110 FEDERAL COEPOEATION TAX LAW. § 92. Amount of Indebtedness. — Secondly, the return must state " the total amount of the bonded and other indebtedness " of the company " at the close of the year." ' What is meant by " other indebtedness " has been explained above.^ § 93. Gross Income. — Thirdly, if the company be a domestic company, it is required to set out in the return " the gross amount of its income received during such year from all sources." ' A foreign company is required to state the " gross amount of its income received within the year from business transacted and capital invested within the United States";* but is also like domestic companies required to state the amount of its gross income derived from all sources, for that amount may be material in estimating the amount of deduction to which it is entitled for interest paid during the year on its indebtedness.^ § 94. Dividends Received from Other Com- panies. — The return must also state, in the case of either a domestic or a foreign company, the amount received within the year by way of divi- dends upon stock of other companies subject to the tax." The Paragraph relating to the return groups the statement of the amount of such ' Act, Par. 3, lines 37-iO (infra Appx. I). 2 Supra § 60. ' Act, Par. 3, lines 41-i4 (infra Appx. I). * Act, Par. 3, lines 44-50 (infra Appx. I). ' Supra § 82. ' Act, Par. 3, lines 50-56 (infra Appx. I). THE EETUEK. HI dividends with the statement of the amount of gross income, although the preceding Paragraph of the Act classes such dividends as the fifth class of deductions. At any rate, the question what the company is entitled to treat as included within such dividends is discussed above.' § 95. Amount Claimed as Deductions — In General. — The Act further requires that the return shall state the amount claimed as deduc- tions under the several heads mentioned in the Second Paragraph of the Act, which are repeated almost verbatim in this Third Paragraph.^ They fall under four heads. § 96. (1) " The Total Amount of aU the Ordi- nary and Necessary Expenses Actually Paid Out of Earnings in the Maintenance and Operation of the Business and Properties of Such Corporation, Joint Stock Company or Association, or Insurance Com- pany within the Year, Stating Separately all Charges Such as Rentals or Franchise Payments Required to be made as a Condition to the Con- tinued Use or Possession of Property, and if Organ- ized under the Laws of a Foreign Country the Amount so Paid in the Maintenance and Operation of its Business within the United States and its Territories, Alaska and the District of Columbia." ^ — For an explanation of the items which the company may properly claim as deductions under » Supra §71-§74. ^ Act, Par. 3, lines 56-123 (infra Appx. I). ' Act, Par. 3, lines '56-70. 112 FEDERAL CORPOKATION TAX LAW. this head, reference is made to the exposition of the corresponding clauses in the preceding para- graph of the Act.' The words " within the year " are transposed in this clause; and if it stood alone, they might perhaps be read in connection with " operation " and " maintenance," so as to require the com- pany to state the amounts paid for operating the business during the year, instead of the amounts paid within the year for expenses of operation or maintenance though incurred at some previous time. But in the corresponding clauses in the Second Paragraph the words " within the year " follow immediately after " paid," ^ so that the latter construction is, as above stated, demon- strated to be correct.' As to foreign companies the Paragraph omits, probably through inadvertence, the word " prop- erty," so that a foreign company is not required to state the amount expended in maintenance of its property, or capital invested, within the United States, but merely the amount expended for the maintenance of its business. But since, under the Second Paragraph, a foreign company is expressly declared to be entitled to deduct from its gross income the amount expended for the maintenance of its American property or investments as well 1 Supra §4&-§52. ^ Act, Par. 2, lines 6-9 (infra Appx. I). * See supra § 47, THE EETUEN. 113 as for the maintenance of its American business,' every foreign corporation subject to the Act will be inclined to make the statement voluntarily so as to get the benefit of the larger deduction. According to the letter of the statute, foreign companies are required to state both the amount expended for maintenance of their business in this country and the total amount expended for maintenance both at home and abroad. The latter amount is irrelevant, and there is no reason for requiring a foreign corporation to^ set it out in its return. To do so would be to impose a a quite gratuitous burden. § 97. (2) " The Total Amount of all Losses Actually Sustained during the Year and not Com- pensated by Insurance or Otherwise, Stating Sepa- rately any Amounts Allowed for Depreciation of Property, and in the case of Insurance Companies the Sums other than Dividends, paid within the Year on Policy and Annuity Contracts and the Net Addition, if any. Required by Law to be made within the Year to Reserve Funds ; and in the Case of a Corporation, Joint Stock Company or Associa- tion, or Insurance Company, Organized under the Laws of a Foreign Country, all Losses Actiially Sustained by it during the Year in Business Con- ducted by it within the United States or its Terri- tories, Alaska, and the District of Columbia, not Compensated by Insurance or Otherwise, Stating ' Act, Par. 2, lines 50-55 (infra Appx. I). See also supra §80. 114 FEDERAL COEPOKATION TAX LAW. Separately any Amounts Allowed for Depreciation of Property, and in the Case of Insurance Com- panies the Sums other than Dividends, Paid within the Year on Policy and Annuity Contracts and the Net Addition, if any. Required by Law to be made within the Year to Reserve Fund." ' — For a statement of the various items which a corporation may justly claim as deductions under this head reference is made to the explanation of the parallel clauses in the Second- Paragraph of the Act.^ It is to be observed that the return must state separately the amounts claimed as an allowance on account of depreciation of property,^ and the amounts of the special allowances to insurance companies.* The letter of the clause would require foreign companies to state the total amount of their losses both within and without the United States; but as losses occurring in business transacted outside the United States are irrelevant, the officials charged with the administration of the law will hardly exact literal compliance with this provision by foreign companies. § 98. (3) " The Amount of Interest Actually Paid witMn the Year on its Bonded or Other In- debtedness not Exceeding the Paid-up Capital Stock ' Act, Par. 3, lines 70-93. ^ Supra § 53-§ 59, as to domestic companies, and § 81 as to foreign companies. ' As to which, see supra § 57. * As to which see supra § 58-§ 59. THE KETTJEIT. 116 of such Corporation, Joint Stock Company or Association, or Insurance Company, Outstanding at the Close of the Year, and in the Case of a Bank, Banking Association, or Trust Company, Stating Separately all Interest Paid by it within the Year on Deposits ; or in the Case of a Corporation, Joint Stock Company or Association, or Insurance Com- pany, Organized under the Laws of a Foreign Country, Interest so Paid on its Bonded or other Indebtedness to an Amount of such Bonded and other Indebtedness not Exceeding the Proportion of its Paid-up Capital Stock Outstanding at the Close of the Year, which the Gross Amount of its Income for the Year from Business Transacted and Capital Invested within the United States and any of its Territories, Alaska, and the District of Columbia, Bears to the Gross Amount of its Income Derived from all Sources within and without the United States." ' — The various items justly claim- able as deductions under this head have been fully explained above. ^ It should be noted that banks and trust com- panies must state separately ^ the amount of interest paid within the year on deposits. Note also that the expression is " interest paid by it within the year on deposits " * and not " interest ' Act, Par. 3, lines 93-117 (infra Appx. I). ^ Supra § 60- §67, as to domestic companies, and § 82, as to foreign companies. 'Act, Par.. 3, lines 101-103 (infra Appx. I). * Act, Par. 3, lines 102-103 (infra Appx. I). 116 FEDERAL CORPOfiATlON TAX LAW. actually paid by it within the year " as in the corresponding clause in Paragraph Two.* § 99. (4) " The Amount Paid by it " — i. e. the company making the return — " Within the Year for Taxes Imposed under the Authority of the United States or any State or Territory Thereof, and Separately the Amount so Paid by it for Taxes Imposed by the Government of any Foreign Country as a Condition to Carrying on Business Therein." ^ — The items which may be legally included under this head are set forth above. ^ It should be noted that foreign taxes must be stated separately. This is very necessary because although the Act, literally construed, requires foreign companies as well as domestic companies to state the amount of taxes paid by them to foreign governments as a condition to carrying on business in their territories, yet amounts paid for such taxes can be deducted from the gross income only in the case of domestic companies. § 99 A. Net Income. — Finally, the return must state " the net income of such corporation, joint stock company or association, or insurance com- pany, after making the deductions in this section authorized." * Observe that the amount to be * Act, Par. 2, lines 29-30. See supra § 67, and compare §49. => Act, Par. 3, lines 117-123 (infra Appx. I). ' Supra § 68- §70, as to domestic companies, and § 83, as to foreign companies. * Act, Par. 3, lines 123-127 (infra Appx. I). THE EETIJEN. 117 stated is the net income after making the deduc- tions authorized, not simply in the Third Para- graph, but anywhere in the Section or in other words anywhere in the law which imposes this tax; for the whole of that law is comprised in Section 38 of Chapter 6 of the Acts of the Sixty- first Congress, 1st Session.* Consequently, there is nothing in this provision to .prove that the only deductions allowable to be made from the gross income are those specifically directed in the sec- ond and third paragraphs of the Thirty-eighth section. § 100. Additional Matters not Required by the Act to be Stated. — The company may in its return voluntarily state additional facts over and above those required by law to be stated. This may often be quite proper, in order to explain the return. At all events, a return cannot be deemed faulty because it may state more than is required. At the worst, the additional matter may be rejected as surplusage. But as indicated above, neither the Commissioner of Internal Revenue nor the Secretary of the Treasury has any power to compel a company to state in its return anything over and above what is required by Congress. Nevertheless, the pub- lished Regulations of the Commissioner undertake to require the various corporations to submit with their returns a supplemental statement or inventory of materials, supplies and merchandise on hand for 'Supra §2. 118 FEDERAL CORPORATION TAX LAW, sale or use at the beginning of the year.' Yet it is submitted that this order is clearly ultra vires. No authority to make any such requirement is conferred upon the Commissioner either by this Act or by any other Act of Congress; but on the con- trary this statute by prescribing in detail pre- cisely what the company shall be obliged to state in the return necessarily implies that it shall not Be required to state anything further. The power of the Commissioner is merely to prescribe the form of the return.^ The Commissioner has no authority to compel the company to disclose how it arrives at the results stated in the return. Its full duty is done when its officers make the statutory declaration under the penalty of perjury and the additional penalties imposed by this statute in case of a false and fraudulent return. § 101. Duty of Company where an Accurate Return is Impossible. — It may often happen that a corporation is unable to ascertain accurately, either on account of the manner in which its books are kept or from some other cause, the matters which the Statute requires to be set out in the return. In such circumstances, the company must answer the statutory interrogatories as best it may. If it is honestly unable to ascertain accu- rately the data which the Statute compels to be » U. S. Int. Rev. Regs., No. 31, Deo. 3d, 1909, Art. 5 (infra Appx. II). ' See supra § 90. THE RETURN. 119 disclosed, it is entitled to make a bona fide guess. Needless to say, there is little danger that any such guess will err on the side of unfairness to the company. To be sure, the Act provides that each company shall make " a true and accurate re- turn." ^ But this can only mean a return as accurate as possible from the information in the company's possession. Not only is this true as to past transactions; but even for the future the corporations are under no obligation to change their method of book- keeping so that the taxable net income may be more easily and" accurately ascertained.^ The Income Tax Law of 1894 did contain a direction that every company doing business for profit should " keep full regular and accurate books of ac- count; " ' but no such provision is contained in * Act, Par. 3, lines 14-15 (infra Appx. I). ^Of course, a company which fails to keep its books so as accurately to show the amount of net income cal- culated in the statutory mode takes the risk of being com- pelled to pay an excessive amount, if proceedings to examine its books are instituted and if the Commissioner of Internal Revenue finds himself obliged to guess or estimate the com- pany's net income. His guess is not so likely to be favorable to the company as the guess of its own officers. An assess- ment based on a mere estimate would be lawful: United States V. U. S. Fidelity & Guaranty Co., 144 Fed. 866, re- versed on another point, 158 Fed. 604. = Act, Aug. 27, 1894, c. 349, § 36; 2 U. S. Comp. State. 2267. A similar requirement is imposed upon dealers in oleomargarine by the oleomargarine-tax laws. See Act, May 120 FEDEKAL CORPOEATIOK TAX LAW. the present law, and the power to enact it is vested in Congress and not in the Commissioner. ' Nevertheless, that ofi&cial appears to be of a con- trary opinion; for he has promulgated a regula- tion that " the business transacted by corpora- tions, joint stock companies, associations or insurance companies must be so recorded that each and every item therein set forth may be readily verified by an examination of the books and accounts, where such an examination is deemed necessary," ^ although he also announces that " no particular system of bookkeeping or accounting will be required by the Department." ' § 102. Disposition of the Return, — The Act provides that the collector, immediately after receiving a return, shall transmit it to the Com- missioner of Internal Revenue,* in whose office the same shall be permanently kept.^ 9, 1902, c. 784, § 6 (U. S. Comp. Stats., 1909, p. 868), con- strued in United States v. Lamson, 173 Fed. 673. ' Cf. supra § 90. But see United States v. Eaton, 144 U. S. 677 (leaving undecided the question whether a regu- lation requiring dealers in oleomargarine to keep books, and make a monthly return was authorized under a provision empowering the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury to make " all needful regulations for carrying into effect a law taxing oleomargarine). 'U. S. Int. Rev. Regs., No. 31, Dee. 3d, 1909, Art. 6 (infra Appx. II). ' Ibid. *Act, Par. 3, Unes' 127-129 (infra Appx. I). ' Act, Par. 6 (infra Appx. I). See infra § 116. THE EETUEN. 121 § 103. Effect of the Return. — Unless the re- turn shall be corrected in the mode provided in the Act and hereinafter explained, it stands as correct and unimpeachable. The Statute enacts that " All returns shall be retained by the Com- missioner of Internal Revenue, who shall make assessments thereon." ' The assessment shall be made thereon — that is, on the facts as stated in the return. The duty of the Commissioner in this regard is little if anything more than minis- terial. He is merely to see that the process of subtracting the various items of deduction from the gross income as set out in the return is cor- rectly performed,^ and to make an assessment of one per cent of the balance.^ § 104. Failure to make Return. — The failure to make a return within the time limited in the Act * renders the corporation liable to a fine of not less than one thousand dollars and not more than ten thousand dollars. ° In case of the failure of any company to make a return as required by law, it is the duty of the collector to report that fact to the Commissioner of Internal Revenue who shall thereupon require such information from the company as he may deem expedient and may specially designate one of the government ' Act, Par. 5, lines 1-3 (intra Appx. I). 2 See infra § 120. = See infra § 121, § 134. * As to what the time so limited is, see supra § 86. 'Act, Par. 8, lines 1-5 (infra Appx. I). 122 FEDERAL COEPOKATION TAX LAW. officers or employees known as revenue agents ' to investigate the matter.^ Thenceforth the pro- ceedings do not differ from the proceedings, which are fully explained below, for the correction of a defective return. In brief, upon the evidence reported by the revenue agent, the Commissioner is himself to prepare a return on behalf of the delinquent company.' The return so prepared is to have the same effect as a return duly made by the company would have done, and upon the return so prepared the assessment is to be made. § 105. Returns Incomplete on Their Face. — It would seem, although the statute does not so declare in words, that a return which on its face fails to comply with law — that is to say, omits some of the information required by law to be given — may be rejected by the collector, and regarded as no return at all, at least as to the omitted matters.* He may, accordingly, report that no return has been made, and the Com- missioner may thereupon institute the proceedings above referred to for supplying the return. A • As to whom, see Rev. Stats. § 3152, amended by Act March 1st, 1879, c. 125, § 2 (U. S. Comp. Stats, p. 2047). ^ Act, Par. 4, lines 7-39 (infra Appx. I). ' Act, Par. 4, lines 40-43 (infra Appx. I). *Cf. Attorney-General v. Till (Ho. of Lds.), 54 Sol. J. 132, reversing (1909) 1 K. B. 694 (where it had been held that a statute which imposed a penalty upon any person who refuses or neglects to deliver a " statement as aforesaid " of his income does not apply to a person who mistakenly makes an erroneous return). THE RETURN. 123 return which is incomplete on its face differs from a return which, though fair on its face, is false or incorrect in some particulars. § 106. Correcting the Return — Preliminary Proceeding before Commissioner. — As stated above, a return which on its face complies with law is presumed to be correct until impeached in the mode provided by the Act. The first step in the statutory proceeding to impeach its cor- rectness is to satisfy the Commissioner of Internal Revenue that the return is false. " Whenever," says the Act, " evidence shall be produced before the Commissioner of Internal Revenue which in the opinion of the Commissioner justifies the belief that the return made by any corporation, joint stock company or association, or insurance com- pany, is incorrect," * the Commissioner may pro- ceed to correct the return in a manner^ specified in the Act. The statute is silent as to how or by whqm this evidence that the return is incorrect is to be adduced. There is no provision for notice to the company; and doubtless this preliminary proceeding is intended to be purely ex parte. There is no provision for compelling the attend- ance of witnesses. The " evidence " referred to must, therefore, be produced voluntarily. Doubt- less any patriotic, not to say oflScious, citizen might testify to the Commissioner that a return is false. The President, or any officer of the government, might very properly lay before the ' Act, Par. 4, lines 1-7 (infra Appx. I). 124 FEDERAL COEPOKATION TAX LAW. Commissioner any facts tending to show the in- correctness of a return. It is expressly made the duty of the several collectors, in the general statute defining their duties, to report any such facts which they may happen to learn. ' In passing upon the sufficiency of any evidence adduced for this purpose, the Commissioner is exer- cising a quasi-judicial function and is not acting in a ministerial capacity as in making up, the as- sessment on the returns.^ No court, therefore, would undertake to control his discretion in de- termining the evidence to be either sufficient or insufficient. But some evidence tending to show the return to be incorrect there must be, or else the Commissioner has no jurisdiction to proceed further for the correction of a return which is fair on its face. It is not necessary to assert that the Commissioner is bound by all the technical rules of evidence applicable to trials at nisi priiis; but there must be some facts shown sufficient to justify a rational man in believing the return to be in- correct — something more than mere suspicion. As the Commissioner in this matter acts in a quasi-judicial capacity, and not in a merely ministerial capacity, it follows that he cannot delegate to anybody else the duty of passing on the evidence. Until he, personally, is satisfied that the " evidence produced " before him justifies ' Rev. Stats. § 3163 (2 U. S. Comp. Stats, p. 2056); Rev. Stats. § 3172 (2 U. S. Comp. Stats, p. 2065). ^ As to which, see supra § 103 and infra § 120. THE BETUEN. 125 the belief that a return is incorrect, he has no jurisdiction to take any further steps for its cor- rection. ' The Commissioner seems to have overlooked the necessity for some ex -parte but quasi-judicial proceedings before instituting any proceedings for correction of the return; for his published regulations intimate that, on the mere request of a collector, a revenue agent will be specially designated to collect data in order to determine the amount of tax to be assessed.^ § 107. Further Proceedings — Requiring Addi- tional Information from the Company. — Whenever the Commissioner decides that the evidence pre- sented to him justifies the belief that the return is incorrect, the Act then provides that he "may require from the corporation, joint stock company or association, or insurance company, making such return, such further information with refer- ence to its capital, income, losses, and expenditures as he may deem expedient." ^ Probably " may " in this clause should be construed as "shall"; for this provision is the only one that implies any notice to the company of the proceeding for correction of the return, and yet unless such notice is required, the Act would seem to be ' As to possible remedies in case he should undertake to do so, see infra § 110, § 134, § 137. 2 U. S. Int. Rev. Regs., No. 31, Dec. 9th, 1909, Art. 7 (infra Appx. II). ^ Act, Par. 4, lines 11-17 (infra Appx. I). 126 FEDERAL CORPOBATION TAX LAW. unconstitutional.' It is true, however, that the only persons whose testimony the revenue agent deputed by the Commissioner is authorized to take are officers and employees of the company, and it may be argued that notice to them, which is necessary in order to compel their attendance as witnesses, is sufficient notice to the company to save the constitutionality of the Act. But this argument is more specious than sound, because the company is entitled to a hearing, so that notice to officers and employees as witnesses hardly satisfies the constitutional requirement of notice to the company as a party or litigant. It is to be observed that here for the first time the Act enables the Commissioner to require from the company such information as he may deem expedient. The facts which each company is obliged to disclose in the return are fixed by law, and the Commissioner has no power to add to them. But as soon as the Commissioner is satis- fied by evidence adduced before him that the return is incorrect, then he may require from the company such information as he may deem ex- pedient. He may, so to speak, cross-examine the company. § 108. Examination of Books and Taking of Testimony. — In addition to requiring further or more detailed information from the company ' Palmer v. McMahon, 133 U. S. 660, 669; 18 Sup. Ct. Rep. 324; Central of Ga. Ry. Co. v. Wright, 207 U. S. 127; Londoner v. Denver, 210 U. S. 373. THE HETUKN. 