
    P. CHAUNCEY ANDERSON, LOWELL L. RICHARDS, C. A. RICHARDS, JOSEPH S. BURTON, CLARENCE HALL, CHARLES W. BOWRING, AND L. B. STODDARD, TRUSTEES IN DISSOLUTION OF THE BURTON-RICHARDS COMPANY, A CORPORATION, IN DISSOLUTION UNDER THE LAWS OF THE STATE OF DELAWARE, v. THE UNITED STATES 
    
    [No. C-46.
    Decided January 5, 1925]
    
      On the Proofs
    
    
      Munitions tax; when deductible ■from gross income. — Where the “ munition manufacturers’ tax ” imposed by section 301 of the revenue act of 1916, 39 Stat. 781, is assessed for the year 1916, and is paid in the year 1917, said tax is properly deductible from gross income for the year 1917, and any income tax assessed and collected by reason of the Commissioner of Internal Revenue having held that such munition tax was properly deductible from gross income for the year 1916 is recoverable by the taxpayer.
    
      The Reporter’s statement of the case:
    
      Mr. .Montgomery B. Angelí for the plaintiffs. Messrs. Franle S. Bright and John W. Davis and Stetson, Jennings c& Russell were on the briefs.
    
      
      Messrs. Fred K. Dyar and A. J. Ward, with whom was Mr. Assistant Attorney General Robert H. Lovett, for the defendant. Messrs. Nelson T. Hartson and John B. Milli-hen were on the brief.
    The following are the facts as found by the court:
    I. The Burton-Richards Co. was a corporation organized under the laws of the State of Delaware on the 18th day of August, 1915, with its principal office at Wihnington, Del., and its principal place of business at Cleveland, Ohio, in which latter city it carried on its business, which was the manufacture arid sale of explosives for use as munitions of war.
    II. During the year 1916, plaintiffs manufactured and sold such explosives, from which business it made a taxable profit of $899,356.32, and under the provisions of Title III of the revenue act of 1916, designated by said title as “ Munition manufacturer’s tax,” it owed a tax for the year 1916 equal to 12% per cent thereof in the sum of $112,419.54. The amount of said tax was assessed by the Commissioner of Internal Revenue and acquiesced in and paid voluntarily by plaintiffs, in the year 1917, as more fully set forth in Finding IV below.
    III. AU munition manufacturers were required to make on or before the 1st day of March, 1917, a return to the Commissioner of Internal Revenue showing the profits from such business during the year 1916, and the tax thereon became due and payable 30 days after assessment and notice of such tax was made by the commissioner. .
    IV. The munition tax return of said corporation for 1916 was duly filed in accordance with the law March 1, 1917. The original return as filed by said corporation showed a tax' due of $86,541.95, which amount having been duly assessed, was paid within 30 days following said assessment, to wit, the 14th day of May, 1917; thereafter as the result of a reexamination conducted by the commissioner it was determined that the munitions tax of said corporations for 1916 should be increased from $86,541.95 to $112,419.54, the corporation having claimed in its original return as a deduction amortization of value of buildings and machinery in an amount shown by its books double that finally allowed by the commissioner, and having paid upon its original return a sum less than the amount determined to be due upon the reexamination of its munitions tax return for 1916.
    Y. A reserve for the payment of munitions tax for the year 1916 was set up monthly on the books of account of said ■corporation during the year 1916 beginning with the month of September, the month of the passage of the revenue act of 1916, which levied the said munitions tax. This reserve totaled $140,000 at December 31, 1916. The entries for same each month were as follows:
    Dr. Tax reserve-$36, 000
    Or. Reserve for taxes_ 35, 000
    As of December 31, 1916, the two accounts were wiped out, one being applied against the other and a reserve designated as a “ tax reserve ” was set up by a charge to surplus account on the books of the corporation to cover, the following taxes:
    Federal capital stock tax_ $28.00
    Federal munitions tax for 1916_ 86, 541.95
    Federal income tax for 1916_ 14, 631.66
    Total__101,201. 61
    The above amount set up as a reserve as of December 31, 1916, for munitions taxes was less than the correct and true amount of said munitions tax for the year 1916, which was increased from $86,541.95 to $112,419.54 for the reasons as examined in Findings IV hereof.
    VI. The original and amended tax returns of said corporation for the year 1916, the tax returns for 1917, and the balance sheets of the corporation as of December 31, 1916, and December 31,1917, are hereto attached and made a part ■of this finding.
