1. Administrative regulations contemporaneously construing a
statute and made for its enforcement under an express general
authorization contained therein, and which are not unreasonable or
inconsistent with the statute, will not be overruled except for
weighty reasons. P.
282 U. S.
378.
Page 282 U. S. 376
2. In accordance with Article 845 of Treasury Regulations 45,
applicable to the Revenue Act of 1918, and which provides that
"federal income . . . taxes are deemed to have been paid out of the
net income of the taxable year for which they are levied," the
Commissioner of Internal Revenue determined that the invested
capital for 1919 of a corporate taxpayer which kept its books and
made returns on the accrual basis should be reduced, in its return
for the taxable year 1919, by the amount of income and excess
profits taxes for 1918, as of the dates in 1919 when the
installments of taxes fell due and were paid. This computation
resulted in an alleged overpayment of excess profits taxes which
the taxpayer sued to recover.
Held:
(1) The regulation was reasonable and consistent with the Act of
1918. P.
282 U. S.
378.
(2) In view of the facts that the Act of 1917 required the
payment of the same sort of taxes; that the petitioner actually
accrued its taxes for 1918 and set them up in a reserve at the end
of the year; that taxpayers understood that the policy of the
government with respect to income and excess profits taxes was
continuous, and that a Treasury Decision, in substance the same as
Article 845, was applicable to the 1917 Act, the regulation was not
unreasonable as applied to 1918 taxes, notwithstanding that the
Revenue Act of 1918 was not passed until February, 1919, and the
taxpayer could not know at the close of 1918 what the exact amount
of its taxes for that year would be. P.
282 U. S. 379.
68 Ct.Cls. 784 affirmed.
Certiorari, 281 U.S. 711, to review a judgment of the Court of
Claims in favor of the United States in an action brought by a
taxpayer to recover an alleged overpayment of excess profits taxes
for the year 1919.
Page 282 U. S. 377
MR. JUSTICE ROBERTS delivered the opinion of the Court.
Certiorari was granted to the Court of Claims to review a
judgment in favor of the United States in an action to recover an
alleged overpayment of excess profits tax for the calendar year
1919. The petitioner, a corporation, kept its books and made its
returns of income and excess profits taxes on the accrual basis. In
its return for the year ended December 31, 1919, it did not deduct
from invested capital any amount on account of income and excess
profits taxes for 1918 assessed and paid in 1919.
The Commissioner of Internal Revenue determined that the
invested capital for 1919 should be reduced by the amount of income
and profits taxes for 1918 as of the dates in 1919 when the
installments of taxes fell due and were paid. To accomplish this,
he computed an average deduction for the year 1919, and diminished
the earned surplus as of January 1, 1919, by subtracting from it
the amount so ascertained.
The Commissioner's action was in accordance with Article 845 of
Treasury Regulations 45, promulgated April 17, 1919, applicable to
the Revenue Act of 1918. The pertinent portion follows: "federal
income . . . taxes are deemed to have been paid out of the net
income of the taxable year for which they are levied."
Section 326(a) of the Revenue Act of 1918 provided that,
"as used in this title the term 'invested capital' for any year
means:"
"
* * * *"
"(1) Actual cash
bona fide paid in for stock or
shares;"
"(2) Actual cash value of tangible property, other than cash,
bona fide paid in for stock or shares; . . ."
"(3) Paid-in or earned surplus and undivided profits; not
including surplus and undivided profits earned during the year. . .
. "
Page 282 U. S. 378
Petitioner asserts that Article 845 was based on the erroneous
assumption that income taxes are payable out of the net income of
the taxable year for which they are levied.
The United States replies that it is, and since 1914 it has
been, required that a taxpayer shall keep his books and make his
returns on a basis which will reflect true income; that, while the
taxes for any year are not payable until the following year, good
accounting practice requires an accrual of them as a liability of
the current year's business, and that the regulation in question
was not only reasonable, but necessary for proper administration of
the Revenue Act.
The position of the government is sound. A corporation cannot
claim to have accumulated any net income in any year until
provision is made for taxes accrued, based on net income for the
same year.
The reasonableness of the regulation is further shown by the
fact that "invested capital" was merely a legislative definition of
an element in the formula prescribed for computation of excess
profits tax. Congress might have expressly declared that taxes
should be excluded from invested capital. It did not do so in
§ 326(a), or elsewhere in the act. The regulations were made
pursuant to express authority (
see § 1309 of the
Revenue Act of 1918). They are valid unless unreasonable or
inconsistent with the statute.
United States v. Grimaud,
220 U. S. 506,
220 U. S.
517-518. They constitute contemporaneous construction by
those charged with the administration of the act, are for that
reason entitled to respectful consideration, and will not be
overruled except for weighty reasons.
United States v.
Moore, 95 U. S. 760,
95 U. S. 763;
Brewster v. Gage, 280 U. S. 327,
280 U. S.
336.
Petitioner insists that Article 845 is unreasonable as applied
to 1918 taxes; that no one could know what those taxes would be at
the close of the year, because the so-called
Page 282 U. S. 379
Revenue Act of 1918 was not passed until February, 1919, and
made changes in the rates. But the 1917 act was in force, and
required the payment of the same sort of taxes, and petitioner
concedes it accrued its taxes for 1918 and set them up in a reserve
at the end of the year. The Act of 1918 was retroactive, and
replaced the prior Act of October 3, 1917, and taxpayers understood
that the policy of the United States with respect to income and
profits tax was continuous. In February, 1919, the Treasury
promulgated Decision 2791, applicable to the 1917 Act, and in
substance the same as Article 845, which was issued under the 1918
Act on April 17, 1919. The taxes in question were provided for by
an act passed in February, 1919, but they were for the year 1918.
The act was passed in ample time to allow the taxpayer to readjust
its accounts for that year by including these taxes, and, since its
books were kept on an accrual basis, it was necessary that this
should be done in order clearly to reflect the income for 1918.
United States v. Woodward, 256 U.
S. 632, on which petitioner relies, is clearly
distinguishable on the grounds stated in
United States v.
Anderson, 269 U. S. 422,
269 U. S.
441.
We cannot hold that the regulation on which the Commissioner
relied was unreasonable or in conflict with the provisions of the
statute. The judgment is
Affirmed.
