
    THE YALE & TOWNE MANUFACTURING CO. v. THE UNITED STATES
    
    [No. C-172.
    Decided March 23, 1925]
    
      On the Proofs
    
    
      Munitions, taw; deduction from gross income. — See Burton^Iiiehards Co. case, ante, p. 106.
    
      The Reporter’s statement of the case:
    
      Messrs. Lov/is H. Porter and F. Carroll Taylor for the plaintiff. Loving <& Rammer were on the briefs.
    
      Messrs. Fred K. Dyár, Nelson T. Hartson, and A. J. Ward, with whom was Mr. Assistant Attorney General William J. Donovan, for the defendant.
    The following are the facts as' found by the court:
    I.' The petitioner, The Yale & Towne Manufacturing Company, is a Connecticut corporation, with its principal-place of business in the city of Stamford, Conn., and engaged in the manufacture and sale of loeks, builders’ hardware, and other articles of commerce.
    II. Under the provisions of the act of Congress approved September 8, 1916, and entitled “An act to increase the revenue and other purposes,” 39 Stat. 756, and the' act approved October 3, 1917, and entitled “An act to provide revenue to defray war expenses and for other purposes,” 40 Stat. 300, plaintiff prepared, and on or about the 30th day of March, 1918, duly filed with the collector of internal revenue at Hartford, Conn., its return of its income and invested capital for the calendar year 1917 on forms furnished by the Commissioner of Internal Revenue. At the time of filing the same a protest in writing against the same was filed by plaintiff.
    III. Such return gave the net income of plaintiff for income-tax purposes as $2,522,913.21; its net income for profits-tax purposes as $2,494,388,21; its invested capital as-$11,834,024.58. The deduction of the percentage of invested capital allowed under section 202 (a) of said act of October 3, 1917, was calculated at 9 per cent. Applying the rates, calculations, and adjustments provided for in said acts to the figures shown in said return the income tax of the plaintiff for the year' 1917 under section 10a of the said act of September 8, 1916, as amended by section 4 of said act of October 3, 1917, was calculated at $130,135.53, and its profits tax, under section 201 of the said act of October 3, 1917, at $333,987.76, a total of $464,123.29. Said sum was assessed against the plaintiff for such taxes by the Commissioner of Internal Revenue by notice given June 10, 1918, and was paid by it to the collector aforesaid on the 15th day of June, 1918.
    IY. Thereafter the Commissioner of -Internal Revenue reviewed plaintiff’s return for' 1917. In such review the commissioner consolidated the return of the plaintiff with those of Yale & Towne (Ltd.), and Yale & Towne Co., corporations affiliated with the 'plaintiff, and at the same time readjusted the return made by plaintiff under said act of September ,8,-1916, for the calendar year 1916;,
    Y. On the 20th day of July, 1921, the Commissioner of Internal Revenue notified plaintiff that as a result of the review described i®. Finding IV above he had redetermined its net income for income-tax purposes for 1917 to be $2,778,851.92, its consolidated net income for profits-tax purposes to be $2,776,226.95, and its consolidated invested capital to be $9,439,105.88, and the deduction allowed under section 203 (a) of the act of October 3, 1917, to be 9 per cent. Upon the rates, adjustments, and calculations provided in said acts he determined that the income tax due from plaintiff for' 1917 was $131,236.30, and the profits tax allocated to it $571,580.26, or a total of $702,816.56, upon which plaintiff was entitled to credits of $464,123.29 previously paid for 1917, and for $5,113.99 overassessments for the year 1916. Upon this calculation the Commissioner of Internal Revenue accordingly assessed an additional income and excess-profits tax for 1917 against plaintiff of $233,579.28, notice of which was received by it on the 18th day of October, 1921. Thereafter, and on or about the 25th day of October', 1921, plaintiff duly filed with the collector aforesaid a plea of abatement against the said additional assessment.
    VI. On the 15th day of February, 1922, the plaintiff duly filed with the collector aforesaid a claim for refund of $106,-179.33, alleged to be the amount of such income and excess-profits taxes theretofore paid by it for the year 1917 in excess of the amount legally due from it. Such claim for refund was based on a complete amended return for said year, and was accompanied by a detailed statement of the reasons for each amendment and its proofs in support thereof. Such amended return consolidated the plaintiff’s returns for 1917 with those of its said affiliated corporations and adjusted its returns for 1915 and 1916, and gave credit for underassessments made in such years. Such amended returns showed á net overpayment at that time by plaintiff for the year 1917 of $106,179.33, for which amount, with interest, refund was claimed. More than six months has elapsed since filing .such claim for refund and the commencement of this action, and, except as hereinafter stated, no decision has been made thereon by the Commissioner of Internal Revenue.
    