127 itself, the Commissioner of Internal Revenue, after being convinced by evidence that the return is incorrect, may specially designate one of the government employees known as revenue agents to examine any books and papers bearing upon the matters required by law to be stated in the return, and to take the testimony of oflB.cers or employees of the company with reference to those matters.' It is not expressly stated that the testimony shall be reduced to writing; but such is a fair inference, inasmuch as the Commissioner must act upon the information elicited.^ It is only officers and employees of the company whose testimony may be taken.' The Act confers no authority to take the testimony of any third person, not connected with the company, or even of a private shareholder who is not an ofiicer. Probably the words " officer or employee " would be construed as including former officers and former employees. It is not expressly stated that the books and papers which may be examined shall be confined to books and papers of the company.' Yet that is the fair inference,* and would seem to follow a fortiori from the clause which authorises the revenue agent to compel the attendance as 1 Act, Par. 4, lines 22-34 (infra Appx. I). '' Act, Par. 4, lines 40-43 (infra Appx. I). ' Act, Par. 4, lines 28-31 (infra Appx. I). * Act, Par. 4, lines 24-28 (infra Appx. I). 5 Cf. Re Chadwick, 1 Lowell, 439. 128 FEDEEAL COHPOEATION TAX LAW. witnesses of officers and employees but not, so far as is stated, of any other persons. The only books and papers which the revenue agent may examine are those " bearing upon matters required to be included in the return." He must show that a book or document contains relevant matter before he should be permitted to examine it. He is not authorised to go through the company's books and papers on a fishing expedition. § 109. Court Proceedings. — Although the rev- enue agent specially designated for the purpose is authorised to examine the company's books and to require the attendance of its officers or employees as witnesses, and may administer oaths to them, yet he cannot punish them if they refuse to attend as witnesses, or to permit him to examine the books.' In order to obviate this difficulty, the Act provides that "the Commissioner of Internal Revenue may also invoke the aid of any court of the United States having jurisdiction to require the attendance of such officers or employees and the production of such books and papers." ^ Another clause of the Act provides that, " Jurisdiction is hereby conferred upon the cir- cuit and district courts of the United States ' It has been thought that it would be unconstitutional to punish as for contempt a refusal to obey an order of an administrative officer: Re Kinney, 102 Fed. 468 (headnote inadequate). ^ Act, Par. 4, lines 35-39 (infra Appx. I). THE EETUEN. 129 for the district within which any person sum- moned under this section to appear to testify or to produce books as aforesaid, shall reside, to compel such attendance, production of books and testimony by appropriate process." • It is to be observed that the power vested in the courts is not a power to punish for disobedience of the order or summons of an administrative officer, as in some similar cases under other statutes; '' but is a power to issue the order or writ and to punish only for disobedience of the court's order. Any such court proceeding should doubtless be begun by petition in the name of the Commissioner of Internal Revenue, stating the facts and praying that appropriate process be issued. Thereupon, a summons should be issued for the officers and employees whom it is desired to examine, and some writ, or order of court, in the nature of a subpoena duces tecum, should be granted, directed to the officers who have custody and control of the books and documents which it is desired to ex- amine. The matter will be governed by the rules applicable to production of documents as evidence under writs in the nature of a subpoena duces tecum ' rather than by the very difiEerent rules * Act, Par. 8, Knes 27-33 (infra Appx. I). 'Rev. Stats. §3175 (2 U. S. Comp. Stats, p. 2068), Quaere, as to the constitutionality of such a statute: Re Kinney, 102 Fed. 468, 468-469. ' Cf. 2 Machen, Mod, Lm of Corps., § 1092, § 1093. 130 FEDERAL CORPORATION TAX LAW. applicable to the inspection of books by share- holders in the exercise of a quasi-proprietary right,' or the somewhat different rules applicable to the production of documents by way of dis- covery.^ Yet, this statutory proceeding does partake somewhat of the nature of a proceeding for discovery, because only officers and employees of the company, which is the substantial though not the nominal defendant, can be summoned as witnesses. The distinction between production of books as evidence under a subpoena duces tecum, production by way of discovery, and pro- duction for inspection by shareholders or other persons having a quasi-proprietary right, though often overlooked, is fundamentally important. §110. Defences. — The person summoned, either to testify or to produce books and papers, may, of course, be heard in court as to the pro- priety of the order, or issuance of the writ.' If it appears that he is not an oflScer or employee of the company, the court under this statute has no jurisdiction to compel him to testify or to pro- duce books or papers, and upon objection he must be excused from testifying or producing the docu- ments; or if it is not proved or admitted that the documents in question are relevant to the matters required to be stated in the return,* the court ' Of. 2 Machen, Mod. Law of Corps., § 1093. * Of. 2 Machen, Mod. Law of Corps., § 1091. *Cf. Re Kinney, 102 Fed. 468 (headnote inadequate). * Act, Par. 4, lines 24-26 (infra Appx. I), THE RETURN. 131 should refuse to compel their production. So, if the Commissioner of Internal Revenue has pro- ceeded without jurisdiction — for example, has ordered the institution of proceedings for correc- tion of the return on mere suspicion or prejudice, and without any evidence of its incorrectness — the court has no jurisdiction, and must quash all writs or orders for attendance of witnesses or pro- duction of books and papers. § 111. Costs. — The Act contains no provision requiring the company to pay the costs of pro- ceedings instituted in order to correct a return, or to supply the lack of a return. Perhaps the only way the Government can be recouped for these expenses is by collecting the fines which are imposed by the Act in such cases,' and by the addition which is required to be made to the amount of the assessment.'' It would seem unjust that costs should be imposed upon the officers or employees who may be summoned to testify. § 112. Decision of Commissioner on Evidence so Acquired. — " Upon the information so acquired the Commissioner of Internal Revenue may amend the return or make a return where none has been made." ' This action is to be taken by the Com- missioner on the " information so acquired " * ' See supra § 104, and infra § 115. ''See infra §121. ^ Act, Par. 4, lines 40-43 (infra Appx. I). * Compare the provision in the succeeding paragraph that the Commissioner shall " make a return upon Lnforma- 132 FEDERAL COEPORATION TAX LAW. — that is, acquired from the company, its books, its officers and its employees; and he has no right to consider evidence of any other person. Of course, the company has a right to be heard upon the matter and present its own side of the question. There is, however, no machinery pro- vided to enable the company to compel attendance of witnesses in its behalf. Indeed, there is no provision for notice to the company, unless, as sug- gested above, " may " be construed as " shall " ; ' but notice and opportunity to be heard in opposi- tion to any change in its return is the constitutional right of the corporation and must, if necessary, be read into the law in order to save its validity. § 113. Period of Limitations. — The correction of returns, or the supplying of a return in case of a neglect to make a return, must take place " within three years after said return is due." ^ It should be observed that the provision is, not that proceedings for the correction of a false return or for supplying a lacking return shall be instituted within three years, but that they shall be completed by the actual making of the corrected return, or substitute return, within the period of three years. It is, therefore, questionable whether this pro- vision should be construed as directory merely, or should operate as a statute of limitations so tion obtained as above provided for." Act, Par. 5, lines 38-39 (infra Appx. I). 'Supra §107, ^ Act, Par. 5, lines 36-37 (infra Appx. I). THE RETURN, l33 as to bar the institution of proceedings for this purpose after the lapse of the period, and to cause the abatement of any proceedings pending at the expiration of the three years.' Proceedings for correcting or supplying a return may be instituted, it seems, at any time within the three years, upon discovery of the incorrect- ness of a return or of the lack thereof, even after the assessment has been made on the original return, has become due, and has even actually been paid.^ § 114. Correcting Return by Action of Debt for Tax Due. — Under some statutes which like this Act of Congress fix the rate of tax and describe the subject, it has been held that even though no return or assessment has been made, an action of debt may be maintained by the United States to recover the proper amount of tax, which may be ascertained by evidence.' Under such statutes it * In any event, the limitation would, perhaps, not bar an action of debt to recover the amount due in excess of the assessment: United States v. Little Miami etc. R. R. Co., 1 Fed. 700, reversed as to other points, svb nom. Little Miami etc. R. R. Co. t>. United States, 108 U. S. 277. See infra § 114. ^ This is the necessary force of the words " at any time " in Act, Par. 5, line 36 (infra Appx. I). But an assessment acquiesced in by the government may be presumed to have been correct: United States v. Philadelphia etc. R. R. Co., 123 U. S. 113; 8 Sup. Ct. Rep. 77. ' United States v. Little Miami etc. R. R. Co., 1 Fed. 700, apparently affirmed as to this point, Little Miami etc. R. R. Co. V. United States, 108 U. S. 277, 280; Dollar Sav. 134 FEDERAL COEPOEATION TAX LAW, has also been held that an erroneous return and assessment thereof, followed by payment of the amount of the assessment, are no bar to an action of debt by the government to recover the excess claimed to have been due over and above ■ the return and assessment.* Perhaps, these cases would be applied to the present law. On the other hand, although income is in most cases repre- sented by cash, yet there may be cases where it comes in the shape of property; and in such cases, there must be a valuation before tax is imposed. It is, therefore, not clear whether the present tax is to be regarded as strictly an ad valorem tax, or as partaking more of the nature of a specific duty. § 115. Penalties for Erroneous Returns. — Re- turns which are made for the fraudulent purpose of cheating the government constitute, of course, a special class of incorrect returns. Such fraudulent returns may be corrected in the same way as other erroneous returns; the fact that a return Bank v. United States, 19 Wall. 227, 240; King v. United States, 99 U. S. 229; Westhus v. Union Trust Co., 164 Fed. 795; 90 C. C. A. 441 (contra to United States v. Marion . Trust Co., libi infra, and reviewing previous cases). But cf. United States v. Marion Trust Co., 143 Fed. 301 (holding that an ad valorem as distinguished from a specific tax is not " imposed " until an assessment), affirmed by a divided court, 205 U. S. 539; Farrell v. United States, 167 Fed. 639. 1 United States v. Little Miami etc. R. R. Co., 1 Fed. 700, reversed on another point, Little Miami etc. R. R. Co. V. United States, 108 U. S. 277. THE EEHtJfilf. 135 is fraudulent does not make it any the less incor- rect. But in addition to subjecting the company to an inquisitorial examination of its books and of its officers, for the purpose of correcting errors, a return which is fraudulent as well as false subjects the company to various penalties. In the first place, as more fully explained below, one hundred per cent is to be added to the amount of the tax. ' This penalty is not incurred in the case of an honest mistake in a return. Secondly, in any case of a return which is either false in fact or fraudulent in purpose, the company is subjected to a fine of not less than one thousand nor more than ten thousand dollars.^ It would seem that an honestly mistaken return subjects the company to this "penalty, as well as a return which is both false and fraudulent.' The language of the statute is that any company shall incur the penalty which shall render a " false or fraudulent return." But in any case of a bona fide mistake the government is unUkely to attempt ta procure the infliction of the fine. If, however, criminal proceedings are in- stituted for that purpose, the company's bona fides is no bar to a conviction, though of course it may be considered by the court in imposing sen- tence. Thirdly, any person authorised by law to make or verify any return, who makes any false or fraudulent statement therein, " vAth ' Infra § 121. ^ Act, Par. 8, lines 5-6 (infra Appx. I). 3 Cf. infra § 121. 136 FEDERAL CORPORATION TAX LAW. - intent to defeat or evade the assessment," is declared guilty of a misdemeanor, punishable by a fine of not more than one thousand dollars or imprisonment for not more than a year, or both, in the discretion of the court.* § 116. Returns as Public Records. — After the assessment shall have been made, the returns, together with apy corrections thereof made in the manner above described, are to be filed in the oflBce of the Commissioner of Internal Revenue as public records, and shall be open to inspection as such.^ § 117. Protection against Disclosure of Secrets. — Burdensome and unnecessary as the provision throwing open to public inspection the returns and corrections thereof may be thought in some quarters, there would be much more ground for complaint if all the evidence obtained in the course of a proceeding for supplying or correcting a return were given to the public. The Act provides, however, under penalty of fine and imprisonment that no " collector, deputy collector, agent, clerk or other officer or employee of the United States " shall divulge, in any manner not provided by law, any information obtained by him in the discharge of official duty, or any document received, evi- ' Act, Par. 8, lines 11-20 (infra Appx. I). ^ Act, Par. 6 (infra Appx. I). This means that any citizen shall not merely have the right to examine them but also to make copies or extracts: Marsh v. Sanders, 110 La. 726; 34 So. 752. THE EETURK. 137 dence taken or report made under this section " except upon the special direction of the Presi- dent." * The general words " other officer or employee " ^ would be restrained by the ejusdem generis rule of construction to officers and em- ployees of the same class as those specially enumer- ated, and therefore would not include the higher officials of the Government such as the Secretary of the Treasury and the Commissioner of Internal Revenue. The authority apparently vested in the President to authorise a disclosure of the innermost secrets of such companies as he sees fit is, like much else in modern legislation, a vio- lation of the principle that ours should be a " government of laws and not of men." § 118. Returns not Affected by Other Revenue Statutes. — The general laws applicable to the " collection, remission and refund " of internal revenue taxes, are, so far as applicable, extended to this new tax; ' but this provision applies only to the collection of the tax after it has been as- sessed.* It can have no reference to the making or correcting of the return, which is a matter that must precede the assessment. Indeed, it would seem by implication to exclude all internal revenue laws except those relating to the collection, remis- * Act, Par. 7 (infra Appx. I). ' Act, Par. 7, lines 3-4 (infra Appx. I). ' Act, Par. 8, lines 21-26 (infra Appx. I). See also infra, § 127, § 128. * Cf. infra § 129. 138 FEDERAL OOEPOEATION TAX LAW. sion and refund of taxes — even those which, if nothing had been said in this statute, would propria vigore have extended to the tax thereby imposed. For the law governing the return, we must look within the four corners of this Act. CHAPTER VI THE ASSESSMENT AND COLLECTION § 119-122 The Assessment. § 119 Assessment to be made on the retvims. § 120 Nature of Commissioner's duties. § 121 Amount of assessment. § 122 Time of assessment. § 123 Notice and payment of assessment. § 124 Payment under protest. § 125-126 C!oUection. § 125 In general — distraint, etc. § 126 By action of debt. § 127-131 Application of other internal revenue laws. § 127 In general. § 128 Powers of Secretary of Treasury. § 129 Powers of Commissioner of Internal Revenue. § 130 Powers and duty of collectors. § 131 Miscellaneous other provisions of internal-revenue laws. §119. The Assessment — To be made on the Returns. — After the return is made, the next step is the levying of the assessment. This must be done by the Commissioner of Internal Revenue, on the returns/ either as originally made by the * Act, Par. 5, lines 1-3 (infra Appx. I). See also supra §103, § 106, § 112. 140 FEDERAL CORPORATION TAX LAW. companies, or as corrected by the Commissioner. It will be remembered that, according to the scheme of the Act, returns shall be made by the several companies, and shall import, for purposes of the tax, absolute verity, unless corrected in the mode provided in the statute. If no return is made, the Commissioner is to prepare a return, upon evidence obtained in the manner prescribed by Congress; and similarly if upon an ex parte examination of evidence adduced before him by any person, the Commissioner is satisfied that a return as made is incorrect, he is to institute proceedings to procure additional evidence from the company, its books and its officers, and upon the evidence so acquired, he is to make a corrected return. ' § 120. Nature of Commissioner's Duties. — In supplying a return where none has been made, or in correcting an erroneous return, the Commis- sioner of Internal Revenue is exercising a dis- cretionary and quasi-judicial function. But in making the assessment' on the returns, "lie is acting in a capacity which is almost, if not quite, ministerial. To make the assessment from the data required to be given in the returns, is a mere matter of arithmetic. This is true whether the assessment is levied upon the returns as made by the companies, or upon returns supplied or cor- rected by the Commissioner. His quasi-judicial duties end as soon as the corrected return is com- ' Supra §112. THE ASSESSMENT AND COLLECTION. 141 pleted and filed. The assessment of the tax thereon is as purely a matter of mathematics as the assessment of a tax on returns made by the companies. § 121. Amount of Assessment. — The amount of the assessment in ordinary cases, is to be one per cent of the net income as ascertained from the returns. ' In case a corporation which is subject to the tax has failed or neglected to make a return, or to verify the same by oath of the officers mentioned in the statute, so that the Commissioner of In- ternal Revenue is obliged to prepare a return on its behalf, then fifty per cent is to be added to the tax.^ It would seem that this addition to the tax must be made where the return is delayed beyond the time limited for making it, although it be made before the Commissioner supplies the lack of it by preparing a return himself; for the Act goes on to provide in the very next sentence that in case of neglect to make a return caused by the illness or absence of an officer, or other just cause, the collector may allow further time, not exceeding thirty days, for making the return, and delivering it to the collector.' In any case of a return " made with false or fraudulent intent," one hundred per cent is to be 1 Act, Par. 1, lines 17-20. ' Act, Par. 5, lines 6-8 (infra Appx. I). ' Act, Par. 5,. lines 9-16 (infra Appx. I). 142 FEDERAL COEPOEATION TAX LAW. added to the amount of the assessment,' thus raising it from one to two per cent on the net income in excess of five thousand dollars. In case of an erroneous return made under a bona fide mistake, there is no provision for in- creasing the assessment beyond the one per cent of the net income. The Act authorizes assessment to be increased only in cases of a failure to make any return in the form prescribed, and in cases of " returns made with false or fraudulent intent." It is necessary to scrutinise the phraseology of the statute rather closely; for the use of similar wording is rather confusing. Thus " false or fraudulent returns " in the middle of the Fifth Paragraph ' apparently include returns which contain honest errors.' The same is perhaps true of " false or fraudulent return " in the Eighth Paragraph.* On the other hand, the words, " false or fraudulent return, or statement, with ' Act, Par. 5, lines 3-8 (infra Appx. I). ' Act, Par. 5, line 34 (infra, Appx. I). ' If this were not so, there would be no provision allow- ing an honestly erroneous return to be corrected after June 1st. The word false is sometimes construed as equivalent to false and fraudulent, and is sometimes con- strued to include a statement which is merely mistaken. See 3 Words and Phrases Judicially Defined 2654-2655, tit. " False "; McGowan v. Larsen, 66 Fed. 910, 914 (instruction to jury that of two inconsistent defences one must be " false " held not equivalent to charging that defendant must have been guilty of a wilfully false statement, as " false " is equivalent in the charge to " erroneous ") ; 14 C. C. A. 178. * Act, Par. 8, line 6 (infra Appx. I). THE ASSESSMENT AND COLLECTION. 143 intent to defeat or evade the assessment," ' appear to be synonymous with the words, " re- turn made with false or fraudulent intent," ' and to exclude all returns which, though erroneous, are bona fide. § 122. Time of Assessment. — Doubtless, it is the Commissioner's duty to proceed to levy the assessment promptly on the receipt of returns from a collector. At all events, the Act provides that the assessment shall be made before June 1st.* In the case of a return made or corrected by the Com- missioner of Internal Revenue after June 1st, it is evidently expected that the assessment thereon shall be made immediately. Failure to make an assessment within the time limited is not a bar to an action to recover the amount of tax due without an assessment,* if such an action is under any circumstances maintainable.' § 123. Notice and Payment of Assessment. — The Act provides that on or before the first day of June, in each year, the several companies shall be notifiied of the amount for which they are re- spectively liable. ' This statute does not expressly provide by whom this notice is to be given; but » Act, Par. 8, linies 13-14 (infra Appx. I). ' Act, Par. 5, line 4 (infra Appx. I). * Act, Par. 5, lines 25-30 (infra Appx. I). * United States v. Little Miami etc., R. R. Co., 1 Fed. 700, reversed as to other points, svb nom., Little Miami etc. R. Co. V. United States, 108 U. S. 277. * As to which see supra § 114 and infra § 126. ° Act, Par. 5, lines 26-30 (infra Appx. I). 