Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931)
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Scribd Government DocsBurnet v. Sanford & Brooks Co., 282 U.S. 359 (1931)
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Scribd Government Docs282 U.S.
359
51 S.Ct. 150
75 L.Ed. 383
BURNET, Commissioner of Internal Revenue,
v.
SANFORD & BROOKS CO.
No. 31.
Argued Dec. 5-8, 1930.
Decided Jan. 5, 1931.
The Attorney General, and Mr. Claude R. Branch, of Providence, R. I., for
petitioner.
Messrs. Harry W. Baetjer and Charles McH. Howard, both of Baltimore,
Md., for respondent.
[Argument of Counsel from page 360 intentionally omitted]
Mr. Justice STONE delivered the opinion of the Court.
In this case certiorari was granted, Lucas v. Sanford & Brooks Co., 281 U. S.
707, 50 S. Ct. 240, 74 L. Ed. 1130, to review a judgment of the Court of
Appeals for the Fourth Circuit, 35 F.(2d) 312, reversing an order of the Board
of Tax Appeals, 11 B. T. A. 452, which had sustained the action of the
Commissioner of Internal Revenue in making a deficiency assessment against
respondent for income and profits taxes for the year 1920.
From 1913 to 1915, inclusive, respondent, a Delaware corporation engaged in
business for profit, was acting for the Atlantic Dredging Company in carrying
out a contract for dredging the Delaware River, entered into by that company
with the United States. In making its income tax returns for the years 1913 to
1916, respondent added to gross income for each year the pamen ts made under
the contract that year, and deducted its expenses paid that year in performing
the contract. The total expenses exceeded the payments received by
$176,271.88. The tax returns for 1913, 1915, and 1916 showed net losses. That
for 1914 showed net income.
In 1915 work under the contract was abandoned, and in 1916 suit was brought
in the Court of Claims to recover for a breach of warranty of the character of
the material to be dredged. Judgment for the claimant, 53 Ct. Cl. 490, was
affirmed by this Court in 1920. United States v. Atlantic Dredging Co., 253 U.
S. 1, 40 S. Ct. 423, 425, 64 L. Ed. 735. It held that the recovery was upon the
contract and was 'compensatory of the cost of the work, of which the
government got the benefit.' From the total recovery, petitioner received in that
year the sum of $192,577.59, which included the $176,271.88 by which its
expenses under the contract had exceeded receipts from it, and accrued interest
amounting to $16,305.71. Respondent having failed to include these amounts as
gross income in its tax returns for 1920, the Commissioner made the deficiency
assessment here involved, based on the addition of both items to gross income
for that year.
The Court of Appeals ruled that only the item of interest was properly included,
holding, erroneously as the government contends, that the item of $176,271.88
was a return of losses suffered by respondent in earlier years and hence was
wrongly assessed as income. Notwithstanding this conclusion, its judgment of
reversal and the consequent elimination of this item from gross income for
1920 were made contingent upon the filing by respondent of amended returns
for the years 1913 to 1916, from which were to be omitted the deductions of the
related items of expenses paid in those years. Respondent insists that as the
Sixteenth Amendment and the Revenue Act of 1918, which was in force in
1920, plainly contemplate a tax only on net income or profits, any application
of the statute which operates to impose a tax with respect to the present
transaction, from which respondent received no profit, cannot be upheld.
If respondent's contention that only gain or profit may be taxed under the
Sixteenth Amendment be accepted without qualification, see Eisner v.
Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Doyle
v. Mitchell Brothers Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054, the
question remains whether the gain or profit which is the subject of the tax may
be ascertained, as here, on the basis of fixed accounting periods, or whether, as
is pressed upon us, it can only be net profit ascertained on the basis of
particular transactions of the taxpayer when they are brought to a conclusion.
All the revenue acts which have been enacted since the adoption of the
Sixteenth Amendment have uniformly assessed the tax on the basis of annual
returns showing the net result of all the taxpayer's transactions during a fixed
accounting period, either the calendar year, or, at the option of the taxpayer, the
particular fiscal year which he may adopt. Under sections 230, 232 and 234(a)
of the Revenue Act of 1918, 40 Stat. 1057, respondent was subject to tax upon
its annual net income, arrived at by deducting from gross income for each
taxable year all the ordinary and necessary expenses paid during that year in
carrying on any trade or business, interest and taxes paid, and losses sustained,
during the year. By sections 233(a) and 213(a) gross income 'includes * * *
income derived from * * * business * * * or the transaction of any business
carried on for gain or profit, or gains or profits and income derived from any
source whatever.' The amount of all such items is required to be included in the
gross income for the taxable year in which received by the taxpayer, unless
they may be properly accounted for on the accrual basis under Section 212(b).
See United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347;
Aluminum Castings Co. v. Rotza hn, 282 U. S. 92, 51 S. Ct. 11, 75 L. Ed. 234,
decided November 24, 1930.
