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large bodies of ore and had an actual cash value not less than $10,105,400; and at all times during the years 1912 to 1917, inclusive, their actual cash value was not less than the sum last mentioned. In the year 1912 the company increased the valuation of said lands upon its books by adding thereto the sum of $10,000,000, which it carried to surplus, and thereupon, in the same year, declared a stock dividend in the sum of $9,915,400, representing the increase in value of the ore lands. Theretofore appellant's capital stock had consisted of shares issued, all of one class, having a par value of $9,915,400. The declaration of the stock dividend was carried out by the surrender to the company of all the outstanding stock, and its cancellation, and the exchange of one share of new common and one share of new preferred stock for each share of the original stock.

In returning its annual net income for the year 1917 the company stated its invested capital to be $26,322,904.14, in which was included the sum of $10,105.400 as representing the value of its ore lands. The Commissioner of Internal Revenue caused a reassessment to be made, based upon a reduction of the invested capital to $16,407,507.14; the difference ($9.915,400) being the increase in the value of the ore lands already mentioned. The result was an additional tax of $1,081.184.61, which, having been paid, was made the subject of a claim for refund; and this having been considered and rejected by the Commissioner, there followed a suit in the Court of Claims, with the result already mentioned.

Appellant's contentions, in brief, are, first, that the increased value of the ore lands, placed upon the company's books in 1912, ought to be included in invested capital under section 207 (a) (3), as “paid in or earned surplus and undivided profits." Second, that within the meaning of clause (2), which provides that invested capital shall include "the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation," the stock of the company issued in 1912, consisting of $9,915.400 of preferred stock and an equal amount of common, was fully paid for: either (a) by the tangible assets, including the ore properties at their increased value, or (b) by the surrender of all the certificates representing the old common stock, which, it is said, had an actual cash value equal to double its par. And, third, that the construction put upon the Act by the Treasury Department, based as it is said not upon value but upon the single feature of cost, disregarding the time of acquisition, would render the Act unconstitutional as a deprivation of property without due process under the Fifth Amendment, because so arbitrary as to amount in effect to confiscation; and hence that this construction must be avoided.

Reading the entire language of section 207 in the light of the circumstances that surrounded the passage of the Act, we think its meaning as to “invested capital" is entirely clear. The Great War in Europe had been in progress since the year 1914, and the manufacture and export of war supplies and other material for the belligerent powers had stimulated many lines of trade and business in this country, resulting in large profits as compared with the period before the war, and as compared with ordinary returns upon the capital embarked. The United States had become directly involved in the conflict in the spring of 1917, necessitating heavy increases in taxation; at the same time manufactures and trade of every description were rendered even more active, and in certain lines more profitable, than before, so that the unusual gains derived therefrom formed a natural subject for special taxation.

On the eve of our entry, and in order to provide a "special preparedness fund" for Army, Navy, and fortification purposes, an Act (March 3, 1917; ch. 159, 39 Stat. 1000) was passed, which, in Title II, provided for an excess profits tax on corporations and partnerships equal to 8 per cent of the amount by which their net income exceeded $5,000 plus 8 per cent of the "actual capital invested"; and, in section 202 (p. 1001), defined this term to mean “(1) actual cash paid in, (2) the actual cash value, at the time of payment, of assets other than cash paid in, and (3) paid in or earned surplus and undivided profits used or employed in the business," but not to include money or other property borrowed.

The Revenue Act of October 3, 1917, passed after we had become engaged in the war, took the place of the Act of March 3, and embodied a "war excess profits tax," with higher percentages imposed upon the income in excess of deductions and a more particular definition of terms. A scrutiny of the particular provisions of section 207 shows that it was the dominant purpose of Congress to place the peculiar burden of this tax upon the income of trades and businesses exceeding what was deemed a normally reasonable return upon the capital actually embarked. But if such capital were to be computed accord

ing to appreciated market values based upon the estimates of interested parties (on whose returns perforce the Government must in great part rely), exaggerations would be at a premium, corrections difficult, and the tax easily evaded. Section 207 shows that Congress was fully alive to this and designedly adopted a term-" invested capital "-and a definition of it, that would measurably guard against inflated valuations. The word "invested" in itself imports a restrictive qualification. When speaking capital of a business corpora

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out of money, or money's worth, either by an individual in acquiring an interest in the concern with a view to obtaining income or profit from the conduct of its business, or by the concern itself in acquiring something of permanent use in the business; in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains. Webster's New Internat. Dict., "invest," 8; Century, Dict., "invest," 7; Standard Dict., "invest," 1.