144 FEDERAL COEPOEATION TAX LAW. the duty would seem to devolve upon the col- lector.' Nor is the form of notice prescribed. Oral notice would therefore be sufficient. The assessment is payable on or before June 30th/ and to any sum or sums which may remain unpaid after that date and for ten days after notice and demand, there shall be added a penalty of five per cent of the amount of tax unpaid, and also interest at the rate of one per cent a month, or twelve per cent a year, from the date when the same became due, until it shall be paid.' The receipt of notice is a condition to the exaction of this penalty and interest; and if the company pays within ten days after receipt of notice, it may avoid all interest and penalty. But the interest, whenever collectible, is declared to run, not from the date of the receipt of notice, but from the time the tax became " due." If this should be construed to refer to the thirtieth of June, the result would be that where notice is not received until after June 30th, prompt payment after notice would avoid all interest, but that if not paid promptly, interest from June 30th would be demandable. In cases where, by reason of failure to make a return, or of an erroneous return, no assessment is made until after June 30th, tax shall be » Rev. Stats. § 3184 (2 U. S. Comp. Stats, p. 2072). And see infra § 130. ' Act, Par. 5, lines 30-32 (infra Appx. I). ' Act, Par, 5, lines 44-51 (infra Appx. I). THE ASSESSMENT AND COLLECTION. 145 payable immediately after receipt of notice.' Unless paid within ten days after notice, the penalty of five per cent is incurred, and interest begins to run, either from the date of receipt of notice, or from the expiration of the ten days thereafter.^ Payment is to be made to the collector, who is authorized to receipt for the same.' § 124. Payment under Protest. — In case the assessment is for any reason disputed, the com- pany should pay the assessment under protest.* § 125. CoUection — In General — Distraint, etc. — No special machinery is provided in the Act for the collection of this tax, but the matter of collection is expressly left to be governed by the laws for the collection of other internal revenue taxes, so far as they may be applicable;* The assessment of this tax is governed exclusively by the Act of 1909 by which it is imposed, but the collection of the assessment after it becomes due and payable under the Act of 1909, is governed by the same laws as other internal revenue taxes. The general laws provide that taxes unpaid after demand shall be a lien on all property and rights belonging to the delinquent tax payer from the 'Act, Par. 5, lines 39-44 (infra Appx. I). * Act, Par. 5, lines 44-51 (infra Appx. I). » Rev. Stats., § 3183 (2 U. S. Comp. Stats, p. 2072), made applicable by the Act of 1909, Par. 8, lines 21-26. * See infra § 137. * Act, Par. 8, lines 21-26 (infra Appx. I). 146 FEDERAL COEPOEATION TAX LAW. time the assessment list was received by the collector.* The general statutes contain full pro- visions for the distraint and sale of personal prop- erty,' and also for the seizure and sale of real estate ' either by distraint,* or by proceedings in chancery.^ If the delinquent has no sufficient property in the district of his residence, the assess- ment may be certified to the collector of any other district, who is authorized to proceed in the matter." All such matters involve no questions peculiar to the new tax, and therefore detailed discussion would be inappropriate here. The fees and charges in cases of distraint and other seizures ' Act, March 1, 1879, o. 125, § 3 (2 U. S. Comp. Stats. p. 2073). ' Rev. Stats., § 3187-§ 3195 (2 U. S. Comp. Stats., pp. 2073-2076); Rev. Stats., § 3205 (2 U. S. Comp. Stats., p. 2080). ' The lien of the United States for taxes in arrears is unaffected by state recording acts: United States v. Snyder, 149 U. S. 210. *Rev. Stats., §3196-§3205 (2 U. S. Comp. Stats., pp. 2077-2080). A sale under such a distraint would pass only the interest of the delinquent company, and would not affect the rights of a holder of a paramount title or of a lienor. See Mansfield v. Excelsior Ref. Co., 135 U. S. 326; Sheridan v. Allen, 153 Fed. 568; 82 C. C. A. 522. « Rev. Stats., § 3207 (2 U. S. Comp. Stats., p. 2081). Cf. Blacklock V. United States, 208 U. S. 75 (holding that the remedy in equity is cumulative, and does not oust the right to proceed summarily by distraint). "Rev. Stats., § 3209 (2 U. S. Comp. Stats., p. 2082). THB ASSESSMENT AND. COLLECTION. 147 are to be fixed by the Commissioner of Internal Revenue. ' § 126. By Action of Debt. — An action of debt will of course lie to recover the amount of an as- sessment, if the government prefers that remedy to the more summary proceedings by way of distraint.^ Perhaps an action of debt may be maintained to recover the amount which ought to have been returned and assessed, when no assessment, or too small a one, has been made.' In such an action the defendant is entitled to a credit for amounts previously overpaid.* The burden of proof is on the government to show the existence of profits, and that they were not off- set by losses.* It seems that although there be no statute of limitations applicable to such an action, yet " in a case where commencement of suit by the United States is delayed many years, and the delay has prejudiced a defendant by the disappearance or loss of evidence essential to his defense, courts ought to apply a rule that will protect individual rights by giving repose ' Rev. Stats., § 3206 (2 IT. S. Comp. Stats., p. 2080). ' Dollar Sav. Bank v. United States, 19 Wall. 227. Such an action cannot be commenced without the approval of the Commissioner of Internal Revenue. See Rev. Stats., § 3214 (2 U. S. Comp. Stats., p. 2084). 'See supra § 114. * Missouri River etc. Co. v. United States, 19 Fed. 66. * Little Miami etc. R. R. Co. v. United States, 108 U. S. 277; 2 Sup. Ct. Rep. 627. 148 FEDERAL CORPOEATION TAX LAW. and seburity to the citizen against stale claims." ' § 127. Application of other Internal Revenue Laws. — Although this Act of Congress contains within itself a fairly complete code for the as- sessment of the tax, providing a special ma- chinery for ascertaining the amount of taxable income, yet after the assessment is once made, or after any errors therein have been corrected in the mode provided in the Act, the statute makes no special provisions for any further step in respect to the tax, but, as already stated, remits the whole matter of its collection to the laws re- lating to the collection of other internal revenue taxes, " so far as applicable to and not inconsistent with the provisions " of the Act of 1909.' Now, in investigating which of the numerous provisions of the Revised Statutes, and the amendments thereto, relating to internal revenue, are thus extended over the so-called excise tax imposed by the Act of 1909, it is necessary to scrutinise closely the words of that Act, which deal with this matter. Now, in the first place, it is only such of the internal revenue statutes as are " applicable to . . . the provisions of this " ^ Act which are " extended and made applicable to the tax im- ' United States v. Marquette etc. R. Co., 17 Fed. 719, 722. * Act, Par. 8, lines 22-24. ' Act, Par. 8, lines 22-24 (infra Appx. I). THE ASSESSMENT AND COLLECTION. 149 posed by this " ' Act of 1909. To be sure, there appears to be some absurdity in providing that laws which are already " applicable " to this new tax should be " made applicable " thereto. Such, however, is the direct language of Congress. The solecism is more apparent than real; for the intention of the legislature is reasonably clear, — namely, to guard against excluding by implica- tion certain laws which by their terms are broad enough to embrace this new tax. If a law relating to collection and refund of internal revenue taxes is by its terms " applicable " to this new tax, it is " extended and made applicable " thereto, and by those words, Congress repels the possible inference that the code contained in this new Act for the collection of the tax thereby imposed was intended to be exhaustive. If, therefore, a law is " applicable " by its terms to certain specific taxes, — for instance, a tax on tobacco, whiskey, or oleomargarine, — it is not " extended " to this new tax. In the second place, it is only such internal- revenue laws as by their terms are " relating to the collection, remission, and refund of internal revenue taxes," '' that are by this Act of 1909 made applicable to the new tax thereby imposed. Laws which relate to internal-revenue taxes, but not to the collection, remission and refund thereof, are not made applicable to this new tax, even ' Act, Par. 8, lines 24-25 (infra Appx. I). * Act, Par. 8, lines 21-22 (infra Appx. I). 150 FEDERAL COEPOEATION TAX LAW. though their terms are sufficiently comprehensive to embrace it. On the contrary, all such laws are by implication excluded. Expressio unius ex- clusio alterius. On the same principle, a clause in the Act of Congress imposing the tax on oleo- margarine, which provided that certain enumerated sections of the Revised Statutes relative to internal- revenue taxes should be applied to the oleomar- garine tax, was held to exclude by implication another section, although the terms of the latter section were in themselves sufficiently broad to have covered the oleomargarine tax, if nothing had been said in the oleomargarine law to exclude by infer- ence its application.' Bearing these principles in mind, let us briefly survey the internal-revenue statutes of the United States for the purpose of ascertaining which of them relate to the present tax. § 128^ Powers of Secretary of Treasury. — The Secretary of the Treasury is authorized to " super- intend the collection of the revenue," and to " prescribe forms of entries, oaths, bonds, and other papers, and rules and regulations not in- consistent with law, to be used under and in the execution of the internal-revenue laws." ^ To ' Schafer v. Craft, 144 Fed. 907; In re Kinney, 102 Fed. 468; In re Kearns, 64 Fed. 481; Tucker v. Gier, 160 Fed. 611; 87 C. C. A. 513. ''Rev. Stats., §251 (1 U. S. Comp. Stats., p. 138). A still more general provision authorises any head of a depart- ment " to prescribe regulations, not inconsistent with law, for the government of his Department, the conduct of its officers THE ASSESSMENT AND COLLECTION. 151 some extent this authority doubtless extends to the new tax. Neither " entries " nor " bonds " are provided for in connection with the present tax, and to that extent this section is inapplicable. The only " rules and regulations " which the Secretary can make with respect to the new tax relate to its " collection, remission and refund"; he has no p'ower to make regulations respecting its assessment. The only rules and regulations upon that subject are prescribed by Congress in the Act. The section of the Revised Statutes above cited goes on to provide that the Secretary of the Treasury " shall give such directions to collectors and prescribe such rules and forms to be observed by them as may be necessary for the proper execution of the law." This provision would seem to be applicable to the new tax. But it must be borne in mind, and will be more fully explained in a moment, that the duties of col- lectors in connection with this new tax are not numerous or important until an assessment is placed in their hands for collection by distraint. They are not inquisitorial officers, as they are in and clerks, the distribution and performance of its business, and the custody, use and preservation of the records, papers and property appertaining to it." Rev. Stats., § 161 (1 U. S. Comp. Stats., p. 80), held in Boske v. Commingore, 177 U. S. 459, to authorise the Secretary of the Treasury to forbid collectors to produce papers in their custody in state courts under a subpcena duces tecum. As to the extent of the power to prescribe treasury regulations, see supra § 90, §101. 152 FEDERAL CORPORATION TAX LAW. connection with some other internal-revenue taxes, such as the tax on distillers. § 129. Powers of Commissioner of Internal Revenue. — " The Commissioner of Internal Rev- enue, under the direction of the Secretary of the Treasury, shall have general superintendence of the assessment and collection of all duties and taxes now or hereafter imposed by any law pro- viding internal revenue." ' This provision would seem clearly to be applicable to the new tax so far as it relates to the " collection " of internal- revenue taxes; but the distinction, which runs all through the internal-revenue laws,^ between the " assessment " ' and the " collection " thereof, must always be remembered. The Act of 1909 adopts only so much of this section as relates to the " collection " as distinguished from the " assess- ment " of the taxes.* This Section, § 321, of the Revised Statutes goes on to provide that the Commissioner of Internal Revenue, under the direction of the Secretary of the Treasury, " shall prepare and distribute all the instructions, regulations, directions, forms, blanks, stamps, and other matters, pertaining to the assessment and collection of internal rev- ' Rev. Stats., § 321. ^ For example, note the heading of Revised Statutes, Title 35, Chapter 2, " Of Assessments and Collections." ' As to the meaning of the word " assessment," see Jack- son Lumber Co. v. McCrimmon, 164 Fed. 759, 763-764. * Cf. aupra, § 118, § 127, and infra § 130. THE ASSESSMENT AND COLLECTION. 153 enue." This provision also is applicable to the " collection " of the new tax; but the same dis- tinction between assessment and collection is again to be noted. The only power of the Com- missioner of Internal Revenue to prescribe forms in connection with the assessment of this tax is that expressly vested in him by the Act of 1909 to prescribe the form of return.' Section 3182,' as to the making of assessments by the Commissioner of Internal Revenue and as to the correction of imperfect lists, is inconsistent with the Act of 1909, which contains full pro- visions upon that subject.* Moreover, it relates to the " assessment," rather than the " collec- tion " of taxes. § 130. Powers and Duty of Collectors. — As already stated, the duties of collectors,' in con- nection with the present tax, are few and simple, until an assessment has been made and is placed in their hands for collection. They are to receive the returns made by the corporations, and forth- with transmit them to the Commissioner of In- ternal Revenue; ° — that is all. By general provision of law, each collector within his dis- trict, is to " see that all laws and regulations ' See supra § 90. ' Rev. Stats., § 3182 (2 U. S. Comp. Stats., p. 2071). 'See supra §106-§113. * As to delegation of duties to deputy collectors, see Act, March 1st, 1879, c. 125, § 2 (2 U. S. Comp. Stats., p. 2043). ' Supra § 89, § 102. 154 FEDEEAL COEPOKATIOST TAX LAW. relating to the collection of internal taxes are faithfully executed and complied with, and shall aid in the prevention, detection and punishment of any frauds in relation thereto.'" This provi- sion is undoubtedly to some extent applicable to the present tax; but as will appear below, its application is limited by the lack of ability of collectors under the law to acquire information as to frauds upon this new law. Similar remarks are applicable to another general provision of law directing each collector to catise his deputies " to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal revenue tax." ^ Collectors are in some circumstances authorized to administer oaths, and to take evidence touch- ing any part of the administration of the internal- revenue laws with which they are charged or when such oaths and evidence are authorized by law or regulation to be taken.' This section may authorize collectors to administer the oath ' Rev. Stats., § 3163, as amended by Act, March 1st, 1879, c. 125, § 2 (2 U. S. Comp. Stats., p. 3163). See also Rev. Stats., § 3169 (2 U. S. Comp. Stats., p. 2059) as to, inter alia, duty to report violations of law to superior oflBcer; Rev. Stats., § 3164 (2 U. S. Comp. Stats., p. 2057), as to duty to report violations of law to district attorney. = Act, Aug. 27, 1894, c. 349 § 34 (2 U. S. Comp. Stats., p. 2065). The word " person " in this statute includes corpo- rations. See Rev. Stats., § 1 (1 U. S. Comp. Stats., p. 3). 'Rev. Stats., § 3165, as amended in 1879 (2 U. S. Comp. Stats., p. 2057). THE ASSESSMENT AND COLLECTION. 155 to ofl&cers of corporations swearing to their re- turns; but would seem to have no other application to proceedings under this Act of 1909. The general statute prohibiting collectors and other officers or employees from divulging in any manner not authorized by law, information ac- quired by them in the course of their official duties, would seem to be largely, if not altogether, super- seded, as to this tax, by the special provisions on that subject, contained in the Act of 1909.' Section 3173 of the Revised Statutes, which was amended by Act of 1894,^ relates to returns to the collectors by persons liable to tax; but this section is manifestly inconsistent with the pro- visions of the Act of 1909, and is for other reasons inapplicable to the tax thereby imposed.' This is a quite important point, because this section authorizes the collector to summon the person liable to the tax, and to compel him to produce his books for inspection. The two succeeding sections of the Revised Statutes,* relate respect- ' As to which, see supra § 116, § 117. 2 Act 1894, c. 349, § 34 (2 U. S. Comp. Stats., pp. 2065- 2067) . This section was among those held void in Pollock v. Farmers' L. & T. Co., 158 U. S. 601, 637; 15 Sup. Ct. Rep. 912; 157 U. S. 429; 15 Sup. Ct. Rep. 673. ' It should be noted that the section prior to the void amendment of 1894 related merely to taxes on " articles or objects charged with a special duty or tax," and on " goods, wares, and merchandise," or tangible property, and not to taxes on business or income, such as this new tax of 1909. * Rev. Stats. § 3174, § 3175 (2 U. S. Comp. Stats., pp. 2067, 2068). 156 FEDERAL CORPORATION TAX LAW. ively to the form and service of such a summons, and to the punishment for disobedience thereof. As the provision for the summons itself has no application to this corporation tax, those two subsidiary sections are likewise irrelevant. The following section of the Revised Statutes,* attempted to be amended in 1894,' authorizes collectors to make returns where no return has been made as required by law, or where a fraudu- lent return has been made. This section is in- applicable (1) because it relates to the " assess- ment " rather than to the " collection " of the tax,' (2) because the Act of 1909 contains different and inconsistent provisions for supplying a return where none has been made, and for correcting an erroneous return,* and (3) because this section, prior to the void amendment of 1894, merely authorized collectors to make returns of " ob- jects liable to tax," whereas the tax of 1909 is not levied upon objects, but upon income, fran- chise, or business. The next section of the Revised Statutes au- thorizes collectors to enter in the day time any building or place where " articles or objects sub- ject to tax " are kept, for the purpose of exam- ' Rev. Stats., § 3176 (2 U. S. Comp. Stats., p. 2069). ' Act, Aug. 27, 1894, c. 349, § 34, held void in Pollock v. Farmers' L. & T. Co., 158 U. S. 601, 637; 15 Sup. Ct. Rep. 912; 157 U. S. 429; 15 Sup. Ct. Rep. 673. 'See supra § 118, §127, § 129. * See supra § 104, § 106-§ 113. THE ASSESSMENT AND COLLECTION. 157 ining them; ' but as there are no " articles or objects liable to tax " under the Act of 1909, this provision has no application to the tax imposed thereby.^ Section 3179,' imposing penalties for false return, or for refusal to produce books when or- dered, is inconsistent with the provisions of the Act of 1909, and is for other reasons inapplicable. Section 3184 * relates to notice of assessment; and is so far applicable to this tax as to impose upon the several collectors the duty of serving notice of assessment and demand for payment under the Act of 1909. § 131. Miscellaneous Other Provisions of In- ternal Revenue Laws. — The other provisions of the internal-revenue laws, except those which are specially considered elsewhere in this treatise, are either manifestly inapplicable to this tax, or else they relate to collection, by distraint or otherwise, after an assessment has been made, in which case they are certainly applicable. 'Rev. Stats., §3177 (2 U. S. Comp. Stats., pp. 2069- 2070). A query has been thrown out whether this section applies to a place where paid unstamped bank cheques are kept: United States v. Mann, 95 U. S. 580, 584. 'Rev. Stats., §3180 (2 U. S. Comp. Stats., p. 2071), as to inspection of taxable objects owned by non-residents, is for similar reasons inappUcable. ' Rev. Stats., § 3179 (2 U. S. Comp. Stats., p. 2070). * Rev. Stats., § 3184 (2 U. S. Comp. Stats., p. 2072). CHAPTER VII REMEDIES § 132 No direct appeal to court provided. § 133 Injunction. § 134 Mandamus, etc. § 135 Passive resistance. § 136 Actionof trespass, trover, etc., for goods distrained. § 137 Action to recover back taxes paid under protest. ^138 Remedy by application to Commissioner of Internal Revenue. § 132. — No Direct Appeal to Court Provided. — In the assessment of a tax, particularly a tax which involves so many difficult questions of accounting, and of the law of capital and income, errors are very likely to be committed by the ad- ministrative officials charged with the assessment and collection of the tax. Nevertheless, this law gives no appeal to court for a direct review of the intricate questions of law and fact which will constantly arise. The absence of some provision for a review by an impartial tribunal is certainly a blemish in the law. The Commissioner of Internal Revenue, who is charged by this Act with quasi-judicial functions, is an officer or agent of the government, and as such his duty EEMEDIES. 159 is to be zealous in augmenting the revenue of the government. He cannot be at once a zealous agent of the United States and an -impartial judge between the government and the tax- payer. It is true that the fact that the returns made by the several corporations are to be taken as prima facie correct and that all assessments are to be made " thereon " unless affirmative evidence of their falsity is produced before the Commis- sioner ' is some protection to the companies which are subject to the tax; but whenever the Com- missioner exercises quasi-judicial functions in re- spect to intricate questions of law, as he does whenever it becomes his duty to prepare a cor- rected return, there ought to be some simple, cheap and speedy remedy by a judicial review of his rulings. This statute remits the whole matter to the general provisions of the statutes of the United States for the collection, remission and refund of internal-revenue taxes. ^ To the general remedies against illegal taxes^, as existing by the common law of the several states and as regulated or enlarged by the general internal-revenue statutes of the United States, we must therefore look. § 133. Injunction. — Although courts of equity, in order to avoid irreparable injury and multiplicity of suits, would sometimes apart from statute 1 See supra § 103, § 106, § 119, ^ 120. ' Act, Par. 8, lines 21-26 (infra Appx. I). 160 FEDERAL CORPORATION TAX LAW. enjoin the collection of an illegal tax, yet as to federal taxes this remedy is specifically prohibited by Act of Congress, which provides that " no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." ' This statute, however, does not apply to a suit by a shareholder in a corporation to enjoin the company and its directors from voluntarily paying an unconstitutional tax. Such a suit can therefore be maintained on the ground that it is ultra vires to apply money belonging to the company in payment of an unconstitutional tax.' It does not appear, however, that this principle has ever been extended to an injunction against paying a tax which is neither unconstitu- tional or illegal as a whole but is merely erro- neous as to amount. This remedy by a share- holder's bill may, therefore, be invoked in order to test the constitutionality of the present law; but it is more doubtful whether it would afford relief, if the Act is not wholly unconstitutional, in order to restrain the directors from paying a tax which is assessed on erroneous principles — for example, where some items are wrongly in- • Rev. Stats., § 3224 (2 U. S. Comp. Stats., p. 2088) en- forced in Snyder v. Marks, 109 U.. S. 189; 3 Sup. Ct. Rep. 157; MUes v. Johnson, 59 Fed. 38; Delaware R. Co. v. Pretty- man, 7 Fed. Cas. 408. ' Pollock V. Farmers' L. & T. Co., 157 U. S. 429, 453-454; 15 Sup. Ct. Rep. 673; 158 U. S. 601; 15 Sup. Ct. Rep. 912. As to such suits, see also 2 Machen, Mod. Law of Corps., § 1153, and Memphis City v. Dean, 8 Wall. 64, 73. REMEDIES. , 161 eluded in the gross revenue or where the Commis- sioner of Internal Revenue has not given the company the benefit of the deductions to which it is entitled. If it should be thought ultra vires for directors of a corporation to divulge any of the secrets of the company except under com- pulsion of law, a shareholder might enjoin them from setting out in their return any particulars in regard to its business not required by the Act' to be stated therein; but except under very peculiar charters the directors have ample power at their discretion to disclose any facts about the company to the public or any person they please, even a tax-collector, and therefore they could not be enjoined from doing so. § 134. Mandamus, etc. — No state court has power to issue a writ of mandamus to a federal officer in any case.' Moreover, the United States Courts have no power to issue that writ except as incidental to their appellate jurisdiction.