    VII. No interest was entered upon the books of the corporation during the year 1916, except such as was actually received or paid during that year, and no other items of interest existed. No losses occurred during the year 1916 nor were any set up on the books or claimed as a deduction by the corporation. The amount of interest on the indebtedness of the corporation charged upon its books for the year-1916 was $2,948.16, all of which was paid during that year and wa§ deducted by the corporation in its tax returns for the year 1916. No bad debts existed during the year 1916,. nor were any set up on the books or claimed as a deduction by the corporation. During the year 1916 the corporation' entered upon its books of account a reserve for munition; taxes, as hereinbefore set forth in Finding Y. In its income-tax return for 1916 the corporation did not deduct its' munitions tax nor any taxes not actually paid within said year, nor the amount of tax reserve set up on its books of account as of December 31, 1916, for taxes for the year 1916, nor the amount of reserve which was set up on its books of account for its munition tax during the year 1916.
    VIII. For the calendar year 1916 the corporation accrued on its books of account and deducted in its original income-tax return for the year 1916 the following items:
    Expenses, general_$2, 268, 841. 53
    Depreciation charged off_ 338, 829. 41
    Interest paid- 2,948.16
    Taxes, domestic, paid_ 1.67
    Total_:_ 2, 610, 620. 77
    The above items, “ Expenses, general,” were accrued on the books of the corporation and were taken as deductions without regard to whether said items were paid during the year 1916 or subsequent years.
    The item of “Depreciation charged off” represented the entire cost to December 31, 1916, of plant and facilities erected for the performance of contracts in hand, this action being taken pursuant to a resolution of the board of directors.
    Subsequently an amended return was filed for the year 1916 as a result of an examination by a revenue agent in which the above item of $338,829.41 was reduced to $169,-414.70.- This resulted in an increase of tax of $3,388.30, which was paid in 1917. Thereafter, upon a further examination, this company was advised, under date of September 23, 1922, that the bureau had disallowed said $169,-414.70, written off as aforesaid, and bad allowed in lieu thereof depreciation as computed by the revenue agent of $33,882.94.
    A part of the item “ Expenses, general, $2,268,841.53,” taken as a deduction by the corporation in its tax return aforesaid, were an “insurance reserve,” “freight reserve,” and “ bonus reserve.”
    IX. The corporation filed its certificate of dissolution in the office of the secretary of the State of Delaware on the 28th day of April, 1920, and certificate of dissolution of .said corporation was thereupon issued by the secretary of state of Delaware, and was filed in the office of the recorder of deeds, of New Castle County, Del., where the principal office of said corporation was located.
    X. Thereafter all the assets of said corporation remaining after the payment of its debts and expenses were converted into money and disbursed to its stockholders of record as of the date of its dissolution.
    • XI. Under the laws of the State of Delaware the directors of a corporation at the time of its dissolution become, and remain as trustees in dissolution, and at the time of dissolution of said corporation the following were its directors: P. Chauncey Anderson, Lowell L. Richards, C. A. Richards, Joseph S. Burton, Clarence Hall, Charles W. Bowring, and L. B. Stoddard, all of whom are still living and as such'trustees have all the powers and duties necessary to the liquidation of the corporation under the laws of the State of Delaware, including the right to sue for and collect debts due said corporation.
    XII. By letter dated September 23,1922, said corporation was advised by E. G. Rarey, revenue agent, in charge, Cleveland, Ohio, that its munition tax in the amount of $112,419.54 had been erroneously deducted by the corporation from its income for the year 1917 and must be restored to its income for said year. The said internal revenue agent advised said corporation that a deduction of the said $112,-419.54 representing munition taxes for the year 1916 must be taken as a deduction from income for the year 1916 and not for the year 1917. Upon a reaudit of the return of the said corporation for the year 1917 based upon the above revenue agent’s report the-Commis,sioner of Internal Revenue disallowed the deduction of said munition tax in the sum of $112,419.54 from its income for the year 1917, and on the 23d of November, 1922, assessed an additional tax against said corporation in the amount of $19,749.55.
    XIII. On February 26, 1923, the plaintiffs paid the said sum of $19,749.55 under protest.
    XIV. On the 27th day of February, 1923, plaintiffs duly presented to the Commissioner of Internal Revenue their ■claim for refund of said sum, and on the same date the claim wa.s denied by the Commissioner of Internal Revenue.
    XY. The action of said Commissioner of Internal Revenue in denying the corporation the right to deduct its munition tax due for. the year 1916 from its income for the year 1917, and in making said assessment against said corporation and compelling payment thereof was based upon the provisions of the revenue acts of 1916 and 1917 and his interpretation thereof, together with the promulgated regulations relative thereto.
    The court decided that plaintiffs were entitled to recover.
    
      
       Appealed.
    
   Hat, Judge,

delivered the opinion of the court:

This is a suit brought by the plaintiffs to recover from the United States the sum of $19,749.55, with interest thereon from February 26, 1928, until paid.

