
    CHARLES S. CHILD AND WILLIAM J. FULLERTON, FORMERLY PARTNERS DOING BUSINESS AS WILSON & BRADBURY, v. THE UNITED STATES
    [No. D-561.
    Decided April 4, 1927]
    
      On the Proofs
    
    
      ISwcess-proflts tax; accrual hasis; deduction of tax payable in following year. — See JD’Olier v. United States, 61 O. Cls. 895.
    
      The Reporters statement of the case:
    
      Mr. Spencer Gordon for the plaintiffs. Mr. J. Harry Covington and Covington, Burling & RvMee were on the briefs.
    
      Mr. Alexander H. McCormich, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. The plaintiffs, Charles S. Child and William J. Fullerton, are citizens of the United States and residents of the .States of Pennsylvania and New Jersey, respectively, and ■during the year 1911 were partners doing business as commission merchants in the city of Philadelphia under the firm name of Wilson & Bradbury.
    II. On June 15, 1918, the plaintiffs paid to the Bureau of Internal Revenue as excess-profits tax imposed upon the said partnership for the year 1911 the sum of $379,160.42. On April 15, 1921, the plaintiffs paid an additional amount of excess-profits taxes for said year 1917 of $2,729.43. Subsequently there was refunded by the Bureau of Internal Revenue the sum of $10,297.26, said refund being allowed, by reason of matters not involved in this suit. The balance, $371,592.59, has been retained by the United States as net excess-profits taxes due from plaintiffs as aforesaid for the’ year 1917 based on an invested capital as determined and found by the Commissioner of Internal Revenue of $1,775,-862.98. The computation of said excess-profits taxes as determined and found by the Commissioner of Internal Revenue is shown by Exhibit B filed with the plaintiffs’ petition, which is made a part hereof by reference.
    III. On December 31, 1916, the invested capital of said partnership was the sum of $2,151,634.54. The net income of said partnership for the calendar year 1917 was $995,-428.14, including dividends of $18,934.37 not subject to the excess-profits tax, leaving net income of said partnership for the calendar year 1917 subject to excess-profits tax of $976,493.77.
    IY. During the year 1917 the partners withdrew from the funds used in the partnership business as follows:
    January- $6,165. 04
    February- 293, 028. 90
    —-- $299,193. 94
    March- 346, 640. 39
    May-1- 30, 000. 00
    June- 12, 000.00
    August- 19, 500.83
    November_ 31, 563.12
    December_,_,_ 50, 000. 00
    Total_ 788, 904. 28
    Y. The Commissioner of Internal Revenue determined and found under his interpretation of the provisions of the revenue act of October 3, 1917, and Regulations 41, article 43 and 53, promulgated by him, that certain withdrawals of the partners in the sum of $299,193.94 to March 1, 1917, and for the month of March, 1917, in the sum of $346,646.39, resulted in deductions of the invested capital of said partnership for the calendar year 1917 in the sum of $375,771.56, as shown by computation in said Exhibit B.
    
      VI. Kegulations 41, articles 43 and 53 read as follows:
    “ INVESTED CAPITAL — GENERAL PROVISIONS
    “Art. 43. How to ascertain average invested capital for the year, averaged monthly. — The invested capital for any pre-war or taxable year (or where the tax is computed upon the basis of a period less than a year, for such period) is the average invested capital for the year or period averaged monthly, according to the following rules:
    