^ But the courts of the District of Columbia, where the office of the Commissioner of Internal Revenue is situated, may in a proper case issue a mandamus against him as against any head of a bureau,^ 1 McOung V. Silliman, 6 Wheat. 598. ^ Mclntire v. Wood, 7 Cranch 504; Marbury v. Madison, 1 Cranch 137; McCaung v. Silliman, 2 Wheat. 369; Coiinty of Greene v. Daniel, 102 U. S. 187, 195; Davenport v. County of Dodge, 105 U. S. 237. ' United States v. Black, 128 U. S. 40; 9 Sup. Ct. Rep. 12; Butterworthi). Hoe, 112U.S. 50; 5 Sup. Ct. Rep. 25. 162 FEDERAL COHPOEATION TAX LAW. or even against a cabinet officer.' If, therefore, the Commissioner should omit to perform any ministerial duties imposed upon him by this Act, he' might be coerced by mandamus.^ For instance, if he should decline to make the assess- ment on the return as filed, without any evidence produced before him of its incorrectness, — for example, merely because the corporation had refused to state in the return particulars demanded by the Commissioner in addition to those re- quired by Congress to be set out therein — it is submitted that mandamus would lie to compel him to perform his ministerial duty of calculating the amount of the assessment on the data furnished in the return. On the other hand, the United States courts will not control a federal executive officer in the exercise of quasi-judicial functions,' even though the questions before him be questions of pure law.* 'United States v. Schurz, 102 U. S. 378; Marbury v. Madison, 1 Cranch 137; Kendall v. United States, 12 Pet. 524 (to be compared with Kendall v. Stokes, 3 How. 87, an unsuccessful action for damages against the cabinet officer). ^ As to the remedy by certiorari, cf. Alexandria Canal Co. V. The District, 5 Mackey (D. C.) 376. -^Carrick v. Lamar, 116 U. S. 423; 6 Sup. Ct. Rep. 424; United States v. Windom, 137 U. S. 636; 11 Sup. Ct. Rep. 197; United States v. Blaine, 139 U. S. 306; 11 Sup. Ct. Rep. 607. * Gaines v. Thompson, 7 Wall. 347; United States v. Black, 128 U. S. 40; 9 Sup. Ct. Rep. 12; Commissioner of Patents u. Whiteley, 4 Wall. 522; Decatur v. Paulding, 14 Pet. 497. REMEDIES. 163 § 135. Passive Resistance. — Another remedy which may sometimes be better is by what may be called passive resistance. That is to say, the company, having done what it conceives to be its full duty in suppl3ang a return, may quietly and passively refuse to do anything further. It will then become necessary for the Commissioner of Internal Revenue to invoke the aid of the United States Courts in order to compel the officers to testify and to produce the company's books. In these legal proceedings, the jurisdiction of the Commissioner to proceed to examination of the officers and inspection of the books can be attacked and tested.' § 136. Action of Trespass, Trover, etc., for Goods Distrained. — If a corporation, conceiving that an assessment is illegal, refuses to pay the same, its goods may be seized and sold under distraint proceedings. If the assessment is void and if the facts to show its invalidity appear on its face, the officer who levies the distraint may be sued in trover, trespass or other appropriate action. Such an action may be maintained without first appealing to the Commissioner of Internal Rev- enue.^ If, however, the assessment is fair on its face and made by an officer having jurisdiction, the collector will be protected in acting thereunder though it may be erroneous, at any rate unless * See supra § 108. 2 Erskine v. Hohnbach, 14 Wall. 613. 164 FEDERAL COEPOEATION TAX LAW.. he is informed of extraneous facts which render the assessment invalid. ' § 137. Action to Recover Back Taxes Paid under Protest. — The usual reiiiedy to test the legality of assessments of federal taxes is by first paying the taxes under protest and then bringing an action of assumpsit against the collector to recover back the amount so paid; ' but money paid without protest cannot be recovered back,' nor wiU protest suffice unless under threat of pro- ceedings by the government to collect the tax.* The declaration or complaint should set out the transactions upon which the assessment was made. ° ' Erskine v. Hohnbach, 14 Wall. 613; Stutsman County V. Wallace, 142 V. S. 293, 310; 12 Sup. Ct. Rep. 297; Dela- ware R. Co. V. Prettyman, 7 Fed. Cas 408. ^ Elliott V. Swartwout, 10 Pet. 137; Erskine v. Van Ars- dale, 15 Wall. 75; Assessor v. Osbornes, 9 Wall. 567, 574; Commissioners v. Buckner, 48 Fed. 533; Chicago Distilling Co. V. Stone, 140 U. S. 647; 11 Sup. Ct. Rep. 862; Armour v. Roberts, 151 Fed. 846 (recovery allowable though collector would not be liable as a trespasser). As to execution on a judgment for the plaintiff in any such action, see Rev. Stats. / §999 (1 U. S. Comp. Stats. 708), construed in Agnew v. Haymes, 141 Fed. 631. ' Elliott V. Swartwout, 10 Pet. 137. The protest need not be in writing: Wright v. Blakeslee, 101 U. S. 174, 179 (headnote inadequate) . Anything sufficient to apprise the col- lector that the taxpayer contends that the taxes are illegal and intends to sue for their recovery is enough: Herold v. Kahn, 159 Fed. 608; 86 C. C. A. 598. * Cheeseborough v. United States, 192 U. S. 253; 24 Sup. Ct. Rep. 262. = Paight & Freese Co. v. McCoach, 135 Fed. 894. EBMBDIES. 165 Interest is recoverable from the date of the pay- ment.* Under the- Tucker Act, such claims may be made the subject of an action against the United States in the Court of Claims or in a United States Circuit or District Court. ^ This remedy against the collector as well as against the United States may constitutionally be taken away by Congress; ' and under the Internal Revenue Laws it is provided that an appeal to the Commissioner of Internal Revenue to repay the amount of the tax shall be a condi- tion precedent to the institution of any such action.* There has been some doubt whether this statute applies where the original assessment which is alleged to be illegal was made by the Commissioner himself and where there has already ' Erskine v. Van Arsdale, 15 Wall. 75; Kinney v. Conant, 166 Fed. 720; McClain v. Pennsylvania Co., 108 Fed. 618; 47 C. C. A. 529; Herold v. Kahn, 163 Fed. 947. Cf. Commis- sioners V. Buckner, 48 Fed. 533; Burrough v. Abel, 105 Fed. 366 (interest disallowed on account of laches). ^ Christie-Street Commission Co. v. United States, 136 Fed. 326 (distinguishing United States v. Savings Bank, 104 U. S. 728, 734); Dooley v. United States, 182 U. S. 222; 21 Sup. Ct. Rep. 762. ^ Cary v. Curtis, 3 How. 236. *Rev. Stats., §3226 (2 U. S. Comp. Stats, p. 2088), enforced in Hubbard v. Collector, 12 Wall. 1. Cf. De Barry V. Dunne, 162 Fed. 961 (holding that defense based on non- performance of the statutory condition is not waived by general appearance and plea to the merits). As to what is necessary evidence in order to prove compliance with this statute, see Hubbard v. Kelley, 8 W. Va. 46. 166 FEDERAL CORPORATION TAX LAW. been a hearing of the question before him.* But the safer plan is even in that case to address to him an appeal for refunding of the tax before bringing suit.^ In order to comply with this statute there must first be an application to the collector and an adverse decision by him and from him an appeal to the Commissioner; and therefore an application to the Commissioner in the first instance is not enough, though rejected by him, to authorise the institution of an action against the collector." The mere noting of protest on the return against the form on which it is required to be made is not enough.* The statute does not prevent a citizen from defending a suit for col- lection of an illegal tax without first appealing to the Commissioner,^ nor does it apply to an action of trespass against a collector for seizing plaintiff's property under an illegal distraint." There is a period of limitations of two years prescribed by Congress for the institution of such ' Cf. De Barry v. Dunne, 162 Fed. 961; Tucker v. Grier, 160 Fed. 611; 87 C. C. A. 513. ' For the statute apparently contemplates an appeal made to the Commissioner after payment of the tax: Kings County Sav. Institution v. Blair, 116 U. S. 200, 205; 6 Sup. Ct. Rep. 353. But see Schwarzchild v. Rucker, 143 Fed. 656. " Cheeseborough v. United States, 192 U. S. 253, 262-263. * Kings County Sav. Institution v. Blair, 116 U. S. 200, 205 (headnote inadequate) ; 6 Sup. Ct. Rep. 353. ^ Clinkenbeard v. United States, 21 Wall. 65. •Supra §136. REMEDIES. 167 suits.' Moreover, such a suit cannot be main- tained unless the appeal to the Commissioner was taken within the time limited for taking such appeals.^ The period of limitations prescribed by Rev. Stats. § 3227 applies to suits brought against the United States under the Tucker Act as well as to suits against the collector." This remedy is very efficient where the assess- ment is wholly void. Even if it is not wholly void, but is merely made upon an erroneous prin- ciple in conflict with some statutory direction so as to be excessive, the party aggrieved may have the aid of the courts to recover the amount of the excess; * but he cannot have a review of any question of valuation committed to the judg- ment of the assessing tribunal.^ If, however, ■ » Rev. Stats., § 3227 (2 U. S. Comp. Stats, p. 2089). Cf. Wright V. Blakeslee 101 U. S. 174 (holding that the period does not begin to run until rejection of the claim by the Commissioner); Commissioners v. Buckner, 48 Fed. 533 (bar removed by Act of Congress); Hicks v. James, 48 Fed. 542 (claim held not barred), affirmed, James v. Hicks, 110 U. S. 272; 4 Sup. Ct. Rep. 6; Cheatham v. United States, 92 U. S. 85; Braun v. Sauerwein, 10 Wall. 218; Schwarzchild v. Rucker, 143 Fed. 656 (if appeal to Commissioner not decided within six months action barred at end of two years after expiration of the six months). ^ Kings County Sav. Institution v. Blair, 116 U. S. 200; 6 Sup. Ct. Rep. 353. » Farrell v. United States, 167 Fed. 639; Christie Street Commission Co. v. United States, 136 Fed. 326. * Herold v. Shanley, 146 Fed. 20, and many other cases. ^ Stanley v. Supervisors of Albany, 121 U. S. 535, 550- 168 FEDERAL COKPOEATION TAX LAW. the Commissioner of Internal Revenue should in undertaking to correct a return receive illegal evidence — for instance, if he should consider evidence of other witnesses than oflScers and employees of the company and its books and papers — his corrected return and the assessment thereon would be illegal; and the action to recover back the taxes paid under protest might be maintained. § 138. Remedy by Application to Commissioner of Internal Revenue. — The federal statutes ex- pressly authorise the Commissioner of Internal Revenue to refund taxes erroneously or illegally assessed or collected, or taxes unjustly assessed or excessive in amount, or in any manner wrong- fully collected.' Such application to the Com- missioner can only be made within two years.' The lodging of an appeal with the collector for transmission in due course to the Commissioner is in effect a presentation of the appeal to the Commissioner within the meaning of a statute limiting the time , within which appeals may be presented to the Commissioner.' In exercising 551; 7 Sup. Ct. Rep. 1234. Cf. United States v. Rindskopf, 105 U. S. 418, 422. > Rev. Stats., § 3220 (2 U. S. Comp. Stats., p. 2086). 'Rev. Stats., §2228 (2 U. S. Comp. Stats., p. 2088). 'United States v. Savings Bank, 104 U. S. 728 (with which compare Cotton Press Co. v. Collector, 1 Woods, 296). As to the limitation of time for appealing to the Commissioner, see Kings County Sav. Institution v. Blair, 116 U. S. 200; 6 Sup. Ct. Rep. 353. REMEDIES, 169 this jurisdiction, the Commissioner is not bound by strict or technical rules, and may direct re- mission of a tax paid without protest.' If he decides in favor of an applicant and payment is nevertheless refused by the disbursing officers of the government, a suit will lie against the United States in the Court of Claims or in a United States Circuit or District Court to recover the amount of the award.^ * Cheeseborough v. United States, 192 U. S. 253; 24 Sup. Ct. Rep. 262. ^ United States v. Savings Bank, 104 U. S. 728; Edison El. lU. Co. V. United States, 38 Ct. of CI. 208. CHAPTER VIII CONSTITUTIONALITY § 139 In general. § 140 Statement of objections to constitutionality of the law. § 141 Pollock V. Farmers' Loan and Trust Co. § 142-144 Is the present tax a " direct tax " 7 § 142 Tax on income from a particular employment not a a direct tax. § 143 Is the present tax within that principle? § 144 A suggested distinction from the income-tax cases. § 145 Is the tax invalid as a federal tax on a state franchise? § 146 The objection of inequality. § 147 Constitutionality as applied to income from state and municipal securities. § 148 Retroactive featiu-es of the law. § 149 Consequences of partial unconstitutionality. § 139. In General. — The question of the con- stitutionality of the tax has been reserved for consideration here, because, although the con- stitutionality of the law is the first question that a lawyer who is called upon to consider the statute must decide, yet the question of constitutionality, in all its multiform phases, cannot be thoroughly understood until the meaning of the Act is first fully comprehended. As stated above, it is a matter of common knowl- CONSTITUTIONALITY. 171 edge that this tax was proposed in the Senate as an amendment to the Tariff Bill of 1909, as a sub- stitute for a pending amendment which would have attempted to levy a general income tax. ' It was believed by the advocates of this tax that the constitutional objections to a general income tax were obviated by this Act. There is, however, ground for serious doubt whether this belief was wholly justified. § 140. Statement of Objections to Constitu- tionality of the Law. — There are at least four possible objections that may be urged against the constitutionality of the Act, or important parts of the Act: — (1) That it attempts to levy a " direct tax " without apportionment between the states in proportion to their population, as required by the Constitution. (2) That it amounts to a tax on franchises granted by the several states, and is therefore within the principle that the Federal Government has no power to tax the governmental functions of the states. (3) That the tax is unequal, and not " uni- form." (4) That in so far as the Act attempts to tax income derived from state and municipal securi- ties, it is unconstitutional as a tax upon the agen- cies of the state governments. § 141. Pollock V. Fanners' Loan & Trust Co. — 'Supra §1. 172 FEDERAL COKPOKATION TAX LAW. All of these objections are connected with the famous case in which the Income Tax Law of 1894 was held unconstitutional.' The statute involved in that case purported to lay a general tax on all incomes both of individuals and of corporations. Four thousand dollars of the "income of every individual was exempt; but no such exemption was allowed to corporations. The case was twice argued in the Supreme Court. At the first hearing the Court held, (1) unani- mously, that in so far as the Act attempted to tax income derived from state and municipal securities, it was a tax on agencies of the state governments, and as such was unconstitutional, and (2) by six judges to two, that a tax on income derived from land is equivalent to a tax on the land itself, and as such is a " direct tax " within the meaning of the Constitution, and is therefore void unless apportioned among the states. Upon the question whether a tax on income derived from personal property is a direct tax, the judges were equally divided in opinion; and were similarly divided upon the question whether the tax levied by the Act of 1894 was unconstitutional because of lack of equality. , Upon rehearing, the Court unanimously ad- hered to the ruling that the Act of Congress, in so far as it attempted to tax income from state 1 Pollock V. Farmers' L. & T. Co., 157 U. S. 429; 15 Sup. Ct. Rep. 673; and, on rehearing, 158 U. S. 601; 15 Sup. Ct. Rep. 912. CONSTITUTIONALITY. 173 and municipal securities, was void. The Court, by a bare majority of five judges, to four, adhered to the previous ruling that a tax on the income of land is a " direct tax," and further held that a tax on the income of invested personal property of all descriptions is also a " direct tax," and therefore unconstitutional unless apportioned among the states according to their population. A majority of the Court was also of opinion that as the income-tax provisions of the Act of 1894 embraced one indivisible, harmonious system; and as they were uncoijstitutional in so far as they taxed income from real estate and from in- vested personal property, it would defeat the presumable intention of Congress to uphold them in so far as they taxed income derived from a business or employment. For this reason, all the income-tax provisions of the Act of 1894 were held void. It thus became unnecessary to express any opinion upon the question, whether the Act was void for inequality. Notwithstanding the criticism to which this decision has been sub- jected, there is no reason to suppose that the Supreme Court would overrule it, although it might be rather closely limited. § 142. Is the present Tax a "Direct Tax " ? — Tax on Income from a Particular Employment not a Direct Tax. — The law may be regarded as settled that a tax upon the income derived from a particular business or employment is an excise tax, and not a direct tax, so that it may be 174 FEDERAL CORPOKATION TAX LAW. levied by Congress without apportionment among the states in proportion to population' No case has ever carried this doctrine to the extent of upholding a generail income tax levied upon the income of all classes of business, but not extending to income from invested personal property and real estate, but there seems no reason to doubt that in a case presenting the question, the court would- carry the doctrine to that extent. Such taxes are not taxes on property, but on the carrying on of business. § 143. Is the Present Tax within That Prin- ciple? — It is under the principle just stated that it is sought to maintain the validity of the present tax. Attention has already been directed to the difficulty in holding this tax to be what it is designated by Congress, — namely, " a special excise tax with respect to the carrying on or doing business," — rather than what in substance it amounts to: namely, a tax on income from all sources.^ Unlike the tax upheld in Spreckels Sugar Refining Co. v. McClain,' this tax is not confined to receipts from business, but expressly includes income derived from all other 'Spreckels Sugar Refining Co. v. McClain, 192 U. S. 397; 24 Sup. Ct. Rep. 376; Pacific Ins. Co. v. Soule, 7 Wall. 433. Cf. Maine v. Grand Trunk Ry. Co., 142 U. S 217, 227- 228; 12 Sup. Ct. Rep. 121, 163; Western Union Tel. Co. v. Massachusetts, 125 TJ. S. 530; 8 Sup. Ct. Rep. 961. 2 Supra § 4-§ 10. ' 192 U. S. 397. CONSTITUTIONALITY. 175 sources, including invested capital.' It would seem, therefore, difficult, to say the least, to sustain this law in its entirety without impinging upon the principle of Pollock v. Farmers' Loan & Trust Co.,^ that a tax upon income of property is a tax on the property itself. It would not, how- ever, follow that the tax must, for this reason, be declared wholly unconstitutional; ' for the ob- jections just stated would affect the validity of the tax only in so far as it relates to income from investments. § 144. A Suggested Distinction from the In- come-Tax Cases. — It may be said that Pollock v. Farmers' Loan & Trust Co. declared a tax on the income of all persons over a certain amount to be a direct tax,' but that it does not follow that a tax on the income of such persons only as are engaged in certain businesses or employments, would be a direct tax.* If this argument is sound, a general tax on the income of all persons would be a direct tax; but a tax on the income of all lawyers or doctors, although not confined to 'Supra §5, §9. 2 157 U. S. 429; 158 U. S. 601. 'Infra §149. *In support of this argument, it should be mentioned that while a general tax on personal property of all kinds was held in Pollock v. Farmers' L. & T. Co., 158 U. S. 601; 15 Sup. Ct. Rep. 912; 157 U. S. 429; 15 Sup. Ct. Rep. 673; to be a direct tax, and not an excise, yet a tax on certain kinds of personal property is deemed an excise. See Patton V. Brady, 184 U. S. 608; 22 Sup. Ct. Rep. 493. 176 FEDERAL COEPORATION TAX LAW. income derived from their practice of those pro- fessions, but including income derived from rents of real estate, and invested personal property, would be an excise tax on engaging in the pro- fession of the law or medicine. When we remem- ber the small proportion of the income of some lawyers which is derived from the practice of their profession, we can appreciate the length to which the supporters of this argument must be prepared to go. But suffice it to say that if this argument is sound, all objection to the present tax, on the score of its being a direct tax levied without apportionment, is removed. § 145. Is the Tax Invalid as a Federal Tax on a State Franchise? — It has been stated above that this tax is hot levied upon any corporate franchise or franchises; for the simple reason that unincorporated joint stock companies are taxed equally with corporations.' For this reason the objection that the tax is a federal tax on franchises granted by the states, and as such is unconstitutional, falls to the ground. But apart from this simple answer to the objec- tion, it may be doubted whether a federal tax on the right or franchise to exist as a corporation under state laws would be unconstitutional,^ unless the corporation were formed as a govern- ' mental agency of the state. It may be true that a state cannot tax a franchise of any kind granted ' Supra § 11. ^ Veazie Bank v. Penno, 8 Wall. 533, 547. CONSTITUTIONALITY. yj'J by the United States; ^ but this is not merely because the franchise is a governmental agency of the United States within the doctrine of Mc- Culloch V. Maryland,^ but because of the suprem- acy of federal laws. Thus a state, is without power to tax a patent right,' not because patents are agencies of the federal government, but because a valid federal law gives the patentee the right to exclusive use of his invention, and a state law forbidding him to enjoy that right, except upon the condition of paying a tax to the state, is in conflict with the federal law, and must therefore yield to the law of superior force. For this reason, decisions holding that a state cannot tax a corporate franchise granted by the United States, are not authority for the proposition that the United States could not tax similar fran- chises granted by a state. Moreover, Congress has no power to create corporations within the states, except as a means of carrying out its governmental powers, so that every corporate franchise granted by the United States is necessarily a governmental agency of the United States. A state, on the other hand, has power to allow incorporation for any lawful purpose, — even a merely private purpose, — and to abrogate the common law rule 1 Central Pac. R. R. Co. v. California, 162 U. S. 91; 16 Sup. Ct. Rep. 766; California v. Central Pac. R. R. Co., 127 U. S. 1, 41; 8 Sup. Ct. Rep. 1073. 2 4 Wheat. 316. 3 Re Sheffield, 64 Fed. 833. 178 FEDERAL COEPORATION TAX LAW. which prohibited the formation of corporations without a license from the Crown, so that state corporations are not necessarily governmental agencies. If a state corporation were created as a means of exercising some governmental power, — for example, as a means of regulating the liquor traffic, — a very different question would be presented.