The Burton-Richards Co. was a corporation organized under the laws of the State of Delaware on August 18, 1915, with its principal office at Wilmington, Del., and its principal place of business at Cleveland, Ohio. Its business was the manufacture and sale of explosives for use as munitions of war. The corporation carried on its business during the World War, and filed its certificate of dissolution in the office. of vthe secretary of state of Delaware on April 28, 1920, and a certificate of dissolution of said corporation was issued by the secretary of state of Delaware, and was filed in the office -of the recorder of deeds of New Castle County, Del., where the principal office of said corporation was located.

Thereafter all the assets of the corporation remaining after the payment of its debts and expenses were converted into money and disbursed to its stockholders.

Under the laws of the State of Delaware the directors of this corporation at the time of its dissolution became and remained as trustees in dissolution, and at the time of the said dissolution the plaintiffs were its directors, and as such trustees have the right to sue for and collect debts due said corporation.

During the life of the corporation, and while it was engaged in carrying on its business, it regularly paid the taxes which were levied upon it by the United States; and when it made its return to the officers of the United States for its income tax for the year 1917 it deducted from its income for the year 1917 the sum of $112,419.54 which was the amount of the munitions tax paid by it for the year 1916. The said sum was paid by said corporation as follows: $86,-541.95 on May 14, 1917, and the residue thereof later in year 1917 after the Commissioner of Internal Revenue of the United States had made a reexamination and determined that the munitions tax of said corporation for the year 1916 should be increased from $86,541.95 to $112,419.54.

On September 23,1922, more than two years after the corporation had been dissolved the revenue agent in charge at Cleveland, Ohio, advised the corporation that its munitions tax in the amount of $112,419.54 had been erroneously deducted by the corporation from its income for the year 1917 and must be restored to its income for that year. The said internal revenue agent advised the corporation that a deduction of the said $112,419.54 representing munition taxes for the year 1916 must be taken as a deduction from the income for the year 1916, and not for the year 1917; that upon a reaudit of the return of the said corporation for the year 1917 based upon the report of the revenue agent the Commissioner of Internal Revenue had disallowed the deduction of said muntion tax in the sum of $112,419.54 from its income for the year 1917, and on November 23,1922, assessed an additional tax of $19,749.55 against said coloration; and on. February 26, 1923, the plaintiffs paid the said sum of $19,749.55 under protest.

The revenue act of 1916, 39 Stat. 756, provides, among other things:

“ Seo. 302. That in computing net profits under the provisions of this title for the purpose of the tax there shall be allowed as deductions from the gross amount received or accrued for the taxable year from the sale or disposition of such articles manufactured within the United States the following items: * * * (d) Taxes of all kinds paid during the taxable year with respect to the business or property relating to the manufacture; * *

In section 12 of the same act, which provides for deductions in the case of corporations, it is provided that deductions shall be made for “ taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or any foreign country, or under the authority of any State, county,' school district, or municipality or other taxing subdivision of any State, not including those assessed against local benefits.” 39 Stat. 769.

It is not denied that this corporation during the taxable year 1917 paid a munition tax amounting to the sum of $112,419.54. When- it made its income-tax return for the year 1917 it deducted that amount from the gross amount received; that is, the munition tax of $112,419.54, which it had paid during the year 1917. It is admitted that the corporation had the right to this deduction at some time. The Commissioner of Internal Eevenue allowed the deduction to be made for the year 1917, but afterwards for some reason which is not apparent reaudited the return of this corporation for the year 1917, and held that the $112,419.54 should have been deducted from income for the year 1916, and assessed an additional tax of $19,749.55 against the corporation for the year 1917. The effect of this action of the commissioner was to deprive the corporation of the deduction to which it was entitled by law not only for the year 1917 but also for the year 1916.

It is manifest that the munitions tax, which was measured by the 1916 income of this corporation, became due and payable, and was in fact paid, in the year 1917. It is therefore a proper deduction in its income-tax return for 1917 under the provisions of the revenue act of 1916, supra. The tax paid by the corporation for the year 1916 did not accrue until it became due and payable. It did not become due and payable until 1911, and was then paid. When the corporation made its return of 1917 income it had the right, conferred, upon it by law, to deduct the taxes paid by it during -the taxable year, which was the year 1917. The plaintiffs are entitled to the refund of $19,749.55, with interest from February 26, 1923, until paid, as this sum was erroneously assessed against the corporation by the action of the Commissioner of Internal Revenue in depriving it of the deduction to which it was by law entitled. United States v. Woodward et al., 256 U. S. 632; Woodward et al. v. United States, 56 C. Cls. 133, 156.

Geaham, Judge; Downey, Judge; Booth, Judge; and Campbell, Chief Justice, concur.  