      VII. After plaintiff received tbe notice of July 20, 1921, and filed the said plea of abatement, as hereinabove described, it commenced proceedings before the Commissioner of Internal Revenue to review the findings contained in such notice a.s to its income and invested capital for 1917, and after an examination of proofs submitted by plaintiff and of its accounts and properties the Commissioner of Internal Revenue revised his said determination of plaintiff’s returns and taxes for 1917, and under date of January ■30, 1923, advised plaintiff of the result of such revision. In such revision the Commissioner of Internal Revenue determined plaintiff’s net income for 1917 for income-tax purposes to be $2,629,245.75, its consolidated net income for •excess profits tax purposes $2,623,785.78, and its consolidated invested capital $11,074,545.13, and, using 9 per cent as the p. rcentage deductible under section 203a of said act of October 3, 1917, found an income tax of $132,430.79, and an excess-profits tax, allocated to plaintiff, of $402,065.95, a total •of $534,496.74 due from it for 1917.
    VIII. On the 25th day of April, 1923, the Commissioner •of Internal Revenue notified plaintiff that its plea of abatement, heretofore mentioned in Finding V, was rejected in part, and that its additional income and excess-profits taxes for 1917 after the adjustment of its 1916 taxes herein referred to was $65,259.46, to which was added $5,873.35, or 9 per cent on the amount of the additional tax from the date •of the additional assessment, making a total amount of $71,-132.81, the amount payable under .such assessment, and plaintiff received a bill for that amount from the collector •of internal revenue at Hartford, Conn., payable on or before May 13, 1923.
    IX. The said sum of $71,132.81 was reached by determining the tax to be $534,496.74, the amount described in Finding VII hereof, and adding thereto $5,873.35 interest as aforesaid and giving credit thereon for $464,123.29 previously paid by plaintiff for the said taxes and $5,113.99 •overassessment for the year 1916.
    
      X. On the 4th day of May, 1923, plaintiff paid the collector of internal revenue at Hartford, Conn., the said sum of $71,132.81 additional income and profits taxes for 1917 assessed as aforesaid. Such payment was made involuntarily and under duress and under specific protest in writing.
    XI. On the 11th day of June, 1923, plaintiff duly filed with the collector aforesaid a claim for the refund of $166,-255.19 with interest, which included the said $71,132.81 additional taxes for 1917 paid, by it, as stated in Finding X hereof, and the balance represented the amount claimed to have been overpaid at the time of making the original payment on June 15, 1918, and corrected the amount named in the refund claim described in Finding VI above. Upon such claim for refund the commissioner notified plaintiff on December 5, 1924, that he had further adjusted its invested capital by allowing as additional value of good will and trade-marks the sum of $350,327.70, making a total allowed for good will and trade-marks of $554,11.09. although such item had been carried on plaintiff’s books at $2,000,000 since 1909. In addition thereto the commissioner-added $40.17 to plaintiff’s invested capital, due to a recalculation of a dividend payment. As a result of such adjustment the commissioner reaffirmed the amount of plaintiff’s net income for 1917 purposes to be $2,629,245.75, its consolidated net income for excess-profits tax purposes $2,623,-785.78, but increased its consolidated invested capital to $11,-424,913, and using 9 per cent as the percentage deductible under section 203a of said act of October 3,1917, found an income tax of $133,387.29 and an excess-profits tax of $386.-124.21, a total of $519,511.50 due from plaintiff for 1917. or $14,985.24 less than the amount previously assessed. He has given credit to plaintiff for this amount without interest.
    XII. The plaintiff has actually paid for its income and excess-profits taxes for the year 1917 the amounts shown in the following table, which shows how such amounts were reached:
    
      Amount assessed on original return and paid June 15. 1918_$464,123.29
    Overpayment of 1916 taxes credited to 1917, September, 1921_ 5,113. 99
    Additional paid May 4, 1923, on basis of action on abatement claim as follows:
    Amount of overa ssessment claimed_$233. 579. 28
    Overassessment shown in A — 2 letter dated Jan. 30, 1923_ 168,319.82
    Difference_ 65,259. 46
    interest asserted_ 5, 873. 35
    -71,132. 81
    Total credited on account of 1917 tax_ 540, 370. 09
    Less: Amount allowed on claim for refund, as shown in certificate of overassessment issued Dec. 5, 1924_ 14,985.24
    Balance, being amount paid by petitioner_ 525, 384. 85
    XIII. This suit was originally started by a petition filed on the 27th day of March, 1923, and an amended petition filed on the 17th day of December, 1923, but the subsequent proceedings of the Commissioner of Internal Revenue have eliminated certain matters originally raised and have resulted in changes in the amount sought to be recovered, and the second amended petition herein sets forth the entire claim of plaintiff. The figures as to plaintiff’s 1917 income and invested income determined by the commissioner as specified in Finding XI above are not disputed by plaintiff, except as they may be modified by the reduction of $255,-696.73 from plaintiff’s income as claimed by it and hereinafter referred to.
    XIV. Plaintiff during 1916 manufactured munitions of war, and in its return of net income for its 1917 income and excess-profits taxes deducted from its gross income the sum of $255,696.73, representing the amounts of $247,763.19 and $7,933.60 paid by it to the collector of internal revenue on May 17, 1917, and July 31, 1917, respectively, for the munition manufacturer’s tax assessed against it under Title III of the act of Congress approved September 8, 1916, which Vvas based on the plaintiff’s profits from munitions manufactured by it during the year 1916, but which was due and payable during the year 1917.
    XV. Plaintiff when it filed its Federal income tax return for 1916 on the 28th day of February, 1917, had made no deduction-thereon for such munition tax payment.
    