* § 146. The Objection of Inequality. — If the present tax is an excise, rather than a direct tax, it is within the constitutional requirement, that " all duties, imposts, and excises shall be uniform throughout the United States "; but it is now well settled that this provision, in accordance with the natural meaning of the words, has exclusive reference to geographical uniformity.^ The power to levy excise taxes is, however, restricted by the provision of the Fifth Amendment, that no person shall be deprived of life, liberty or property with- out due process of law. Moreover, a certain amount of equality may be inherent in the power of taxation as distinguished from arbitrary ex- actions and confiscation. Now the present tax will undoubtedly cause a certain amount of inequality. In the first place, ' Apparently, however, the power of federal taxation would extend even to such cases: South Carolina v. United States, 199 U. S. 437; 26 Sup. Ct. Rep. 110. ^ Patton V. Brady, 184 U. S. 608, 622-623; 22 Sup. Ct. Rep. 493; Knowlton v. Moore, 178 U. S. 41, 106; 20 Sup. Ct. Rep. 747; Head-Money Cases, 112 U. S. 580, 594; 5 Sup. Ct. Rep. 247. CONSTITUTIONALITY. 179 it is levied only on companies having a share capital, and insurance companies. It discrim- inates against such companies, and the economic wisdom is, therefore, in the writer's judgment, more than questionable; but such a consideration is for the legislature, rather than the courts. The judiciary can hardly say that the discrimination is so gross atid arbitrary as to convert the exaction into mere confiscation, and to destroy its char- acter as a tax.' In the Income Tax Cases, great stress was laid by the appellants on the fact that the statute exempted incomes of less than four thousand dollars, and was thus unequal in its operation, and this argument seems to have commanded the assent of four judges. But no reliance can be placed upon the similar exemption in the present Act as affecting its validity; for the Supreme Court has sustained a statute which laid an excise tax on incomes from certain businesses in excess of two hundred and fifty thousand dollars a year,* and has upheld taxes laid according to a progress- ive rate.' There are many other striking inequalities pos- sible under the present law, which have already 'Cf. MoCrary i>.. United States, 195 U. S. 27; 24 Sup. Ct. Rep. 769. ' Spreckels Sugar Refining Co. v. McClain, 192 U. S. 397; '24Sup. Ct. Rep. 376. ' Knowlton v. Moore, 178 U. S. 41, 109; 20 Sup. Ct. Rep. 747; Magoun v. Illinois Trust etc. Co., 170 U. S. 283, 293; 18 Sup. Ct. Rep. 594. 180 FEDERAL COEPOEATION TAX LAW. been adverted to; but probably none of them can be relied upon with any degree of confidence to impair the constitutionality of the statute. If, indeed, the Act should be construed to lay the tax on incomes received by corporations as trustees,' then truly the inequalities might well be held to be so great and glaring as to amount to a taking of property without due process of law. Even if the Act shall be so construed as to avoid that injustice, nevertheless it would seem to be liable to every objection on the score of inequality which was urged against the Income Tax Law of 1894, and, so far at least as four of the eight judges who participated in the first hearing, urged successfully. ^ § 147. As to Income from State and Municipal Securities. — As explained above, the objections to the validity of this tax, so far as it applies to income received by corporations from state and municipal securities, would seem to be, to say the least, very formidable.^ Congress is wholly without power to tax such securities, either directly or indirectly; and the tax in the present case is, it is submitted, if not a direct tax, at least an indirect one upon the income from such securities. § 148. Retroactive Features. — It is no ob- jection to the validity of the law that it attempts 1 As to this, see supra § 38. 2 Supra §40. OONSTITUTIOKALITT. Igl to tax income earned before its passage.* There is, however, some doubt whether it should be construed as having that effect.^ § 149. Consequences of Partial Unconstitu- tionality. — Even if the tax sought to be imposed by this Act should be held to be unconstitutional in part, it would not necessarily follow that the whole should fall. The rule in such cases of partial unconstitutionality is simple enough, although often difficult of application: If the unconstitu- tional parts of the Act form so important a part of the whole, and are so intimately connected with the rest that it cannot be assumed that the legislature would have enacted the remaining provisions if it had been informed of the un- constitutionality of the others, then the courts will declare the whole inoperative; but if, on the other hand, the unconstitutional features are separable from the rest, and if there is no reason to doubt that the legislature would have wished the law to be carried out so far as can constitutionally be done, then the courts will not declare the whole act inoperative, but will enforce its provisions so far as they may be constitutional. Now, applying these rules to the present case, we cannot doubt that the mere inability of Con- gress to tax so much of the income of companies subject to the Act as may be derived from state 1 SchuylkUl Nav. Co. v. Elliott, 21 Fed. Cas. 762; Stock- dale V. Insurance Cos., 20 Wall. 323, 331. ^ See supra § 39. 182 FEDEEAL COEPOEATIOK TAX LAW. and municipal securities, is no reason why, the tax should not be enforced as to income derived from other sources. Of course, if the tax should be held to be a tax upon state franchises, and there- fore to be unconstitutional as a tax on the agencies of the state, or if it should be held to be so un- equal in its operation as to amount to a taking of property without due process of law, it would be wholly void; but if those contingencies be passed by as too remote, the most radical view possible would be that the law is unconstitutional so far as it attempts to tax income from investments in real and personal property. Even then, there would seem to be no reason why the Act should not be held operative as to income from the carrying on of business. It is true that in Pollock v. Farm- ers' Loan & Trust Co.,' the Supreme Court held, though not without dissent, that a tax levied on all incomes would not be held operative as to such in- come as was derived from business or employ- ments, but, being invalid as to income from real estate and from invested personal property, should be declared void altogether. But this decision is not in point in this respect, for the present tax is expressly laid " with respect to the carrying on or doing business," and even if those words should not be held sufficient, in view of the express language of other parts of the Act, to justify the courts in declaring that the tax is laid exclu- sively on the business of companies subject to » 158 U. S. 601, 635-637; 15 Sup. Ct. Rep. 912. CONSTITUTIONALITY. 183 the tax, and not upon their property as well as business, yet at least the words quoted do show that the taxing of the business was the chief object which Congress had in view. And as that chief object can be constitutionally carried out, there is no reason for declaring the whole Act to be void because some of the minor provisions, such as that for taxing income from invested capital, may be unconstitutional. APPENDIX I TEXT OF THE ACT OF CONGRESS Reprinted from U. S. Stats., 61st Cong., 1st Sess., pp. 11, 112-117, 118. ' Chap. 6. An act to provide revenue, equalize duties and encourage the industries of the United States, and for other purposes. Be it enacted by the Senate and House of Repre- sentatives of the United States of America in Congress Assembled, [Paragraph One] 1 Sec. 38.' That every corporation, joint 2 stock company or association, organized for 3 profit and having a capital stock represented 4 by shares, and every insurance company, now 5 or hereafter organized under the laws of the 6 United States or of any State or Territory of 7 the United States or under the acts of Congress 8 applicable to Alaska or the District of Columbia, 'The first paragraph of this section is not numbered, as the succeeding paragraphs are. It should be read, however, as Paragraph I, and is so cited in this book. 186 FEDERAL COEPOKATION TAX LAW. 9 or now or hereafter organized under the laws 10 of any foreign country and engaged in business 11 in any State or Territory of the United States 12 or in Alaska or in the District of Columbia, 13 shall be subject to pay annually a special 14 excise tax with respect to the carrying on or 15 doing business by such corporation, joint stock 16 company or association, or insurance company, 17 equivalent to one per centum upon the entire 18 net income over and above five thousand dollars 19 received by it from all sources during such 20 year, exclusive of amounts received by it as 21 dividends upon stock of other corporations, 22 joint stock companies or associations, or in- 23 surance companies, subject to the tax hereby 24 imposed; or if organized under the laws of 25 any foreign country, upon the amount of net 26 income over and above five thousand dollars 27 received by it from business transacted and 28 capital invested within the United States and 29 its Territories, Alaska, and the District of 30 Columbia during such year, exclusive of 31 amounts so received by it as dividends upon 32 stock of other corporations, joint stock com- 33 panies or associations, or insurance companies, 34 subject to the tax hereby imposed: Provided, 35 however, That nothing in this section contained 36 shaU apply to labor, agricultural or horticul- 37 tural organizations, or to fraternal beneficiary 38 societies, orders, or associations operating 39 under the lodge system, and providing for APPENDIX I. 187 40 the payment of life, sick, accident, and other 41 benefits to the members of such societies, 42 orders, or associations, and dependents of such 43 members, nor to domestic building and loan 44 associations, organized and operated exclusively 45 for the mutual benefit of their members, nor 46 to any corporation or association organized 47 and operated exclusively for religious, chari- 48 table, or educational purposes, no part of 49 the net income of which inures to the benefit 50 of any private stockholfier or individual. [Paragraph Two] 1 Second. Such net income shall be ascertained 2 by deducting from the gross amount of the 3 income of such corporation, joint stock com- 4 pany or association, or insurance company, 5 received within the year from all sources, 6 (first) all the ordinary and necessary expenses 7 actually paid within the year out of income 8 in the maintenance and operation of its busi- 9 ness and properties, including all charges such 10 as rentals or franchise payments, required to 11 be made as a condition to the continued use 12 or possession of property; (second) all losses 13 actually sustained within the year and not 14 compensated by insurance or otherwise, in- 15 eluding a reasonable allowance for deprecia- 16 tion of property, if any, and in the case of 17 insurance companies the sums other than 18 dividends, paid within the year on policy 188 FEDERAL COKPOKATION TAX LAW. 19 and annuity contracts and the net addition, 20 if any, required by law to be made within the 21 year to reserve funds; (third) interest actually 22 paid within the year on its bonded or other 23 indebtedness to an amount of such bonded 24 and other indebtedness not exceeding the 25 paid-up capital stock of such corporation, 26 joint stock company or association, or in- 27 surance company, outstanding at the close 28 of the year, and in the case of a bank, banking 29 association, or trust company, all interest 30 actually paid by it within the year on deposits; 31 (fourth) all sums paid by it within the year 32 for taxes imposed under the authority of the 33 United States or of any State or Territory 34 thereof, or imposed by the government of 35 any foreign country as a condition to carrying 36 on business therein; (fifth) all amounts re- 37 ceived by it within the year as dividends 38 upon stock of other corporations, joint stock 39 companies or associations, or insurance com- 40 panics, subject to the tax hereby imposed: 41 Provided, That in the case of a corporation, 42 joint stock company or association, or insur- 43 ance company, organized under the laws of 44 a foreign country, such net income shall be 45 ascertained by deducting from the gross 46 amount of its income received within the 47 year from business transacted and capital 48 invested within the United States and any 49 of its Territories, Alaska, and the District of APPENDIX I. 189 50 Columbia, (first) all the ordinary and necessary 51 expenses actually paid within the year out 52 of earnings in the maintenance and operation 53 of its business and property within the United 54 States and its Territories, Alaska, and the 55 District of Columbia, including all charges 56 such as rentals or franchise payments required 57 to be made as a condition to the continued 58 use or possession of property; (second) all 59 losses actually sustained within the year in 60 business conducted by it within the United- 61 States or its Territories, Alaska, or the Dis- 62 trict of Columbia not compensated by in- 63 surance or otherwise, including a reasonable 64 allowance for depreciation of property, if 65 any, and in the case of insurance companies 66 the sums other than dividends, paid within 67 the year on policy and annuity contracts 68 and the net addition, if any, required by IeCw 69 to be ipade within the year to reserve funds; 70 (third) interest actually paid within the year 71 on its bonded or other indebtedness to an 72 amount of such bonded and other indebtedness, 73 not exceeding the proportion of its paid-up 74 capital stock outstanding at the close of the 75 year which the gross amount of its income 76 for the year from business transacted and 77 capital invested within the United States 78 and any of its Territories, Alaska, and the 79 District of Columbia bears to the gross amount 80 of its income derived from all sources within 190 FEDERAL COEPORiTION TAX LAW. 81 and without the United States; (fourth) the 82 sums paid by it within the year for taxes 83 imposed under the authority of the United 84 States or of any State or Territory thereofj 85 (fifth) all amounts received by it within the 86 year as dividends upon stock of other corpora- 87 tions, joint stock companies or associations, 88 and insurance companies, subject to the 89 tax hereby imposed. In the case of assessment 90 insurance companies the actual deposit of 91 sums with State or Territorial ofi&cers, pur- 92 suant to law, as additions to guaranty or 93 reserve funds shall be treated as being pay- 94 ments required by law to reserve funds. [Paragraph Three] 1 Third. There shall be deducted from the 2 amount of the net income of each of such 3 corporations, joint stock companies or associa- 4 tions, or insurance companies, ascertained as 5 provided in the foregoing paragraphs of this 6 section, the sum of five thousand dollars, and 7 said tax shall be computed upon the remainder 8 of said net income of such corporation, joint 9 stock company or association, or insurance com- 10 pany, for the year ending December thirty-first, 11 nineteen hundred and nine, and for each calen- 12 dar year thereafter; and on or before the first 13 day of March, nineteen hundred and ten, and 14 the first day of March in each year thereafter, a 15 true and accurate return under oath or affifma- APPENDIX I. 191 16 tion of its president, vice-president, or other 17 principal officer, and its treasurer or assistant 18 treasurer, shall be made by each of the cor- 19 porations, joint stock companies or associa- 20 tions, an4 insurance companies, subject to 21 the tax imposed by this section, to the collector 22 of internal revenue for the district in which 23 such corporation, joint stock company or 24 association, or insurance company has its 25 principal place of business, or, in the case of 26 a corporation, joint stock company or associa- 27 tion, or insurance company, organized under 28 the laws of a foreign country, in the place 29 where its principal business is carried on within 30 the United States, in such form as the Com- 31 missioner of Internal Revenue, with the 32 approval of the Secretary of the Treasury, 33 shall prescribe, setting forth (first) the total 34 amount of the paid-up capital stock of such 35 corporation, joint stock company or associa- 36 tion, or insurance company, outstanding at 37 the close of the year; (second) the total amount 38 of the bonded and other indebtedness of such 39 corporation, joint stock company or association, 40 or insurance company at the close of the year; 41 (third) the gross amount of the income of 42 such corporation, joint stock company or 43 association, or insurance company, received 44 during such year from all sources, and if 45 organized under the laws of a foreign country 46 the gross amount of its income received within 192 FEDEEAL CORPORATION TAX LAW. 47 the year from business transacted and capital 48 invested within the United States and any of 49 its Territories, Alaska, and the District of 50 Columbia; also the amount received by such 51 corporation, joint stock company or association, 52 or insurance company, within the year by 53 way of dividends upon stock of other corpora- 54 tions, joint stock companies or associations, or 55 insurance companies, subject to the tax im- 56 posed by this section; (fourth) the total 57 amount of all the ordinary and necessary 58 expenses actually paid out of earnings in the 59 maintenance and operation of the business 60 and properties of such corporation, joint 61 stock company or association, or insurance 62 company, within the year, stating separately 63 all charges such as rentals or franchise pay- 64 ments required to be made as a condition to 65 the continued use or possession of property, 66 and if organized under the laws of a foreign 67 country the amount so paid in the maintenance 68 and operation of its business within the United 69 States and its Territories, Alaska, and the 70 District of Columbia; (fifth) the total amount 71 of all losses actually sustained during the 72 year and not compensated by insurance or 73 otherwise, stating separately any amounts al- 74 lowed for depreciation of property, and in the 75 case of insurance companies the sums other 76 than dividends, paid within the year on policy 77 and annuity contracts and the net addition, APPENDIX I. 193 78 if any, required by law to be made within the 79 year to reserve funds; and in the case of a 80 corporation, joint stock company or associa- 81 tion, or insurance company, organized under the 82 laws of a foreign country, all losses actually 83 sustained by it during the year in business 84 conducted by it within the United States or its 85 Territories, Alaska, and the District of Colum- 86 bia, not compensated by insurance or otherwise, 87 stating separately any amounts allowed for de- 88 preciation of property, and in the case of insur- 89 ance companies the sums other than dividends, 90 paid within the year on policy and annuity 91 contracts and the net addition, if any, required 92 by law to be made within the year to reserve 93 fund; (sixth) the amount of interest actually 94 paid within the year on its bonded or other 95 indebtedness to an amount of such bonded 96 and other indebtedness not exceeding the 97 paid-up capital stock of such corporation, 98 joint stock company or association, or insur- 99 ance company, outstanding at the close of 100 the year, and in the case of a bank, banking 101 association, or trust company, stating sepa- 102 rately all interest paid by it within the year 103 on deposits; or in case of a corporation, joint 104 stock company or association, or insurance 105 company, organized under the laws of a foreign 106 country, interest so paid on its bonded or 107 other indebtedness to an amount of such 108 bonded and other indebtedness not exceeding 194 FEDERAL COKPOKATION TAX LAW. 109 the proportion of its paid-up capital stock 110 outstanding at the close of the year, which 111 the gross amount of its income for the year 112 from business transacted and capital invested 113 within the United States and any of its Terri- 114 tones, Alaska, and the District of Columbia, 115 bears to the gross amount of its income derived 116 from all sources within and without the United 117 States; (seventh) the amount paid by it within 118 the year for taxes imposed under the authority 119 of the United States or any State or Territory 120 thereof, and separately the amount so paid 121 by it for taxes imposed by the government 122 of any foreign country as a condition to carry- 123 ing on business therein; (eighth) the net 124 income of such corporation, joint stock com- 125 pany or association, or insurance company, 126 after making the deductions in this section 127 authorized. All such returns* shall as received 128 be transmitted forthwith by the collector to 129 the Commissioner of Internal Revenue. [Paragraph Four] 1 Fourth. Whenever evidence shall be pro- 2 duced before the Commissioner of Internal 3 Revenue which in the opinion of the commis- 4 sioner justifies the belief that the return made 5 by any corporation, joint stock company or 6 association, or insurance company, is incor- 7 rect, or whenever any collector shall report 8 to the Commissioner- of Internal* Revenue APPENDIX I. 195 9 that any corporation, joint stock company or 10 association, or insurance company has failed 11 to make a return as required by law, the Com- 12 missioner of Internal Revenue may require 13 from the corporation, joint stock company or 14 association, or insurance company making 15 such return, such further information with 16 reference to its capital, income, losses, and 17 expenditures as he may deem expedient; and 18 the Commissioner of Internal Revenue, for 19 the purpose of ascertaining the correctness of 20 such return or for the purpose of making a 21 return where none has been made, is hereby 22 authorized, by any regularly appointed revenue 23 agent specially designated by him for that 24 purpose, to examine any books and papers 25 bearing upon the matters required to be in- 26 eluded in the return of such corporation, joint 27 stock company or association, or insurance 28 company, and to require the attendance of 29 any officer or employee of such corporation, 30 joint stock company or association, or insur- 31 ance company, and to take his testimony 32 AAdth reference to the matter required by law 33 to be included in such return, with power to 34 administer oaths to such person or persons; 35 and the Commissioner of Internal Revenue 36 may also invoke the aid of any court of the 37 United States having jurisdiction to require 38 the attendance of such officers or employees 39 and the production of such books and papers. 