      “ (a) Add the capital for each of the several months during which no change occurs, and the average capital (ascertained as provided in subdivision (&) of this article) for each month in which a change occurs and divide the total by the number of months in the year or period.
    “(&) To ascertain the capital for any month in which a change occurs multiply the capital as of the first day of the month by the number of days it remains constant and the capital after each change by the number of days (including the day on which the change occurs) during which it remains constant, add the products, and divide the sum by the number of days in the month.
    “INVESTED CAPITAL — CORPORATIONS AND PARTNERSHIPS
    “Art. 53. Buie for computing unvested capital. — In computing invested capital, every corporation or partnership paying taxes at the graduated rates prescribed in section 201 (see art. 16), shall add together its paid-in capital and its paid-in or earned surplus and undivided profits (under whatever name the same may be called) as shown by its books at the beginning of the taxable year. The total thus obtained shall be adjusted for any asset or item which it covers that is not carried on the books at the valuation prescribed by law or by these regulations. When necessary, adjustment (addition or subtraction) shall be made in respect of the following:
    “adjustments
    “ 11. * * * If there has been any change made during the taxable year in the amount of the invested capital, the monthly average shall be taken (see art. 43), but in no case may the invested capital include any surplus or undivided profits earned during the taxable year.” '
    VII. Said partnership was and is unable to state its earnings and expenses month by month for the calendar year 1917 and in determining its invested capital for said calendar year 1917 the Commissioner of Internal Eevenue deducted from the invested capital of $2,151,634.54 existing on December 31, 1916, said sum of $375,771.56, said deduction being computed by reducing said invested capital as of March 1, 1917, and April 1, 1917, to the extent that the withdrawals of funds used in the partnership set forth in paragraph 5 hereof were in excess of the prorated net earnings of the partnership to said dates, respectively, said net prorated earnings being based on the proportionate part of the total net earnings for the year 1917 averaged monthly, reduced, however, by such proportionate part of the total excess-profits tax for the year 1917, averaged monthly, as the period to the dates of the respective withdrawals bore to the whole year, all as set forth in detail in said Exhibit B.
    VIII. If the invested capital of the partnership for the calendar year 1917 is to be the sum of $2,151,634.54, then the excess-profits tax of the partnership for the year 1917 is the sum of $326,500.10, the computation of which is shown by Exhibit A filed with the plaintiffs’ petition and made part hereof by reference.
    IN. If the invested capital of said partnership for the calender year 1917 is to be the sum of $1,842,789.63, then the excess-profits tax of said partnership for the year 1917 is the sum of $363,561.51, the computation of which is shown by Exhibit C filed with plaintiffs’ petition and made part hereof by reference.
    X. On or about December 14, 1922, plaintiffs filed a claim for refund of $55,389.75 with the collector of internal revenue at Philadelphia, Pa. Said claim related to the same matters as those contained in this suit and to certain other matters not material herein. The part of said claim for refund relating to matters not involved in this suit was allowed by the Commissioner of Internal Eevenue, and the remaining part of said claim for refund — that is the part relating to the controversy embodied in this suit — was disallowed on April-17, 1923. No part of the disputed sum of $45,092.61 has ever been repaid to plaintiffs.
    XI. Said partnership during the year 1917 kept its books of account and reported its income for Federal taxation purposes on the accrual basis of accounting as distinguished from the cash receipts and disbursements basis of accounting; that is to say, said partnership accrued on its books as income and earnings for the year 1917 all credits and accounts receivable for that year, such as bills receivable, accounts receivable, etc., whether actually received in cash in that year or subsequent years, and likewise all accounts payable and charges against income, such as materials purchased, expenses incurred, etc., save and except excess-profits taxes for the year 1917, were accrued on the books of said partnership as ordinary and necessary business expenses applicable to the year 1917, whether actually paid in the year 1917 or subsequent years, and were taken as deductions in the Federal income-tax return for the year 1917. Copies of said partnership’s original and amended income and excess-profits tax returns for the calendar year 1917 are filed herein as a report of the Treasury Department.
    The partnership carried an inventory in its balance sheets and the values used in this inventory affected the partnership income for the year 1917.
    Excess-profits taxes, however, for the year 1917 were not so accrued on the books of said partnership as an account payable or charge against accrued income for the year 1917, and no entries were made on the books of said partnership during or as of dates in 1917 indicating that excess-profits taxes for the year 1917 had become due, nor did the said partnership establish during the year 1917 a reserve for such excess-profits taxes. Said excess-profits taxes for the year 1917 were actually paid by the partnership in June, 1918.
    All of the excess-profits taxes paid by the plaintiffs were received by the United States and were paid into the United States Treasury, and after the refunds described herein had been paid, the United States has retained and still retains in its Treasury the sum of $371,592.59 of said excess-profits taxes, no part of which has been repaid to plaintiffs.
    The court decided that plaintiffs Avere not entitled to recover.
   Hat, Judge,

delivered the opinion of the court:

This is a suit brought by the plaintiffs against the United States to recover certain excess-profits taxes for the calendar year 1917, alleged to have been erroneously assessed against and collected under protest from the partnership of Wilson & Bradbury.

The facts are agreed to by the parties, and are set out in the findings of fact made by the court. The plaintiffs, formerly partners doing business under the firm name of Wilson & Bradbury, paid net excess-profits taxes assessed against the partnership for the calendar year 1917 in the sum of $371,592.59, based on an invested capital determined and found by the Commissioner of Internal Revenue to be $1,775,862.98.

On December 31, 1916, the invested capital of the partnership was $2,151,634.54, and its net income for the calendar year 1917 subject to excess-profits taxes was $976,493.77. How much of the net income of the said partnership for the year 1917 was earned in any given month can not be stated, but it is shown that during the first three months of 1917 plaintiffs withdrew from the partnership’s funds the sum of $645,840.33, of which $299,193.94 was withdrawn prior to March 1, 1917, and $346,645.39 during the said month of March, and that the total withdrawals by the partners for the year 1917 amounted to the sum of $778,904.28.

It is also shown that plaintiffs’ books for the calendar year 1917 were kept on the accrual basis of accounting both as to debits and credits as distinguished from the cash receipts and disbursements basis of accounting.

The Commissioner of Internal Revenue, under the provisions of section 207 of the revenue act of October 3, 1917, and regulations 41, articles 43 and 53, in determining the amount of invested capital used and employed in the partnership business during the year 1917, made certain deductions from the partnership invested capital of $2,151,634.54 existing at the beginning of the taxable year 1917. These deductions and the method of their ascertainment are set forth in, the findings of fact, the amount on which the tax was based having been ascertained to be the sum of $1,775,862.98.

This court had before it in the case of Franklin D'Olier et al. v. United States, 61 C. Cls. 895, the same questions which are presented in this case. In the D'Olier case this court held as follows:

“ Where a partnership in 1918 makes a return of its excess-profits tax for the year 1917 on an accrual basis, and during the year 1917 withdraws certain amounts from its invested capital, the Commissioner of Internal Revenue is authorized, for the purpose of computing the tax, to reduce the invested capital shown in said return for 1917 by deducting, as of the dates of withdrawal, that part of the excess-profits tax for the taxable year estimated to have accrued at that date, although such tax was not assessed and did not become due and payable until a year after the withdrawal.”

The plaintiffs in their brief ask us to reexamine the question decided by us in the TPOlier case. This we have done, and we find no reason to change our conclusion, especially as in that case an application was made for a certiorari to the Supreme Court of the United States, and that application was denied.

We are of opinion that the petition of the plaintiffs must be dismissed. It is so ordered.

Moss, Judge; Graham, Judge; Booth, Judge; and Campbell, Chief Justice, concur.  