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In order to adhere to this restricted meaning and avoid exaggerated valuations, the draftsman of the Act resorted to the test of including nothing but money, or money's worth, actually contributed or converted in exchange for shares of the capital stock, or actually acquired through the business activities of the corporation or partnership (involving again a conversion) and coming in ab extra, by way of increase over the original capital stock. How consistently this was carried out becomes evident as the section is examined in detail. Cash paid in, and tangible property paid in other than cash, are confined to such as were contributed for stock or shares in the corporation or partnership; and the property is to be taken at its actual cash value "at the time of such payment "-distinctly negativing any allowance for appreciation in value. There is but a single exception: Tangible property paid in prior to January 1, 1914, may be taken at its actual cash value on that date, but in no case exceeding the par value of the original stock or shares specifically issued for it; a restriction in itself requiring the valuation to be taken as of a date prior to the war period, and in no case to exceed the stock valuation placed upon it at the time it was contributed. The provision of clause (3) that includes "paid in or earned surplus and undivided profits used or employed in the business" recognizes that in some cases contributions are received from stockholders in money or its equivalent for the specific purpose of creating an actual excess capital over and above the par value of the stock; and, in view of the context, surplus "earned " as well as that “paid in" excludes the idea of capitalizing (for the purposes of this tax) a mere appreciation of values over cost.

The same controlling thought is carried into the proviso, which relates to the valuation of patents, copyrights, trade-marks, good will, franchises, and similar intangible property. Every line shows evidence of a legislative purpose to confine the account to such items as were paid in for stock or shares, and to their values "at the time of such payment;" but, with regard to those bona fide purchased prior to March 3, 1917, there is a special provision, limiting the effect of any adjustments that might have been made in view of the provisions of the Act of that date.

It is clear that clauses (1) and (2) refer to actual contributions of cash or of tangible property at its cash value contributed in exchange for stock or shares specifically issued for it; and that neither these clauses, nor clause (3) which relates to surplus, can be construed as including within the definition of invested capital any marking up of the valuation of assets upon the books to correspond with increase in market value, or any paper transaction by which new shares are issued in exchange for old ones in the same corporation, but which is not in substance and effect a new acquisition of capital property by the company.

It is clear enough that Congress adopted the basis of "invested capital" measured according to actual contributions made for stock or shares and actual accessions in the way of surplus, valuing them according to actual and bona fide transactions and by valuations obtaining at the time of acquisition, not only in order to confine the capital, the income from which was to be in part exempted from the burden of this special tax, to something approximately representative of the risks accepted by the investors in embarking their means in the enterprise, but also in order to adopt tests that would enable returns to be more easily checked by examination of records, and make them less liable to inflation than if a more liberal meaning of “capital and surplus" had been adopted; thus avoiding the necessity of employing a special corps of valuation experts to grapple with the many difficult problems that would have ensued had general market values been adopted as the criteria.

In view of the special language employed in section 207, obviously for the purpose of avoiding appreciated valuations of assets over and above cost, the argument that such value is as real as cost value, and that in the terminology of corporation and partnership accounting "capital and surplus" mean merely the excess of all assets at actual values over outstanding liabilities, and "surplus" means the intrinsic value of all assets over and above outstanding liabilities plus par of the stock, is beside the mark. Nor has the distinction between capital and income discussed in Doyle v. Mitchell Bros. Co. (247 U. S. 179, 187); Hays v. Gauley Mtn. Coal Co. (247 U. S. 189, 193); and Southern Pacific Co. v. Lowe (247 U. S. 330, 334–335), any proper bearing upon the questions here presented.

Upon the strength of an administrative interpretation contained in a Treas ury regulation pertaining to the Revenue Act of 1917, under which "stocks were to be regarded as tangible property when paid in for stock or shares of a corporation, it is insisted that appellant's stock dividend distribution of 1912 ought to be treated as paid for in tangible property, the old stock surrendered being regarded as tangible for the purpose. But that distribution, in substance and effect, was an internal transaction, in which the company received nothing from the stockholders any more than they received anything from it (see Eisner v. Macomber, 252 U. S. 189, 210-211); and the old shares can not be regarded as having been "paid in for" the new ones within the meaning of section 207(a)2, even were they "stocks" within the meaning of that regulation, which is doubtful.