196 FEDERAL CORPORATION TAX LAW. 40 Upon the information so acquired the Com- 41 missioner of Internal Revenue may amend 42 any return or make a return where none has 43 been made. All proceedings taken by the 44 Commissioner of Internal Revenue under the 45 provisions of this section shall be subject to 46 the approval of the Secretary of the Treasury. [Paragraph Five] 1 Fifth. All returns shall be retained by the 2 Commissioner of Internal Revenue, who shall 3 make assessments thereon; and in case of 4 any return made with false or fraudulent intent, 5 he shall add one hundred per centum of such 6 tax, and in case of a refusal or neglect to make 7 a return or to verify the same as aforesaid he 8 shall add fifty per centum of such tax. In 9 case of neglect occasioned by the sickness or 10 absence of an officer of such corporation, joint 11 stock company or association, or insurance 12 company, required to make said return, or for 13 other sufficient reason, the collector may allow 14 such further time for making and delivering 15 such return as he may deem necessary, not 16 exceeding thirty days. The amount so added 17 to the tax shall be collected at the same time 18 and in the same manner as the tax originally 19 assessed, unless the refusal, neglect, or falsity 20 is discovered after the date for payment of 21 said taxes, in which case the amount so added 22 shall be paid by the delinquent corporation, APPENDIX I. 197 23 joint stock company or association, or insur- 24 ance company, immediately upon notice given 25 by the collector. All assessments shall be made 26 and the several corporations, joint stock com- 27 panies or associations, or insurance companies, 28 shall be notified of the amount for which they 29 are respectively liable on or before the first 30 day of June of each successive year, and said 31 assessments shall be paid on or before the 32 thirtieth day of June, except in cases of refusal 33 or neglect to make such return, and in cases 34 of false or fraudulent returns, in which cases 35 the Commissioner of Internal Revenue shall, 36 upon the discovery thereof, at any time within 37 three years after said return is due, make a 38 return upon information obtained as above 39 provided for, and the assessment made by 40 the Commissioner of Internal Revenue thereon 41 shall be paid by such corporation, joint stock 42 company or association, or insurance company 43 immediately upon notification of the amount 44 of such assessment; and to any sum or sums 45 due and unpaid after the thirtieth day of 46 June in any year, and for ten days after notice 47 and demand thereof by the collector, there 48 shall be added the sum of five per centum on 49 the amount of tax unpaid and interest at the 50 rate of one per centum per month upon said 51 tax from the time the same becomes due. 198 -^ FEDERAL COEPORATION TAX LAW. [Paragraph Six] 1 Sixth. When the assessment shall be made/ 2 as provided in this section, the returns, to- 3 gather with any corrections thereof which may 4 have been made by the commissioner, shall 5 be filed in the office of the Commissioner of 6 Internal Revenue and shall constitute public 7 records and be open to inspection as such. [Paragraph Seven] 1 Seventh. It shall be unlawful for any col- 2 lector, deputy collector, agent, clerk, or other 3 officer or employee of the United States to 4 divulge or make known in any manner what- 5 ever not provided by law to any person any 6 information obtained by him in the discharge 7 of his official duty, or to divulge or make 8 known in any manner not provided by law 9 any document received, evidence taken, or 10 report made under this section except upon the 11 special direction of the President; and any 12 offense against the foregoing provision shall 13 be a misdemeanor and be punished by a fine 14 not exceeding one thousand dollars, or by im- 15 prisonment not exceeding one year, or both, 16 at the discretion of the court. [Paragraph Eight] 1 Eighth. If any of the corporations, joint 2 stock companies or associations, or insurance AI-fENDlX 1. 199 3 companies aforesaid, shall refuse or neglect 4 to make a return at the time or times herein- 5 before specified in each year, or shall render a 6 false or fraudulent return, such corporation, 7 joint stock company or association, or insur- 8 ance company, shall be liable to a penalty of 9 not less than one thousand dollars and not 10 exceeding ten thousand dollars.' 11 Any person authorized by law to make, 12 render, sign, or verify any return who makes 13 any false or fraudulent return, or statement, 14 with intent to defeat or evade the assessment 15 required by this section to be made, shall be 16 guilty of a misdemeanor, and shall be fined 17 not exceeding one thousand dollars or be 18 imprisoned not exceeding one year, or both, 19 at the discretion of the court, with the costs of 20 prosecution. 21 All laws relating to the collection, remission, 22 and refund of internal-revenue taxes, so far 23 as applicable to' and not inconsistent with the 24 provisions of this section, are hereby extended 25 and made applicable to the tax imposed by 26 this section. 27 Jurisdiction is hereby conferred upon the 28 circuit and district courts of the United States 29 for the district within which any person sum- 30 moned under this section to appear to testify 31 or to produce books, as aforesaid, shall reside, 32 to compel such attendance, production of 33 books, and testimony by appropriate process. 200 FEDEEAL COEPORATION TAX LAW. 1 Sec. 42. That unless otherwise herein 2 specially provided, this Act shall take effect on 3 the day following its passage. Signed Five minutes after Five o'clock p.m. August 5th, 1909. w. h. t. APPENDIX II INTERNAL REVENUE REGULATIONS PART I (T. D. 1571) Regulations relating to the assessment and collection of the special excise tax imposed by section 38, act ' of August 5, 1909, on corporations, joint stock companies, associations, and insurance companies. (Regulations No. 31) Treasury Department, Office of Commissioner of Internal Revenue, Washington, D. C, December 3, 1909. Section 38 of the act of August 5, 1909, is as follows: (Here follows text of Section 38, for which see supra Appendix I.) Article 1 The attention of collectors and others is specially- called to the fact that the tax imposed by this sec- 202 FEDERAL COEPOEATION TAX LAW. tion of the law applies to all corporations, joint stock companies, associations, or insurance com- panies described (except those specifically exempted), without reference to the kind of business carried on, and that the tax is to be computed upon the net income of such corporations, joint stock companies, associations, and insurance companies, which shall be calculated by subtracting from the gross income received from all sources during the year certain deductions specifically set forth in the statute. Every corporation, joint stock company, asso- ciation, or insurance company not specifically enumerated as exempt shall make the return re- quired by law, whether it may have net income liable to tax or not.' In the case of corporations, joint stock companies, associations, or insurance companies organized under the authority of the United States or any State or Territory thereof, including Alaska and District of Columbia, such net income relates not only to the business carried on within the confines of the United States, but to income received from business transacted in any foreign country as well.' In case of corporations, joint stock companies, and associations organized under the authority of foreign countries the terms " Gross income," " Net in- come," and " Authorized deductions " relate only * As to the correctness of this construction of the Act, see supra § 87, 72. ^ See supra § 44A. APPENDIX II. 203 to business transacted * within the United States or any State or Territory thereof. Article 2 — Gross income The following definitions and rules are given for determining the gross income of the various classes of corporations: lA. Banks and other financial instittttions. — Gross income consists of the gross revenue derived from the operation and management of the business and property of the corporation making the return, together with all amounts of income (including dividends received on stock of other corporations,^ joint stock companies, associations, and insvirance companies subject to this tax) derived from all other sources, as shown by the entries on its books " from January 1 to December 31 of the year for which return is made.* IB. Insurance companies. — Same as lA above. 2. Transportation companies. — Same as lA above. 3. Manufacturing companies. — Gross income received dmng the year from all sources will con- ' This apparently overlooks the words, "capital invested," which are found in the Act. See supra § 78, § 80 et seq. ^ Cf . supra § 34. '^ Qxiaere, as to income entered on the books but not actually received. See supra § 37. * This, like many other parts of these regulations, assumes that income received during the year 1909 before the Act took effect is to be included. See supra § 39. 204 FEDERAL CORPORATION TAX LAW. sist of the total amount, ascertained through an accounting, that shows the difference between the price received for the goods as sold and the cost of such goods as manufactured. The cost of goods manufactured shall be ascertained by an addition of a charge to the account of the cost of goods as manufactured during the year of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at the end of the year. To this amount should be added all items of income received during the year from other sources, including dividends received on stock of other corporations, joint stock companies, associa- tions, and insurance companies subject to this tax. In the determination of the cost of goods manu- factured and sold as above such cost shall compre- hend all charges for maintenance and operation of manufacturing plant, but shall not embrace allow- ances for depreciation of property nor for losses sustained which are to be taken account of in ascertaining the net income subject to tax under the proper heading in the authorized deductions.' 4. Mercantile companies, — Gross amount of income received during the year from all sources consists of the total amount ascertained through inventory, or its^ equivalent, which shows the difference between the price received for goods sold * Quaere, why should there be this distinction between expenses of maintenance and operation, and allowances for depreciation of property, both of which are treated in the Act under the head of deductions? See supra § 46, § 53. APPENDIX II. 205 and the cost of goods purchased during the year, with an addition of a charge to the account of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at the end of the year. To this amount should be added all items of income received during the year from other sources inclusive of dividends received on stock of other corporations, joint stock compar nies, associations, and insurance companies subject to this tax. In determining this amount no account shall be taken of allowances for depreciation of property, nor for losses sustained which are to be taken account of in ascertaining the net income subject to tax under the proper heading in the authorized deductions. 5. Miscdlaneous. — Gross income consists of the' gross revenue derived from the operation and management of the business and property of the corporation making the return, together with all amounts of income (including dividends received on stock of other corporations, joint stock com- panies, associations, and insurance companies sub- ject to this tax) derived from all other sources as shown by the entries on the books from January 1 to December 31 of the year for which return is made. It will be noted from these definitions that gross income is practically the same as gross profits,' the only difference being that gross income is more inclusive, embracing as it does not only gross profits ' Quaere, as to the correctness of this statement. See supra § 31. 206 FEDERAL CORPORATION TAX LAW. of the corporation, joint stock company, and asso- ciation itself, but also all amounts of income re- ceived from other sources. It is immaterial whether any item of gross income is evidenced by cash re- ceipts during the year or in such other manner as to entitle it to proper entry on the books of the corporation from January 1 to December 31 for the year in which return is made.* Sale of capital assests.^ — In ascertaining income derived from the sale of capital assets, if the assets were acquired subsequent to January 1, 1909, the difference between the selling price and the buying price shall constitute an item of gross income to be added to or subtracted from gross income according to whether the seUing price was greater or less than the buying price. If the capital assets were ac- quired prior to January 1, 1909, the amount of increment or depreciation representing the differ- ence between the selUng and buying price is to be adjusted so as to fairly determine the proportion of the loss or gain arising subsequent to January 1, 1909,' and which proportion shall be deducted from or added to the gross income for the year in which the sale was made. But for the purpose of deter- mining the selling price, as provided in this section, ' This gives a liberal construction to the word " received." See supra § 37. ' Quaere as to the soundness of the views of the law on which this paragraph is JDased. See supra § 35. ' In addition to the other objections to this regulation, it assumes that income received before the Act took effect is to be included in the assessment. Cf . supra § 39. APPENDIX II. 207 there shall be added to the price actually realized on sale any amount which has already been set aside and deducted from gross income by way of depre- ciation as defined in article 4 and has not been paid out in making good such depreciation on the prop- erty sold. Where a corporation is engaged in carrying on more than one class of business, gross income de- rived from the different classes of business shall be ascertained according to the definitions above apphcable thereto. Article 3 — Net income Net income shall be ascertained by deducting from the gross amount of the income of such cor- poration, joint stock company or association, or insurance company, received within the year from all sources, (first) all the ordinary and necessary expenses actually paid within the year out of in- come in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments, required to be made as a condition to the continued use or pos- session of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within year to reserve funds; (third) interest actu- ally paid within the year on its bonded or other indebtedness to an amount of such bonded and 208 FEDERAL CORPOEATION TAX LAW. other indebtedness not exceeding the paid-up cap- ital stools of such corporation, joint stock com- pany or association, or insurance company, out- standing at the close of the year, and in the case of a bank, banking association, or trust company, all interest actually paid by it within the year on deposits. [In case of corporations, joint stock companies, and associations organized under the laws of a foreign country, " the proportion of its paid-up capital stock outstanding at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia bears to the gross amount of its income derived from all sources within and without the United States "];* (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the government of any foreign country as a condition to carrying on business therein; (fifth) all amounts received by it within the year as dividends upon stock of other corporar tions, joint stock companies or associations, or insurance companies, subject to the tax hereby imposed. Section 38 further provides: That in the case of a corporation, joint stock ' Note. — The matter included in brackets [ ] relates to interest actually paid within the year on " bonded or other indebtedness," and should be read in connection with the preceding provision (art. 3) relating to such interest paid by corporations, joint stock companies, etc., organized in the United States. (This note is by the Commissioner of Inter- nal Revenue.) APPENDIX II. 209 company or association, or insurance company, organized under the laws of a foreign country, such net income shall- be ascertained (by making like deductions) from the gross amount of its income received within the year from business transacted and its capital invested within the United States and any of its Territories, Alaska, and the District of Columbia.. Also that: In the case of assessment insurance companies the actual deposit of sums with state or territorial officers, pursuant to .law, as additions to guaranty or reserve fund, shall be treated as being payments required by law to reserve fund. Also (third paragraph) that: There shall be deducted from the amount of the net income of each of such corporations, joint stock companies or associations, or insurance companies, ascertained as provided in the fore- going paragraphs of this section, the sum of five thousand dollars. The net income, therefore, is the remainder of the gross income after making the specified deductions.^ Article 4. — Deductions The specified deductions actually paid within the year, set forth in the statute and as described in article 3 preceding, shall include all proper items of expenses and charges under the respective heads as ' Quaere, whether any deductions in addition to those specially required by the Act are permissible. See supra § 45. 210 FEDERAL CORPOEATION TAX LAW. designated. The amount returned for ordinary and necessary expenses actually paid within the year out of income in maintenance and operation of the business and properties of the corporation should not, however, embrace allowances for depreciation of fixed property which are otherwise to be taken account of under the proper heading in the author- ized deductions, nor expenses paid within the year and charged to such allowances for depreciation credited in the current year or in previous years. In ascertaining expenses proper to be included in the deductions to be made under this article, cor- porations carrying materials and suppHes on hand for use should include in such expenses the charges for materials and supplies only to the amount that the same are actually disbursed and used in opera- tion and maintenance during the year for which the return is made. , It is immaterial whether the deductions are evidenced by actual disbursements in cash, or whether evidenced in such other way as to be prop- erly acknowledged by the corporate officers and so entered on the books as to constitute a liability against the assets of the corporation, joint stock company, association, or insurance company making the return.* Losses. — The deduction for losses must be in 'respect of losses actually sustained during the year * This is a liberal construction in favor of the corporations of the expression " actually paid." See supra § 49. APPENDIX II. 211 and not compensated by insurance or otherwise. It must be based upon the difference between the cost value and salvage value of the property or assets, including in the latter value such amount, if any, as has in the current or previous years been set aside and deducted from gross income by way of .depreciation as defined in the following section and not been paid out in making good such depreciation. Depreciation. — The deduction for depreciation should be the estimated amount of the loss, accrued during the year to which the return relates,' in the value of the property in respect of which such deduction is claimed that arises from exhaustion, wear and tear, or obsolescence out of the uses to which the property is put, and which loss has not been made good by payments for ordinary main- tenance and repairs deducted under the heading of expenses of maintenance and operation or in the ascertainment of gross income. This estimate shoiild be formed upon the assumed life of the property, its cost value, and its use. Expenses paid in any one year in making good exhaustion, wear and tear, or obsolescence in respect of which any deduction for depreciation is claimed must not be included in the deduction for expense of maintenance and operation of the property or in the ascertain- ment of gross income, but must be made out of accumulative allowances deducted for depreciation in current and previous years. * As to this see supra § 57. 212 FEDERAL CORPOEATION TAX LAW. Article 5. — Inventories It will be noted that an inventory or its equivalent of materials, supplies, and merchandise on hand for use or sale at the close of each calendar year is essen- tial in the case of certain corporations in order to determine the gross income, and in case of other corporations to determine their expenses of opera- tion. Where such inventory or its equivalent was not taken at the close of the year 1908, a supple- mental statement showing such inventory approxi- mately must be submitted' with the return on the regular form.* Such supplemental statement shall be verified under oath by the treasurer or principal financial ofiicer in submitting the same. Where any item under any of the deductions is of an unusual nature a special explanatory note re- ferring to such item shall be made and attached to the form at the appropriate place and made a part thereof by proper reference. ' Paragraph 3 of said section 38 also provides: And said tax shall be computed upon the remainder of said net income of such corporation, joint stock company or association, or insurance company, for the year ending December thirty-first, nineteen hundred and nine, and for each calendar year there- after; and on or before the first day of March, ' It is Bubraitted that- this requirement is unauthorized by law, and need not be obeyed. See supra § 90, § 100, § 101. ^ As to the propriety of following such a course, see supra §100. ApPE^roix II. ■ 213 nineteen hundred and ten, and the first day of March in each year thereafter, a true and accurate return under oath or affirmation of its president, vice-president, or other principal officer, and its treasurer or assistant treasurer, shall be made by each of the corporations, joint stock com- panies or associations, and insurance companies, subject to the tax imposed by this section, to the collector of internal revenue for the district in which such corporation, joint stock company or as- sociation, or insurance company, has its principal place of business, or, in the case of a corporation, joint stock company or association, or insurance company, organized under the laws of a foreign country, in the place where its principal business is carried on within the United States, in such form as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe. Each return so made is required to set forth: (a) The total amount of the paid-up capital stock of such corporations, joint stock compa- nies or associations, or insurance companies, out- standing at the close of the year; (b) The total amount of bonded and other in- debtedness of such corporation, joint stock com- pany or association, or insurance company, at the close of the year; (c) The gross amount of the income of such corporation, joint stock company or association, or insurance company, received during the year from all sources, and if organized under the laws of a foreign country, the gross amount of its 214 FEDERAL COKPOKATION TAX LAW. income received within the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia. Such returns are also required to set forth the items claimed as deductions (Article 4), also the net ' income after such deductions have been made. Article 6 Under the authority conferred by this act forms of return have been prescribed,* in which the varioiis items specified in the law are to be stated. Blank forms of this return will be mailed to col- lectors and should be furnished to every corporation, not expressly excepted, on or before January 1, 1910, and on or before January 1st of each year thereafter. Pailiu-e on the part of any corporation, joint stock company, association, or insurance company liable to this tax, to receive a blank form will not excuse it from making the return required by law, or relieve it from any penalties for failure to make the return in the prescribed time.* Corporations not supplied with the proper forms for making the return should make application therefor to the collector of internal revenue in whose district is located its principal place of business. Each corporation should care- fully prepare its return so as to fully and clearly set forth the data therein called for. * For which see infra Appx. III. ^See supra §86. APPENDIX II. 215 Bookkeeping. — No particular system of book- keeping or accounting will be required by the Department. However, the business transacted by corporations, joint stock companies, associations, or insurance companies must be so recorded that each and every item therein set forth may be readily verified by an examination of the books and accounts, where such examination is deemed necessary.^ Calendar year. — As the law specifically provides that the tax imposed shall be computed on the net income during e^ch " calendar year," returns of income based on any period other than the calendar year can not be accepted.^ Corporations organized during the year or going into liquidation during the year should nevertheless render a sworn return on the prescribed form.^ Article 7 Collectors will see that as soon as each return made by any corporation is received a record on Form 632 is made, setting out the name of the corporation making the return, the nature of the principal business transacted, the location of prin- cipal place of business, with net income reported, and the date on which such return was received. ' It is submitted that the Treasury Department has no power to exact any such requirement. See supra § 90, § 100, §101. ^ See supra § 84A. 3 Cf. supra § 29. 