United States v. American Can Company/Opinion of the Court

In the courts below these causes were heard together, and one opinion here will suffice.

Respondent the American Can Company owned the entire capital stock of respondents Missouri Can Company and Detroit Can Company. All were incorporated under the laws of New Jersey and had their legal residences and principal offices therein. Their places of business were within the Second United States Internal Revenue District of New York. William H. Edwards, formerly Collector for that district, retired in 1921; Frank K. Bowers succeeded him. During Edwards' term he demanded and collected from these three corporations income and excess profits taxes for 1917 aggregating more than $5,200,000. Thereafter Collector Bowers exacted of them above $3,300,000 as additional income and excess profits taxes for the same year.

In January, 1926, respondents instituted actions against the United States in the District Court for New Jersey, as permitted under U.S.C.ode, § 41, par. 20, 28 USCA § 41 (20) (Judicial Code, § 24, par. 20; Revenue Act, Nov. 23, 1921, c. 136, § 1310(c), 42 Stat. 311; Revenue Act, February 24, 1925, c. 309, 43 Stat. 972). They sought to recover with interest more than $2,700,000 paid, as they alleged, to Edwards in excess of taxes properly assessable to them for 1917. Judgments against the United States for the amounts claimed were affirmed by the Circuit Court of Appeals, Third Circuit, March 5, 1929; and the matter is here upon certiorari.

They also sued Bowers, Collector, in the District Court, Southern District of New York, to recover the additional taxes for 1917 ($3,300,000) demanded by and paid to him. These suits involved the same questions as those presented in the causes now before us. Judgments went for Bowers, Collector. The Circuit Court of Appeals, Second Circuit, affirmed them November 4, 1929. American Can Co. v. Bowers, 35 F.(2d) 832.

The opinions and judgments in the two Circuits upon the same facts are thus in direct conflict.

Pertinent provisions of the statutes and Treasury Regulations are printed in the margin.

The accounts of respondents were kept during 1917 not upon the basis of actual receipts and disbursements but upon the accrual basis-that is, pecuniary obligations payable to or by the company were treated as if discharged when incurred. Purporting to proceed as permitted by section 13(d), Title I, Revenue Act of 1916 (39 Stat. 771), they made returns to the collector upon the same basis. The Commissioner ascertained that the books showed excessive inventory values and thereby indicated net incomes much too small. The valuation placed on large quantities of tin plate had been marked up from $3.60 per box to $7, and the higher rather than the lower cost of this raw material had been reported. Thereupon, he disallowed the inflation, corrected the erroneous entries, and made reassessments according to the returns so modified. Respondents claimed that this action amounted to rejection of the basis upon which their returns and been made. Also that, after such rejection, no assessment could be made except one based upon receipts and disbursements; that is, upon amounts ascertained by deducting from gross income received, expenses paid out, losses charged off, interest, and taxes (section 12, Act 1916, 39 Stat. 767). And, further, that computation should be made without regard to inventories.

The District Court of New Jersey and the Circuit Court of Appeals, Third Circuit, accepting respondents' view, awarded and approved judgments against the United States aggregating some $4,000,000. The result, we think, is manifestly erroneous. Upon the findings, judgments should have gone the other way.

The claims of respondents rest upon improper construction of paragraph (d), § 13, Act of September 8, 1916. This provides that 'a corporation * *  * keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations *  *  * make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned. * *  * '

'Basis of keeping accounts' as there used refers to the general bookkeeping system followed by the taxpayer and not to the accuracy or propriety of mere individual items or entries upon the books. And to correct an improper item in a return-whether the result of mere error or designed-cannot properly be said to constitute rejection of the basis upon which the return was constructed. The statute empowers tax officers to make necessary rules and regulations and to take action essential to orderly enforcement of the obligations imposed. Here the taxpayers kept their accounts on the accrual basis and elected to make their returns accordingly. They cannot complain because an item therein was changed so as to conform with admitted facts. If their returns had been made on the basis of actual receipts and disbursements, certainly they would have been subject to correction for errors without changing the basis; and the same thing is true of returns framed upon an accrual basis.

United States v. Anderson, 269 U.S. 422, 437, 440, 443, 46 S.C.t. 131, 70 L. Ed. 347, considered the meaning of sections 12(a) and 13(d), Act of 1916, and sustained the action of the Commissioner who had reassessed according to an adjusted return originally made up on the accrual basis.

We need not discuss the question whether under any circumstances the taxable income of a manufacturing or mercantile corporation can be ascertained without reference to inventory values. Certainly, in most instances, where the taxpayer carries on an extensive business, this cannot be done.

The challenged judgments are reversed. The causes will be remanded to the District Court for appropriate action in harmony with this opinion.

Reversed.