It is said that the admitted increase in the value of appellant's ore lands is properly to be characterized as earned surplus, because it was the result of extensive exploration and development work. We assume that a proper sum, not exceeding the cost of the work, might have been added to earned surplus on that account, but none such was stated in the appellant's petition, nor, so far as appears, in its return of income. In the absence of such a showing it was not inproper to attribute the entire $9,915,400, added to the book value of the ore property in the year 1912, to a mere appreciation in the value of the property; in short, to what is commonly known as the "unearned increment," not properly "earned surplus" within the meaning of the statute.

The foregoing considerations dispose of the contention that either the increased value of appellant's ore lands, or the surrender of the old stock in exchange for the new issues based upon that value, can be regarded as "tangible property paid in other than cash, for stock or shares in such corporation" within the meaning of section 207(a)2; and of the further contention that such increased value can properly be regarded as "paid-in or earned surplus and undivided profits" under section 207 ( a )3.

It is urged that this construction, defining invested capital according to the original cost of the property instead of its present value, has the effect of rendering the Act "glaringly unequal" and of doubtful constitutionality; the insistence being that, so construed, it operates to produce baseless and arbitrary discriminations, to the extent of rendering the tax invalid under the due process of law clause of the Fifth Amendment. Reference is made to cases decided under the equal protection clause of the Fourteenth Amendment (Southern Ry. Co. v. Greene, 216 U. S. 400, 418; Gast Realty Co. v. Schneider Granite Co., 240 U. S. 55); but clearly they are not in point. The Fifth Amendment has no equal protection clause; and the only rule of uniformity prescribed with respect to duties, imposts, and excises laid by Congress is the territorial uniformity required by Article I, section 8.--Pollock v. Farmers' Loan & Trust Co. (157 U. S. 429, 557); Knowlton v. Moore (178 U. S. 41, 98, 106); Flint v. Stone Tracy Co. (220 U. S. 107, 150); Billings v. United States (232 U. S. 261, 282); Brushaber v. Union Pacific R. R. (240 U. S. 1, 24). That the statute under consideration operates with territorial uniformity is obvious and not questioned.

Appellant cites Looney v. Crane Co, (245 U. S. 178, 188), and International Paper Co. v. Massachusetts (246 U. S. 135, 145), but these cases also are inapplicable, being based upon the due process clause of the Fourteenth Amendment, with which State taxing laws were held in conflict because they had the effect of imposing taxes on the property of foreign corporations located and used beyond the jurisdiction of the taxing State. There is no such infirmity here.

Nor can we regard the Act-in basing "invested capital" upon actual costs to the exclusion of higher estimated values-as productive of arbitrary discriminations raising a doubt about its constitutionality under the due process clause of the fifth amendment. The difficulty of adjusting any system of taxation so as to render it precisely equal in its bearing is proverbial, and such

nicety is not even required of the States under the equal protection clause, much less of Congress under the more general requirement of due process of law in taxation. Of course, it will be understood that Congress has very ample authority to adjust its income taxes according to its discretion within the bounds of geographical uniformity. Courts have no authority to pass upon the propriety of its measures; and we deal with the present criticism only for the purpose of refuting the contention, strongly urged, that the tax is so wholly arbitrary as to amount to confiscation.

The Act treats all corporations and partnerships alike, so far as they are similarly circumstanced. As to one and all, Congress adjusted this tax, generally speaking, on the basis of excluding from its operation income to the extent of a specified percentage (7 to 9 per cent.) of the capital employed, but upon condition that such capital be valued according to what actually was embarked at the outset or added thereafter, disregarding any appreciation in values. If in its application the tax in particular instances may seem to bear upon one corporation more than upon another, this is due to differences in their circumstances, not to any uncertainty or want of generality in the tests applied. Minor distinctions such as those turning upon the particular dates of January 1, 1914, and March 3, 1917-are easily explained, as we have seen. The principal line of demarcation-that based upon actual costs, excluding estimated appreciation-finds reasonable support upon grounds of both theory and practice, in addition to the important consideration of convenience in administration, already adverted to. There is a logical incongruity in entering upon the books of a corporation as the capital value of property acquired for permanent employment in its business and still retained for that purpose a sum corresponding, not to its cost, but to what probably might be realized by sale in the market. It is not merely that the market value has not been realized or tested by sale made, but that sale can not be made without abandoning the very purpose for which the property is held, involving a withdrawal from business so far as that particular property is concerned. Whether in a given case property should be carried in the capital account at market value rather than at cost may be a matter of judgment, depending upon special circumstances and the local law. But certainly Congress, in seeking a general rule, reasonably might adopt the cost basis, resting upon experience rather than anticipation.