216 FEDERAL CORPOEATION TAX LAW. The date of receipt in each case will be noted in the last column of that form, in which column the list on which assessment is made wiU also be noted. For this purpose the column so used may be sub- divided, or the date of receipt of such returns may be noted in red ink over the date entered therein as to such assessment list. Any collector will, whenever it appears advisable to do so, request that a revenue agent be specially designated to collect and furnish this office with such other data as, in his judgment, is necessary to determine the actual amount of tax to be assessed against any^,- corporation, joint stock company, or association which under the law set forth in these regulations is required to make return.' Such returns are required to be made not later than March 1 of each year, and any failure to com- ply with the law in this regard should be at once reported by the collector to the Commissioner of Internal Revenue.^ To enable collectors to determine whether all returns due have been received, a careful canvass of each district should be made, and all corporations, joint stock companies, and associations subject to the tax imposed should be listed as above di- rected.' ' It seems clear that the Commissioner of Internal Revenue would not be justified in acting upon such a request un- supported by evidence. See supra § 106, § 110, § 134. ^ Cf. supra § 86, § 130. ^Cf. supra §130. APPENDIX II. 217 Article 8 For statistical purposes all such corporations, joint stock companies, and associations will be classified as follows: Class A : Financial and commercial. — Including banks, banking associations, trust companies, guaranty and surety companies, title insurance companies, building associations (if for profit), and insurance companies, not specifically exempt. Class B: Public service. — Such as railroads, 'steamboat, ferryboat, and stage-hne companies; pipe-fine, gas, and electric-light companies; express, transportation, and storage companies; telegraph and telephone companies. Class C : Industrial and manufacturing. — Such as mining, lumber, and coke companies; roUing mills; foundry and machine shops; saw-mills; flour, woolen, cotton, and other mills; manufacturers of cars, automobiles, elevators, agricultural imple- ments, and all articles manufactured wholly or in part from metal, wood, or other material; manu- facturers or refiners of sugar, molasses, sirups, or other products; ice and refrigerating companies ; slaughter- house, tannery, packing, or canning companies, etc. Class D: Mercantile. — Including all dealers (not otherwise classed as producers or manufacturers) in coal, lumber, grain, produce, and all goods, wares, and merchandise. Class E: Miscellaneous. — Such as architects, contractors, hotel, theater, or other companies, or associations, not otherwise classed. 218 FEDERAL COKPOKATIOBT TAX LAW, When classified as above indicated the names of the various corporations, companies, and associa- tions will be listed alphabetically, and will be num- bered consecutively (commencing with No. 1 in each class), and in forwarding returns or papers subsequently rendered or submitted by such cor- porations or companies collectors will see that the same have placed thereon the designating class letter and number corresponding with those noted on the lists herein required to be furnished. Article 9. — Examination of books, etc., by revemie agents Paragraph 4 of said section 38 provides: Fourth. Whenever evidence shall be produced before the Commissioner of Internal Revenue which in the opinion of the commissioner justifies the belief that the return made by any corporation, joint stock company or association, or insurance company, is incorrect, or whenever any collector shall report to the Commissioner of Internal Revenue "that any corporation, joint stock company or as- sociation, or insurance company, has failed to make a return as required by law, the Commissioner of Internal Revenue may require from the corpora- tion, joint stock company or association, or in- surance company making such return, such further information with reference to its capital, income, losses, and expenditures as he may deem expedi- ent; and the Commissioner of Internal Revenue, for the purpose of ascertaining the correctness of such return or for the purpose of making a return where none has been made, is hereby authorized, APPENDIX II. 219 by any regularly appointed revenue agent specially designated by him for that purpose, to examine any books and papers bearing upon the matters required to be included in the return of such cor- poration, joint stock company or association, or insurance company, and to require the attendance of any oflBcer or employee of such corporation, joint stock company or association, or insurance company, and to take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons; and the Commissioner of Internal Revenue may also invoke the aid of any court of the United States having jurisdiction to require the attendance of such officers or em- ployees and the production of such books and papers. Upon the information so acquired the Commissioner of Internal Revenue may amend any return or make a return where none has been made. All proceedings taken by the Commissioner of Internal Revenue under the provisions of this section shall be subject to the approval of the Secretary of the Treasury. Article 10. — Assessment and collection of tax, etc. Paragraph 5 of said section 38 provides: Fifth. All returnr shall be retained by the Com- missioner of Internal Revenue, who shall make assessments thereon; and in case of any return made with false or fraudulent intent, he shall add one hundred per centum of such tax, and in case of a refusal or neglect to make a return or to verify the same as aforesaid he shall add fifty per centum of such tax. In case of neglect occasioned by the sickness or absence of an officer of such corpora- tion, joint stock company or association, or in- 220 FEDERAl CORPORATION TAX LAW. surance company, required to make said return, or for other sufficient reason, the collector may allow such further time for making and delivering such" return as he may deem necessary, not exceeding thirty days. The amount so added to the tax shall be collected at the same time and in the same manner as the tax originally assessed unless the refusal, neglect, or falsity is discovered after the date for payment of said taxes, in which case the amount so added shall be paid by the delinquent corporation, joint stock company or association, or insurance company immediately upon notice given by the collector. AH assessments shall be made and the several corporations, joint stock companies or associations, or insurance companies, shall be notified of the amount for which they are respect- ively liable on or before the first day of June of each successive year, and said assessments shall be paid on or before the thirtieth day of June, except in cases of refusal or neglect to make such return, and in cases of false or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as above provided for, and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such corporation, joint stock company or association, or insurance company immediately upon notifica- tion of the amount of such assessment; and to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due. APPENDIX II. 221 Upon the receipt and verification of the returns rendered, the tax as ascertained to be due will be assessed as above prescribed; and notice of such assessment will be given and subsequent demand made (if necessary) on Forms 1? and 21, respect- ively.* In case of failure to make returns within the time and manner required by the statute, or where the return rendered is found or believed ^ to be incorrect, action in such cases will be taken, as provided in paragraph 4 of the law. The additional tax imposed by paragraph 5 of the law for failure to make the required return, or for making a false or fraudulent return, will in all cases be assessed as therein provided. Article 11. — Returns to constitute public records Paragraph 6 of said section 38 provides: Sixth. When the assessment shall be made, as provided in this section, the returns, together with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the Commissioner of Internal Revenufe and shall constitute public records and be open to inspection as such. 1 See supra § 123. ' This should be construed to mean " behaved from evi- dence adduced before the' Commissioner." See supra §106, §110, §134. 222 FEDERAL CORPORATION' TAX LAW. Article 12. — Penalties Paragraphs 7 and 8 of section 38 provide: Seventh. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or make known in any manner whatever not provided by law to any person any information obtained by him in the discharge of his official duty, or to di- vulge or make known in any manner not provided by law any document received, evidence taken, or report made under this section except upon the special direction of the President; and any of- fense against the foregoing provision shall be a misdemeanor and be punished by a fine not ex- ceeding one thousand dollars, or by imprisonment not exceeding one year, or both, at the discretion of the court. Eighth. If any of the corporations, joint stock companies or associations, or insurance companies, aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, or shall render a false or fraudulent return, such corporation, joint stock company or associa- tion, or insurance company, shall be liable to a penalty of not less than one thousand dollars and not exceeding ten thousand dollars. Any person authorized by law to make, render, sign, or verify any return who makes any false or fraudulent return, or statement, with intent to defeat or evade the assessment required by this section to be made, shall be guilty of a misde- meanor, and shall be fined not exceeding one thousand dollars or be imprisoned not exceeding one year, or both, at the discretion of the courts, with the costs of prosecution. APPENDIX II. 223 Article 13. — Certain revenue laws made applicable, and jurisdiction conferred on United States courts to compel attendance of witnesses, etc. Paragraph 8 further provides: All laws relating to the collection, remission, and refund of internal-revenue taxes, so far as applicable to and not inconsistent with the provisions of this section, are hereby extended and made applicable to the tax imposed by this section. Jurisdiction is hereby conferred upon the cir- cuit and district courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books, as aforesaid, shall reside, to compel such attendance, production of books, and testimony by appropriate process. Article 14. — Collection of tax The tax assessed under the provisions of this act will be collected and will be receipted for on Form 1, as in the case of other assessed taxes. Unless paid within the time fixed by the statute, notice and demand should be at once issued, and, in case of nonpayment, distraint proceedings should be insti- tuted without delay. Royal E. Cabell, Commissioner, Approved: Franklin MacVeagh, Secretary of the Treasury. 224 FEDERAL CORPORATION TAX LAW. PART II (T. D. 1578) Excise Tax Corporations to render returns to collectors of internal revenue for the calendar year 1909 and each calendar year thereafter. — Actual inventories required only when taxable net income can not be stated otherwise. — Book inventories, or statements therefrom equivalent to in- ventories, permissible when showing the real taxable income. Treasury Department, Oflfice of Commissioner Internal Revenue, Washington, D. C, January 4, 1910. To collectors of internal revenue and others interested: Many inquiries have been made at this office concerning the requirements of section 38, act of August 5, 1909, levying an excise tax of 1 per cent of the total net income over $5,000 of corporations, as to the time that must be covered by the returns of such corporations. In order that the position of this office may be known to all interested in this subject, attention is invited to the language of the act bearing on this point. Subdivision 3 reads, in part, as follows: . . . and said tax shall be computed upon the remainder of said net income of such corporation, joint stock company or association, or insurance company, for the year ending December thirty-first, nineteen hundred and nine, and for each calendar year thereafter. APPENDIX II. 225 From this it will be seen that the law fixes the calendar year as the period to be covered by these returns,' and no one is vested with discretionary power to change it. Many inquiries have been submitted as to the manner of arriving at an inventory January 1, 1909, when none was taken on that date and where the fiscal year of the corporation ends with a date other than December 31. In article 5 of Regulations No. 31 it is stated that an inventory or its equivalent of materials, supplies, and merchandise on hand for use or sale at the close of each calendar year is essential in the case of certain corporations in order to determine the gross income, and in case of other corporations to determine their expenses of operation.' Where such inventory or its equivalent was not taken at the close of the year 1908, a supplemental statement showing such in- ventory approximately must be submitted with the return on the regular form. Such supplemental statement shall be verified under oath, etc. Under the statute no return for a period other' than the calendar year can be accepted. The primary object to be kept in view is the preparation of a statement or return which shall correctly set forth the net income taxable under the law. If this * See supra § 84A. These regulations assume that the tax is to be computed upon the income of the entire year 1909 and not upon only so much thereof as elapsed after the statute took effect. As to the correctness of this assumption, see supra § 29, § 39. 226 FEDERAL OOEPOEATION TAX LAW. can be accomplished without the necessity of an inventory, either at the beginning or the close of the calendar year, actual inventories are not necessary. If, however, a statement such as may be verified by oath of the officers of the corporation, showing the net taxable income, can not be made without an inventory, then the same is necessarily required.' It is beUeved that corporations whose business is of sufficient volume to produce a taxable income under this law would ordinarily keep such books as would enable them to arrive at a book inventory, or what might be termed the " equivalent " of an inventory, for the period between the 1st of January and the end of their fiscal years. While the office is unable to set forth any rule in this connection for arriving at inventories or their equivalents, the corporations will readily see the necessity of resort- ing to the best means at their hands to show in their sworn returns their net taxable income. Royal E. Cabell, Commissioner. * Thia clause indicates somewhat of a recession from the absolute requirement of an inventory attempted to be pre- scribed in the Regulations of Dec. 3d, 1909. As stated above, it is submitted that no such requirement could be enforced. See supra § 100. As to the course to be pursued where the company is unable to make an accurate return see § 101. The maxim, lex non cogit ad impoasihilia, would seem to govern such cases. Appendix III. Forms of Returns PRESCRIBED BY THE TREASURY DEPARTMENT goQ ^ ^ S g §"« §- 0) o "5 j3 Qi 03 ^ a o^S 2 So § £ a Sag :oS-^g a ga ^ S ^-w s i s -IS'" g5 ".a ^ =s^5 ^ a • S « '^ 5 3 2 O dj a -Q ■ 05 O i-H !B •■" O a S S es « o ° S* S S' .2 -S o g >» C IS a P'.S 2i § a CD oD^ g m i-io|ib m 3-^-^ 3-'^ g°.S oH I 5>>pQ_ 03. 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S 0) r^ „ g ca ' =3 a B n t-*H '7^ o ■ D ^ ^^ TO 05 Q-S^ ^■$£ a ° I .llliiii ^i?Q§t;^;:i^« a^|£a:Sai II INDEX [References are to sections] ACT OF CONGRESS LEVYING CORPORATION TAX. (See also Constitutionality of the Act OF CONGBBSS.) title of ... 3 purpose of . 3 how cited and referred to in this book . 2 form of . . .2 discordant provisions of, with respect to what the tax is on . . . " . 5, 9 when became effective . 29 provisions of, prescribing method of calculating income, mandatory 32 whether retroactive ... 29, 39 whether list in, of deductions to be made from gross income is exhaustive . 45 See also Deductions to be made from Gross Income. deductions allowed by, from gross income, See Deductions to be made from Gross In- come. ACTION. (See Remedies.) ACTION OF DEBT to recover tax, limitation of time for instituting . 113n. as means of correcting erroneous return 114, 126 where no assessment has been made 114, 122, 126 may be defended without first appealing to Commissioner of Internal Revenue . 137 242 INDEX, [References are to sections] SECTIOM ACTION OF B^BT— Continued to collect an assessment . .... 126 APPORTIONMENT of earnings between business transacted in United States and abroad . . . . 77 ASSESSMENT to be made by Commissioner on facts as stated in return . . . 103, 119, 120, 134 acquiesced in by government, presumed correct . 113n. whether condition precedent to action of debt to recover tax 114 necessity for . . .... 114 nature of Commissioner's duty in making 103, 120, 134 amount of .... ... 121 time of ... . .122 on original return . .103, 119, 120, 121 on corrected return . . . 119, 120, 121, 122 notice of 123, 130 payment of . . . 123 See also Payment. distinguished from collection . . 125, 129, 130 collection of, See Collection. general statutes as to, not applicable to this tax 125, 129, 130 mandamus to compel . . . 134 ASSESSMENTS, SPECIAL. (See Special Assess- ments.) ASSETS increase in value of, not necessarily income . . 31, 35 B BANKS tax on deposits of 40, 40n. interest on deposits of, when deductible from gross income 67 INDEX. 243 [References are to sections] SECTION BANKS —Continued what are 67n. capital of, what is ... . . 78ii. foreign, not allowed to deduct interest on deposits in excess of paid-up capital , . ' 82 BONDS held by foreign company, when deemed capital invested in United States . 78 BOOKS company cannot be required to change its mode of keeping .... 101 company not bound to keep . . 101 examination of, by revenue agents 108, 109 court proceedings to compel production of 109 defences to . . . ' 110 costs of . . Ill general statute as to production of, to collectors, inapplicable . .... 130 BREWERIES what may be treated as operating expenses of ... 47n. BUSINESS taxes on, proportioned to dividends and interest on bonded debt 4n. is this tax laid on . 4-10, 48 this tax not proportioned to amount of 5, 10, 42, 149 this tax designated by Congress as a tax on . 6, 48 is income used a mere measure of the 7-10, 14, 48 whether companies which do no, are liable to this tax . . . . .9 character of , classification of corporations with respect to . . . ... 18 when a corporation is engaged in, within United States . . ._.... 28 tax on, whether affected by ownership of property exempt from taxation 40 244 INDEX. [References are to sections] SECTIOS BUSINESS — Continued what is income from, as distinguished from in- come from investments . . 43 expenses of maintaining and operating 46-52 See Maintenance and Operation. what is income from, transacted in United States 76, 77 what is loss in a given 8 In. principal place of, retm-n to be made at . 89 tax on income derived from, not a direct tax 142 BUSINESS CORPORATION whether equivalent to corporation organized for profit 17 whether educational corporation charging for tuition is 26 CAPITAL. (See also Capital Stock.) invested, income from 5, 10, 78, 41, 42 invested in United States, what is income from . 78 employed, what is . 78n. circulating and fixed, distinction between . 35, 53 and surplus, what is . . 43n. what expenses properly chargeable to See Deductions to be made prom Gross In- come. income charges paid by, recoupment for . . 50 loss of, See Loss. CAPITAL STOCK divided into shares, whether this tax is on priv- ilege of having .... 12 what corporations have 19 meaning of ... ... 61 paid-up, what is . . ... 61 outstanding, what is 63 INDEX. [References are to sections] 245 CAPITAL STOCK — ContiniiM what return must state in regard to CHARITABLE CORPORATION what is whether exempt from this tax COLLECTION. (See also Collectobs.) distinguished from assessment governed by general internal revenue statutes by distraint, etc. by action of debt, (See Action op Debt.) COLLECTORS may extend time for making return whether may administer oath to return . I to receive returns to transmit returns to Commissioner of Internal Revenue . . . to report to Commissioner failure of company to make return duties of, in case return submitted is imperfect on its face .... to report errors in return to serve notice of assessment to receive payment of the tax . directions to, by Secretary of Treasury not inquisitorial officers in connection with this tax 128, 130 general duties of . 130 not to divulge information 117, 130 actions against, to recover back taxes paid under protest COMMISSIONER OF INTERNAL REVENUE no power to prepare return for corporation not in default .... regulations of, as to liability to this tax of corporations organized or dissolved within the year 29 91 18n., 26 26 125, 129, 130 125 125 86 130 89 102 104 105 106 123 123 128 137 29 246 INDEX. [References are to sections] SECTION COMMISSIONER OF INTERNAL REVENUE — Continued as to meaning of gross income, criticised 31n. as to treating increase in value of property as income ... 35 disregarding provision of law that income is not taxable unless received . . .37 as to taxing income from foreign business and property . . 44A disregarding words " actually paid " in the statute ... . . 49 as to what companies must make returns . 87 extent of power to make 90 as to contents of return 90, 100 as to keeping of book by corporations . . 101 as to submission of inventory 100 as to appointment of internal revenue agents to collect data . . . 106 powers of, s may prescribe form of return 90 but not its substance or contents 90, 100, 134 cannot compel company to disclose how it ai^ rives at data given in return . 100 whether can compel company to keep books 101 to keep returns in his office . 102, 116 to make assessment on the returns 103, 119, 120, 134 ministerial duty of, in making assessments 103, 120, 134 where no return is made . .104 in cases of returns imperfect on their face . 105 in cases of false or erroneous returns 106 et seq. to institute proceedings for correction of return 1 06 quasi-judicial function of . . 106, 134 delegation of powers by . 106 to require additional information from the company 90, 100, 107, 134 INDEX. 247 [References are to sections] SECTION COMMISSIONER OF INTERNAL REVENUE — Continued to appoiat revenue agent to examine books and,take testimony . . . 108 to invoke aid of courts for inspection of books and examination of witnesses 109 to make amended return on information so acquired .... ... 112 assessment by, See Assessment. application of general internal revenue statutes asto . . . . 129 Jto authorise institution of action for recovery of taxes . . . 126n. cannot be both loyal agent and impartial judge 132 mandamus against . . ... 134 appeal to, not necessary before suing for illegal distraint . 136 necessity for appeal to, before suing to recover back taxes illegally exacted 137 applications to, for refund of taxes . 138 COMPANIES. (See also Foreign Companies, Cor- porations.) what, are liable to this tax companies doing no business . . . 9 unincorporated companies . . . . 16 companies organized for profit 17 having capital represented by shares . 19 insurance companies . 20 foreign companies ... . 27, 28 organized or dissolved within the year . 29 expressly excepted classes of . . 21-26 what are deemed " subject to the tax " 72, 73, 87 whether the word includes successors 29n. returns by, See Returns. 248 INDEX. [References are to sections] SECTION COMPANIES — Continued requiring additional infonnation from . . . 107 right of, to be heard as to correcting return . 107, 112 CONGRESS. (See also Act of Congress, Consh- TUTIONAUTr OP THE ACT OF CoNGEESS.) discussion of corporation tax in ... . 1 designation by, of what tax is on, not conclusive 6 CONSTITUTIONALITY OF THE ACT OF CON- GRESS with respect to income from state and municipal securities . . ... 