7
That the recovery made by respondent in 1920 was gross income for that year
within the meaning of these sections cannot, we think, be doubted. The money
received was derived from a contract entered into in the course of respondent's
business operations for profit. While it equalled, and in a loose sense was a
return of, expenditures made in performing the contract, still, as the Board of
Tax Appeals found, the expenditures were made in defraying the expenses
incurred in the prosecution of the work under the contract, for the purpose of
earning profits. They were not capital investments, the cost of which, if
converted, must first be restored from the proceeds before there is a capital
gain taxable as income. See Doyle v. Mitchell Brothers Co., supra, page 185 of
247 U. S., 38 S. Ct. 467.
That such receipts from the conduct of a business enterprise are to be included
in the taxpayer's return as a part of gross income, regardless of whether the
particular transaction results in net profit, sufficiently appears from the quoted
words of Section 213(a) and from the character of the deductions allowed. Only
by including these items of gross income in the 1920 return would it have been
possible to ascertain respondent's net income for the period covered by the
return, which is what the statute taxes. The excess of gross income over
deductions did not any the less constitute net income for the taxable period
because respondent, in an earlier period, suffered net losses in the conduct of its
business which were in some measure attributable to expenditures made to
produce the net income of the later period.
Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 46 S. Ct. 449, 70 L. Ed. 886,
on which respondent relies, does not support its position. In that case the
taxpayer, which had lost, in business, borrowed money, which was to be repaid
in German marks, and which was later repaid in depreciated currency, had
neither made a profit on the transaction, nor received any money or property
which could have been made subject to the tax.
10
But respondent insists that if the sum which it recovered is the income defined
by the statute, still it is not income, taxation of which without apportionment is
permitted by the Sixteenth Amendment, since the particular transaction from
which it was derived did not result in any net gain or profit. But we do not think
the amendment is to be so narrowly construed. A taxpayer may be in receipt of
net income in one year and not in another. The net result of the two years, if
combined in a single taxable period, might still be a loss; but it has never been
supposed that that fact would relieve him from a tax on the first, or that it
affords any reason for postponing the assessment of the tax until the end of a
lifetime, or for some other indefinite period, to ascertain more precisely
whether the final outcome of the period, or of a given transaction, will be a gain
or a loss.
11
The Sixteenth Amendment was adopted to enable the government to raise
revenue by taxation. It is the essence of any system of taxation that it should
produce revenue ascertainable, and payable to the government, at regular
intervals. Only by such a system is it practicable to produce a regular flow of
income and apply methods of accounting, assessment, and collection capable of
practical operation. It is not suggested that there has ever been any general
scheme for taxing income on any other basis. The computation of income
annually as the net result of all transactions within the year was a familiar
practice, and taxes upon income so arrived at were not unknown, before the
Sixteenth Amendment. See Bowers v. Kerbaugh-Empire Co., supra, page 174
of 271 U. S. 46 S. Ct. 449; Pacific Insurance Co. v. Soule, 7 Wall, 433, 19 L.
Ed. 95; Pollock v. Farmers' Loan & Trust Co., 158 U. S. 601, 630, 15 S. Ct.
912, 39 L. Ed. 1108. It is not to be supposed that the amendment did not
contemplatetha t Congress might make income so ascertained the basis of a
scheme of taxation such as had been in actual operation within the United
States before its adoption. While, conceivably, a different system might be
devised by which the tax could be assessed, wholly or in part, on the basis of
the finally ascertained results of particular transactions, Congress is not
required by the amendment to adopt such a system in preference to the more
familiar method, even if it were practicable. It would not necessarily obviate
the kind of inequalities of which respondent complains. If losses from particular
transactions were to be set off against gains in others, there would still be the
practical necessity of computing the tax on the basis of annual or other fixed
taxable periods, which might result in the taxpayer being required to pay a tax
on income in one period exceeded by net losses in another.
12
Under the statutes and regulations in force in 1920, two methods were provided
12
by which, to a limited extent, the expenses of a transaction incurred in one year
might be offset by the amounts actually received from it in another. One was by
returns on the accrual basis under Section 212(b), which provides that a
taxpayer keeping accounts upon any basis other than that of actual receipts and
disbursements, unless such basis does not clearly reflect its income, may,
subject to regulations of the Commissioner, make its return upon the basis upon
which its books are kept. See United States v. Anderson, and Aluminum
Castings Co. v. Routzahn, supra. The other was under Treasury Regulations
(article 121 of Rug. 33 of Jan. 2, 1918, under the Revenue Acts of 1916 and
1917; article 36 of Reg. 45, April 19, 1919, under the Revenue Act of 1918)
providing that in reporting the income derived from certain long term contracts,
the taxpayer might either report all of the receipts and all of the expenditures
made on account of a particular contract in the year in which the work was
completed, or report in each year the percentage of the estimated profit
corresponding to the percentage of the total estimated expenditures which was
made in that year.
13
The Court of Appeals said that the case of the respondent here fell within the
spirit of these regulations. But the court did not hold, nor does respondent
assert, that it ever filed returns in compliance either with these regulations, or
Section 212(b), or otherwise attempted to avail itself of their provisions; nor on
this record do any facts appear tending to support the burden, resting on the
taxpayer, of establishing that the Commissioner erred in failing to apply them.
See Niles Bement Pond Co. v. United States, 281 U. S. 357, 361, 50 S. Ct. 251,
74 L. Ed. 901.
14
The assessment was properly made under the statutes. Relief from their alleged
burdensome operation which may not be secured under these provisions, can be
afforded only by legislation, not by the courts.
15
Reversed.