In organizing corporations it is not unusual to issue different classes of securities, with various priorities as between themselves, to represent different kinds of contribution to capital. In exchange for cash, bonds may be issued; for fixed properties, like plant and equipment, preferred stock may be given, while more speculative values, like good will or patent rights, may be represented by common stock. In the present case, for instance, when appellant took the estimated increase in value of its ore lands as a basis for increased capitalization it issued preferred stock to the amount of the former total, carrying those lands at cost, and issued a like amount of common stock to represent the appreciation in their market value. It does not appear that in form the new issues were thus allocated, but at least there was a recognition of a higher claim in favor of one part of the book capital than of the other. Upon like grounds it was not unreasonable for Congress, in adjusting the "excess-profits tax," to accord preferential treatment to capital representing actual investments as compared with capital representing higher valuations based upon estimates, however confident and reliable, of what probably could be realized were the property sold instead of retained.

From every point of view the tax in question must be sustained. We intimate no opinion upon the effect of the Act with respect to deductions from cost values of capital assets because of depreciation or the like; no question of that kind being here involved.

Judgment affirmed.

Mr. Justice MCREYNOLDS concurs in the result.

SECTION 326, ARTICLE 833: Tangible property paid in: evidences of indebtedness.

10-21-1502 A. R. R. 413

Held, that good will in a corporation can not be allowed as invested capital under a claim that a price paid to stockholders by certain individuals was in excess of corporate book value of the stock. Good will must be acquired by direct purchase; it can not be determined by a collateral transaction.

The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in denying an item of good will of 10 dollars, claimed by the corporation to have been purchased with cash in 1911.

In 1876, A established a restaurant business and continued to operate the same as sole owner until his death in February, 1901. After his death, the business was carried on under the terms of his will by certain trustees. The trust estate continued for a period of 10 years, but on account of contracts expiring in 1905 and 1906 requiring a renewal for a period of 10 years, thus extending beyond the trust, it was necessary to create some entity capable of contract. A corporation with nominal capital of 4 dollars was accordingly formed and, in keeping with the terms of the will, the stock was issued in the name of the trustees. All contracts were renewed in the name of A, except for certain business directly pertaining to the State of Y, which business was contracted in the name of the N Company, another corporation capitalized at 4 dollars to meet statutory requirements of the State of Y. It is the contention of the taxpayer that the business of the corporation was conducted substantially as a personal service corporation and that all bank accounts were continued in the name of A.

In 1911, in accordance with the provisions of the will, the trust terminated and it was necessary to make distribution to the six heirs. Under this distribution the widow was entitled to 50 per cent of the estate and the balance was to be equally divided among five children. In order to make satisfactory distribution, the trustees sold the stock which they held for 60 dollars in cash and this amount was distributed to the heirs in the proportions above indicated. It appears that the book value of the stock was only 50.c dollars and in order to measure the value of the stock by the cash consideration that was paid to the trustees, there was set up an asset of good will in the amount of 10 dollars. This amount was subsequently, in the next succeeding five years, charged off at 2x dollars per annum.

In submitting the case for consideration by this Committee, B, president of the corporation, made affidavit in the following state

ment:

* * * in other words, there was paid in cash for 4r dollars par value of M Company stock (with which went the 4r dollars par value N Company stock), 50 dollars being the book value of the furniture, fixtures, supplies, etc., and also 10 dollars for good will, or a total of 60 dollars which was contributed as follows: B, 38%; C, 20%; D, 20%; E, 15%; F, 7% and the stock was distributed accordingly.

Of these purchasers, only B and D were beneficiaries under the will, each receiving 10 per cent of the estate. Subsequent to consideration of the case by the Committee but prior to the final approval by the Committee, B submitted an additional affidavit in which the statement is made that

As representative of the corporation, I had agreed to sell to myself and the other four individuals, the entire assets of the business of the M Company and the N Company. This was my intention; it was what we did.

The matter of the transfer of this property to the new organization was never discussed, but what we were purchasing was minutely understood by all of us; that is to say, we were purchasing all of the assets of the business. No thought was given to the purchase of stock, and no thought was given as to the method of transfer.

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