40, 147 with respect to income from land 41, 141-144 with respect to income from invested personal property 42, 141-144 on account of failure to provide for notice to company . . . . . 107, 112 statute framed to obviate objections to . . 1, 139 general statement of objections to . . . . 140 whether void as unapportioned direct tax 141, 142, 143, 144 objection to, as tax on a state franchise . . 145 objection to, on the ground of inequality 146 whether impaired by retroactive features of tax 148 effect of partial unconstitutionality . . . 149 CONTEMPT. (See Coorto, Books, Witnesses.) CONTRACTS soliciting of, not necessarily doing business . . 28 CORPORATION TAX OF 1909. (See also Act of Congress Levying Corporation Tax. origin of 1 2 2 3 4-14, 48 form of how cited and referred to in this book purpose of . . . . what property or rights levied upon what corporations, companies or associations are subject to 15-29 INDEX. 249 [References are to sections] SECTION CORPORATION TAX OF 1909 — Continued companies doing no business .... 9 unincorporated companies . . . . 16 corporations or companies not organized for profit . .... .17 corporations or companies not having capi- tal divided into shares 19 insurance companies 20 expressly excepted classes . . . 21-22 labor organizations ... . 26 agricultural or horticultural organizations . 23 fraternal beneficiary societies ... 24 domestic building and loan associations . 25 religious, charitable or educational corpora- tions . . .26 possible methods of evading . . .19, 72 what income included in, See Income, Deductions to be made phom Gross Income. what is a company " subject to the tax " 72, 73 assessment of, See Assessment. returns for, See Return. action to recover. See Action of Debt. collection of, See Collection CORPORATIONS. (See also Companies.) how objects of, determined for purposes of tax law 18 not organized for profit, whether subject to this tax 17 not having capital stock represented by shares . 19 expressly excepted classes of 21-26 foreign, when subject to this tax ... 28 organized or dissolved within the year, whether subject to tax , . 29 250 INDEX. [References are to sections] SECTION COSTS of proceedings for correction of return . . . Ill COURTS federal, follow state courts as to meaning of doing business in state statutes 28 jurisdiction of, to compel attendance of witnesses and production of books for correcting return 109 no direct appeal to, from assessment of tax . . 132 remedies in. See Remedies. D DEBT, ACTION OF. (See Action of Debt.) DEBTS. (See also Indebtedness.) whether expenses of collecting, deductible from gross income ... . . 47n. DEDUCTIONS TO BE MADE FROM GROSS IN- COME whether statutory list of, is exhaustive 45, 58, 65, 66, 99A what proper on general principles 45, 46, 53, 58, 63n., 66 expressly required by the Act of Congress 46-74, 80-84 expenses of maintenance and operation 46-52, 80, 96 See Maintenance and Opekation. for charges such as rentals or franchise payments 52 for losses 53-59,81 See Loss, by insurance companies . . ... 58-69 See Insurance Companies. for interest paid on indebtedness . 60-65, 67, 82 See also Interest, Indebtedness. for principal of debts of company paid . . 66 for additions to sinking funds . . 66 by banks and trust companies . . . , 67, 82 for taxes . . . . 68-70, 83 See also Taxes. INDEX. 251 [References are to sections] SECTION DEDUCTIONS TO BE MADE FROM GROSS INCOME — Continued for dividends on shares in other companies 71-74, 84 See also Dividends. by foreign companies 79-84 See also Foreign Companies. return must state amount claimed as . . . 95 DEPOSITS. (See Banks.) with state officers, whether capital within the state 78 DEPRECIATION occurring prior to 1909, whether expense of making good may be deducted from gross income . 51 deduction for, dependent solely on express statute 53 of investments 53n. what allowances may be made for ... . 57 occurring in previous years, whether to be allowed for 51,57 of property of foreign companies . ... 81 amount claimed as, to be stated separately in return 97 DIRECT TAX whether an income tax is 141 tax on income from particular business is not 142 whether present tax is within this principle 143 whether tax on income of certain classes of persons is . . 144 DISTRAINT for tax: in arrear . . . 125 remedies against illegal .... 136 DIVIDENDS this tax not a tax on .... ^. . 13 may be payable though no income received . 31 on stock held in other companies, whether amount to income . . 34 whether amount to income from business . 43 252 INDEX. [Keferences are to sections] SECTION DIVIDENDS — Continued taxes on right to exist as corporation proportioned to amount of 40 what are .... .... 74 on shares held in other companies subject to the tax, deductions from gross income for . . 71-74 construction of the provision in general . 71 on shares in companies whose net income is less than five thousand dollars ... 72 on shares in foreign companies ... 73 what are deemed " dividends " . . 74 on shares held by foreign companies, when to be deducted in ascertaining their taxable income . 84 received on shares in other companies, what return must state in regard to 94 E EDUCATIONAL CORPORATIONS what are . . 26 exempt from this tax 26 EVASION of the tax, possible modes of 19, 72 EXEMPTIONS FROM TAXATION what included in 40, 43 FOREIGN BUSINESS AND PROPERTY income of domestic company from, whether tax- able ... . 44A FOREIGN COMPANIES not doing business, not liable to this tax . . 9 what are . . . . . 27 what deemed to be engaged in business in the United States ....,,... 28 INDEX. 253 [References are to sections] SECTION FOREIGN COMPANIES— Coreimwed ceasing to do business in United States prior to passage of act . , . .... 29 income of, not taxable because stock owned by domestic company 34 dividends on shares in, when deductible from gross income of domestic companies ... 73 how taxable income of, calculated .... 75-84 what is income from American business of . . 76, 77 what is income of, from capital invested in United States .... .... 78 deductions by, from gross income . . . 79-84 expenses of, for maintenance and operation . . 80 losses by, when deductible from gross income . 81 interest on indebtedness of, when deductible from gross income .... . .82 taxes paid by, when may be deducted from gross income 83 dividends on shares held by, in other compa- nies 84 what returns by, should state in regard to main- tenance and operation . . 96 in regard to losses ... . . 97 in regard to indebtedness and interest . . 92, 98 returns by, in general, See Retukns. FRANCHISE so-called tax on, as tax on business . . 4, 11 to be a corporation, this tax not on . . 11, 145 taxes on, proportioned to amount of dividends 40 taxes on, proportioned to income . . 40n. whether tax on, is a tax on property . lln. whether this tax unconstitutional as a tax on a, granted by state 145 FRANCHISE PAYMENTS deductions for, from gross income .... 52 254 INDEX. [References are to sections] SECTION G GOODWILL tax on '5 I IMPROVEMENTS whether expenses of, deductible from gross in- come 47 INCOME (See also Income Tax.) this tax proportioned to 10 whether a mere measure of the value of the busi- ness 7-10, 14 how calculated for purposes of this tax . 30-84A definition of 33 distinguished from profits 31 increase in value of assets not taxable as . . 31, 35 cannot be calculated by balance-sheet method of estimating profits available for dividends . , 31 gross, whether equivalent to gross profits . . 31 what is, in general 33 statutory provisions as to method of calculating, mandatory ... ... 32 rental value of property occupied by company not .......... 33 money described as capital in remittance to com- pany, may be 33 dividends on stock of other companies as 34 of other companies in which taxpaying company owns shares, whether taxable . . .34 what is, in case of sale of property by company . 35, 36 received, what is . 37 as trustee, whether taxable .... 38 received before passage of act, whether taxable . 39 derived from property exempt from taxation, whether taxable 40 INDEX. 255 [References are to sections] SECTION INCOME — Continued taxes on right to exist as a corporation propor- tioned to 40n. from contracts with state, whether taxable . 40 from land .... . . . 41 from invested personal property .... 42 from business as distinguished from investments, what is ... . .... 43 from idtra vires business 44 from foreign business and property . . 44A deductions from gross, in order to ascertain net, SeeDBDucTioNS to be made feom Gkoss Income. " paid out of " when expenses deemed to be 49n., 50 of insurance companies, how estimated . . .58, 59 of foreign companies, how calculated for purposes of tax . . 75-84 See FoEEiGN Companies. for what period calculated for purposes of tax net, to be stated in return INCOME TAX corporation tax as substitute for whether this tax amounts to . difference between this tax and an . whether constitutional INDEBTEDNESS bonded, or other, what is 60 interest paid on, deduction for, from gross income 60-65, 67, 82 See also Interest. limitation of amount of, on which interest paid may be deducted from gross income 61, 62, 63, 82 of non-stock corporations 64 in excess of paid-up capital stock outstanding, what is ... . ... 61-64 payment of principal of, deductions for, from gross income 66 ■tax 84A 99A 1, ,139 . 4 -10 1, 14 14 40, 41, 42, 141 256 INDEX. [References are to sections] SECTION INDEBTEDNESS — Continued of foreign companies, deductions on account of . 82 what return must state in regard to ... 92, 98 INEQUALITY in the operation of this tax . . 8, 38, 71, 72, 146 INHERITANCE TAX not a tax on the property inherited . . . 4n. proportioned to value of exempt property . . 40 INJUNCTION against illegal tax 133 against giving information unnecessarily . 133 INSURANCE whether premiums paid for, are deduttible from gross income .... 47 when premiums for, deemed actually paid 49 losses not compensated by .... 56 INSURANCE COMPANIES effect of making all, subject to this tax ... 20 what are .... .... 20 when deemed to be doing business in a state . 28 losses by, what to be deducted from gross income 68 deductions by, from gross income, for amounts other than dividends paid on policy or annuity contracts ... ... for additions to reserve funds . how income of, to be estimated whether deduction may be made for unearned premiums . . . . mutual, interest on indebtedness of returns by, need not state amount of capital stock .... bonds deposited by, with state officer as capital within the state foreign, deductions allowed by, from gross income 81 special allowances claimed by, to be stated sepa- rately in the retvim 97 68 59 58,59 58 64 91 78 INDEX. 257 [References are to sections] SECTIOH INSPECTION of books. (See Books.) of returns ... 116 INTEREST. (See also Indebtedness.) on bonded or other indebtedness, when to be deducted from gross income . . 60-65, 67, 82 on indebtedness in excess of paid-up capital stock 65 on indebtedness of non-stock corporations . . 64 on indebtedness of foreign companies ... 82 on amount of assessment 123 recoverable in actions to recover back illegal tax 137 INTERNAL REVENUE LAWS application of, to returns . . . 118 to collection of the tax . ... 125 to assessment of the tax . . . 125, 129, 130 to the corporation tax in general . . . 127 as to the powers of Secretary of the Treasury 128 as to the powers of Conjmissioner of Internal Revenue 129 as to collectors 130 applicability of, to remedies against illegal as- sessment 132 INVENTORY whether company compellable to submit . . 100 INVESTMENTS income from, whether included in the tax . 10, 42 acquisition of property as, not doing business . 28 what is income from, as distinguished from in- come from business . . ... 43 within United States, what is incdme from . . 78 L LAND income from, whether taxable .... 41 LEGACY TAX. (See Inheritance Tax.) 258 INDEX. [References are to sections] SECTION LIMITATIONS for supplying or correcting return . . . 113 as bar to action to recover tax . . 122, 126 against suit to recover back taxes paid under protest 137 against appeal to Commissioner of Internal Revenue for refimd 137, 138 LOSS income charges borne by capital as . . . 50 whether damages paid for torts are a . . . 47 whether proper to allow for, without express provision . . . ... 53 by payment of bonds purchased at premium 53n. by depreciation of investments . 53n., 57, 81 See also Deprkciation. by embezzlement ... . . 53n., 54 of circulating capital 53 meaning of . 54 by insolvency of debtors .... .54 must be sustaiaed within the year ... 55 must be not compensated by insurance or otherwise 56 by foreign companies, when deductible from gross income 81 what returns must state in regard to . . . 97 burden of proving 126 M MAINTENANCE AND OPERATION expenses of, to be deducted from gross income . 46 what are expenses of, in general .... 47 during previous years, whether deductible . . 47, 96 of property as distinguished from business . 48, 80, 96 expenses of, must be actually paid in order to be deducted 49 when expenses deemed to be paid " out of in- come " 49n., 50 INDEX. 259 [References are to sections] SECTION MAINTENANCE JlND OPERATION — Continued what are " ordinary and necessary expenses of " 51 payments in nature of rentals or franchise pay- ments . . "52 payment of losses as part of expenses of . . 58 payment of indebtedness as part of expense of . 60, 66 contributions to sinking fund as expense of . 66 whether expenses of, include ordinary taxes im- posed by foreign government .... 70 of foreign companies, what expenses deductible as 80 what return must state in regard to . . . 96 MANDAMUS as remedy against illegal proceedings in con- nection with tax 134 MUNICIPAL SECURITIES whether income derived from, is taxable . . 40 N NAME not conclusive as to nature of tax .... 6 NOTICE of proceedings to supply or correct return, whether necessary 107, 112 of assessment . . . .' . 123, 130 O OATH to return, who shall make 88 by whom to be administered . . 88, 130 form of 88 OBJECTS of corporations or companies, how determined . 18 subject to tax, none under this law . . 130 OPERATION. (See Maintenance and Operation.) ORIGIN of the corporation tax of 1909 . . .1 260 INDEX. [References are to sections] SECTION P PAYMENT of the tax, when to be made 123 penalties for failure to make 123 to whom to be made . .... 123 mider protest 124, 137 enforcement of, See Collection. PERSONAL PROPERTY invested, whether income from, is taxable . . 42 PHILIPPINE ISLANDS whether corporation organized imder laws of, are subject to this tax 27 PORTO RICO whether corporations organized under laws of, are subject to this tax ... ... 27 PREMIUM. (See Insurance.) paid for lease, whether deductible from gross income 62n. PRESIDENT may authorise disclosure of company's secrets . 117 PROFITS. (See also Income.) bmrden of proving 126 PROPERTY. (See also Land, Personal Property, Income.) when taxes proportioned to value of, not taxes on . 4 ownership or acquisition of, in state, not doing business 28 increase in value of, not income . . . . 31, 35 sales of, what amounts to income in cases of . 35, 36 expense of maintaining 48, 80, 96 See Maintenance and Operation. depreciation of. See Depreciation. sale of, for non-payment of tax .... 125 INDEX. 261 [References are to sections] SECTION PUBLICITY of returns 116 provision to guard against 117 R RAILWAYS when not doing business in state .... 28 exemptions of, from taxation .... 43 REGULATIONS. (See Commissioner of Internal Revenue, Secretary of the Treasury.) RELIGIOUS CORPORATIONS what are 26 exempt from this tax 26 REMEDIES for collection of tax. See Collection. against illegal tax or assessment . . 132-138 by injunction 133 by mandamus, etc 134 by passive resistance 135 by trover or trespass in case of illegal distraint 136 by action to recover back taxes paid under protest ... .... 137 by application to Commissioner of Internal Revenue 138 RENTAL VALUE of premises occupied by company, whether part of gross income 33 of part of banking house occupied by manager, whether deductible from gross income . . 47 RENTALS deductions for payments such as ... 52 RESERVE FUNDS. (See also Sinking Fund.) additions to, whether deductible from gross income 59 RETURN importance of 85 262 INDEX. [References are to sections] SECTION RETURN — Continued when to be made 86 by what companies to be made .... 87 by whom and how to be sworn to ... . 88 to whom to be made 89 control of Commissioner of Internal Revenue over 90 what it must contain 91-101 statement as to capital stock . . . . 91 amount of indebtedness .... 92 gross income ..... .93 dividends received from companies subject to tax 94 statement as to maintenance and operation 96 as to losses and depreciation .... 97 as to interest paid ... ... 98 as to taxes 99 net income 99A may contain additional statements . . 100 duty of company where cannot state details of, accurately 101 guessing at data stated in 101 disposition of 102, 116 assessment to be made on facts as stated in 103, 119, 120, 134 failure to make, consequences of . . . 104, 121 imperfect on its face, effect of . .105 correcting an erroneous return . . 106-114 necessity for evidence of its incorrectness before instituting proceeding for cor- rection . . . 106, 110, 134 preliminary proceeding before Commissioner 106 requiring additional information from the company . . ... 107 examining books and taking testimony 108, 109, no. 111 INDEX. 263 [References are to sections] SECTION RETURN — Continued action of Comimssioner on information so acquired . . 112 limitation as to time . . 113 penalty for erroneous . . . 115, 121 as public record .... 116 not affected by other internal revenue laws . 118 distinction between honestly erroneous and fraudulent returns 115, 121 assessment on, See Assessment. general statutes as to . .... 130 REVENUE AGENTS specially designated to examine books and take testimony . ... 106, 108 SALARIES money paid in commutation of, whether deduc- tible from gross income . 47 SALE of assets by corporation, what is income in cases of 35, 36 for non-payment of tax . . . 125 SEARCHES by collectors, not authorized with respect to this tax . 130 SECRETARY OF THE TREASURY validity of regulations of 90n., 128 no power to add to statutory requirements as to contents of return . 100 powers of, in general ..... 128 SHAREHOLDER suit by to enjoin company from paying illegal tax 133 to enjoin company from giving unnecessary information to collectors . . . 133 264 INDEX. [References are to sections] SECTION SHARES stock not divided into . . 19 whether this tax is on privilege of having . 12 taxes on, proportioned to value of exempt prop- erty owned by corporation . 40 issued at a discount, whether to be included in estimating amount of capital stock outstanding 61 watered ... 61 outstanding, what are ... 63 whether taxes on, may be deducted from gross income of company . 68 SINKING FUNDS. (See also Reserve Funds.) money added to, whether deductible from gross income 66 SPECIAL ASSESSMENTS whether deductible from gross income as taxes . 69 STATE SECURITIES whether income derived from is taxable . 40 STATUTES. (See Table of Federal Statutes Cited.) STOCK. (See Capital Stock, Shares.) SUBPOENA DUCES TECUM from state court, disobedience of, by collectors 128n. to compel production of documents for correction of return . . . . 108, 109 T TARIFF corporation tax as amendment to tariff Act . 1, 2, 139 TAX. (See Corporation Tax, Act of Congress Levying Corporation Tax, Shares.) how to determine what property or rights tax is on 4, 6 remedies against illegal. See Remedies. direct, what is . . 141, 142, 143, 144 TAXES when to be deducted from gross income . 68-70 INDEX. 265 [References are to sections] SECTION TAXES — Contimied must be paid within the year .... 68 whether must be assessed against the company 68 assessed against company as trustee . . 68 special assessments for betterments . . 69 imposed by foreign governments . . 70 in case of foreign companies ... 83 what returns must state in regard to . . . 99 TESTIMONY on preliminary proceeding before Commissioner to show falsity of return . ... 106 of officers and employees of the company, to correct return . . . ... 108 TIME for making return ... 86 for correcting return . ... 113 for supplying return . . 113 for assessment 122 for notice of assessment . . . 123 for suit to recover back taxes paid under protest . 137 for appealing to Commissioner of Internal Revenue for refund of taxes 137, 138 TITLE of act levying corporation tax . . 3 how far to be considered in construction of statute 3 TORTS whether damages paid for, are deductible from gross income . . .... 47 TRUSTEE income received as, whether taxable ... 38 taxes paid by company as, whether deductible from gross income . ■ .68 U ULTRA VIRES BUSINESS whether income from, taxable .... 44 266 INDEX. [References are to sections] SECTION UNIFORMITY. (See also Inbqtjalitt.) whether this tax violates constitutional require- ment of ... 146 UNINCORPORATED COMPANIES whether liable to this tax 16 UNITED STATES action against, to recover back taxes paid under protest . 137 to recover amount ordered refunded by Com- missioner of Internal Revenue 138 meaning of . . . 27 W WITNESSES at preUminary proceeding before Commissioner to show incorrectness in return . 106 who may be, on proceedings for correction of return .... ... 108 compelling attendance of . 109, 110, 111 WORDS AND PHRASES EXBLAINED OR COM- MENTED UPON actually paid ... 49, 60, 67 agricultural or horticultural associations 23 annually . . 84A applicable ... 127 articles or objects subject to tax . 130 ascertained as provided in the foregoing para- graphs .... 45 assessments thereon . 103, 132 associations . ... 16, 29n. at any time within three years 113 bearing upon matters required to be included in the return . . 108 bonded or other indebtedness 60 building and loan associations .... 25 business 4, 21, 76 INDEX. 267 [References are to sections] SECTION WORDS AND FB.-RASES — Continued business conducted . .... 81 business transacted within the United States 76 capital and surplus .... 43n. capital invested ... . . 10, 78 capital stock ... 61 capital stock represented by shares . . 19 charges such as rentals or franchise payments . 62, 70 close of the year . . 62, 84An. collection, remission and refund of internal revenue taxes 127 companies . 16, 29n. compensated by insurance or otherwise 56 corporation, joint stock company or association 16n. corporations . 16n. domestic . . .25 due 123 during such year . . 84A earnings 31n., 33, 60. encourage the industries of the United States 3 engaged in business in the United States . 28 equivalent to .... .6 evidence . . '. 106 exercises a trade . 28 extended and made applicable 127 false or fraudulent . 116, 121 foreign country . . 27 form ... . . 90 franchise ... ... 4, 11 franchise payments 52 fraternal beneficiary societies .... 24 from all sources 5, 10, 42, 44A, 93 gross income 31n., 76, 93 income .... 31, 50 insurance 56, 68 insurance companies 20, 58 268 INDEX. [References are to sections] WORDS AND PaRASES — Continued interest of money .... labor organizations .... loss maintenance and operation may necessary expenses net income not compensated by insurance or otherwise now or hereafter organized objects liable to tax officers and employees .... operation ordinaiy and necessary expenses organized and operated organized for profit ... other officer or employee of the United States otherwise 49n, out of earnings . out of income outstanding paid paid-up capital stock person . principal place of business profit profits properties . ... property received religious, charitable or educational purposes remission and refund rentals or franchise payments ... required by law . so far as applicable to and not inconsistent with 43n. 22 47, 50, 54 47 107 51 45 56 29 130 108 47 51 18 17, 20, 26 117 56 50,80 50 63 . 49, 60, 67 61 130n. 89 17 17n., 20n., 30 48 48,96 37,76 26 127 52 59 127 subject to the tax hereby imposed 72, 73, 87 INDEX. [References are to sections] 269 WORDS AND PHRASES — Continued sustained Tvithin the year 65 taxes . 68, 69 territories . ... 27 true and accurate return . . ... 101 United States and its territories .... 27 upon the information so acquired . . . 112 with intent to defeat or avoid the assessment 115, 121 with respect to the carrying on or doing business 5, 6, 38, 48, 149 within the year . ... 84A, 96 year . 55, 84A YEAR for which tax is assessed 84A