      XVI. Plaintiff, in accordance with the provisions of the-act imposing said munition-manufacturers’ tax duly filed its return for said munition tax on February 28, 1917, and thereafter received an assessment thereon of $247,763.19, the amount of tax shown to be due on such return, which plaintiff paid May 17, 1917. Thereafter the collector of internal revenue reviewed said return and assessed against plaintiff an additional tax of $7,933.60, which it paid July 31, 1917. In calculating such munition tax the Commissioner of Internal Revenue allowed the deduction by plaintiff of the accrued expenses of maintaining and producing this munition business and accrued accounts receivable therefrom, but only permitted the deduction of taxes actually paid during 1916 in connection with such munition business.
    XVII. The Commissioner of Internal Revenue does not dispute the validity or amount of the munition tax deduction by plaintiff in determining its net income for income and excess-profits taxes, but has refused to allow the deduction of said munition tax to be taken in the year 1917. In his adjustment of plaintiff’s 1917 return the commissioner has disallowed the deduction for that year and has restored the said amount of $255,696.73 to plaintiff’s income for 1917, but has held that the said amount should have been taken as a deduction from plaintiff’s gross income for the year 1916 and has credited plaintiff on the 1917 additional taxes assessed against it the sum of $5,113.99 for the decreased 1916 tax resulting from such adjustment.
    XVIII. Plaintiff kept its books of account for 1917 and in the years prior thereto on an accrual basis of accounting, showing thereon the accruals of accounts receivable and accounts payable and all the other necessary and ordinary expenses of maintaining and operating its business irrespective of whether they were actually received or paid, and at the end of the year putting into a tax account or reserve taxes which it estimated it would have to meet in the next’ year under existing laws. Such tax account was set up as a reserve before the amount of plaintiff’s surplus was estimated. In the year 1916, at the close of the year, the plaintiff, after inventory and determination of its operation for the year, had set up as a tax reserve as of December 31,1916, the sum of $449,312.33, including the sum of $247,763.19, representing what it estimated would be the amount of its said munition taxes payable in 1917 and based on its 1916 munitions profits.
    XIX. In making its Federal corporation excise-tax and income-tax returns for the year 1909 to 1914, inclusive, plaintiff had in every return deducted from its gross income the tax reserves as aforesaid set up on its books at the end of the particular year for which the return was made.
    XX. In 1915 a representative of the Internal Eevenue Department audited the books of plaintiff in connection with its 1914 income-tax returns and adjusted such return by disallowing as deductions from its 1914 gross income all reserves for taxes and allowing as a deduction only such taxes as were actually paid during 1914, although he permitted the deduction of accrued business expenses.
    XXI. Following this ruling, and in each year thereafter, plaintiff, in making its returns for Federal income and excess-profits taxes, adjusted its accounts as shown on its books as to taxes and made or claimed no deduction for tax account or reserves set up at the end of the taxable year, but only made and claimed deductions for such taxes as it had actually paid during such year. For the said period, 1914 to 1917, inclusive, the taxes charged on the books and the amounts actually paid and deducted in the tax returns for the said years by plaintiff are as follows:
    Deductible Deduction Tax reserve taxes actually taken in tax Year ending charged on books paid during year return for year
    12/31/1914 $30,202.76 $33,463.82 $33,463.82
    12/31/1915 58,632.42 42,023.63 42,023.63
    12/31/1916 449,312.33 85,758.75 85,758.75
    12/31/1917 662,825.40 376,574.65 376,574.65
    XXII.For the purpose of computation only, and without any admission as to the merits of the questions involved, it is agreed that in the event the court finds that the plaintiff is entitled to deduct said munition tax in the year 1917, the amount of the aggregate income and excess profits taxes of petitioner for 1917, calculated otherwise, on the basis of the figures determined by the commissioner, would be $409,-340.45. The court, upon the evidence, makes the following finding of fact, which is in addition to the findings of fact agreed upon by the parties:
    XXIII. The payment of the sum of $464,123.29 for income and excess profits taxes for 1917 by the plaintiff to the collector of internal revenue on June 15, 1918, was made under protest.
    The court decided that plaintiff was entitled to recover the sum of $116,044.40, with interest on $44,911.59 from June 15, 1918, and on $71,132.81 from May 4, 1923.
    
      
       Appealed.
    
   MEMORANDUM BY THE COURT

This case is decided upon the authority of the case of P. Chcmneey Anderson and others, trustees in dissolution of the Burton-Richards Co. v. United States, ante, p. 106. The principle of law involved in this case is the same as decided in that case.  