Seymour Mfg. Co. v. Commissioner

*1222 The Commissioner determined deficiencies in income and profits tax of $124,024.25 for fiscal year ending June 30, 1919, and $5,897.37 for fiscal year ending June 30, 1921.

Petitioner contends that the application of section 301 of the 1918 Revenue Act to it violates the Constitution.

The facts are stipulated.

FINDINGS OF FACT.

Petitioner is a Connecticut corporation with principal office at Seymour.

For its fiscal year ended June 30, 1919, petitioner reported its net income on Form 1120 in the sum of $418,282.27. The Commissioner, for the purpose of computing the tax at 1918 rates under the Revenue Act of 1918, revised such reported net income by increasing same to $638,069.55 and determined: (a) that $235,100.29 of such revised and increased net income was received as income from Government contracts for such period; (b) that $164,659.97, representing the difference*2708 *1223 between such net income of $638,069.55 aforesaid, and the "war-profits credit" as determined by the Commissioner, of $473,409.58, was subject to the tax at the war-profits rate of 80 per cent or $131,727.98; (c) that after deducting therefrom the excess-profits tax as determined by the Commissioner, of $77,622.57, the war-profits tax at 1918 rates was $54,105.41.

Further, the Commissioner, for the purpose of computing the taxes at 1919 rates under the Revenue Act of 1918, revised petitioner's reported net income aforesaid for the fiscal year ended June 30, 1919, by increasing same to $696,197.37 and determined: (a) that the difference between such revised net income and the excess-profit-tax credit of $379,327.66, or $316,869.71, was taxable at 20 per cent, producing a tax of $63,373.94; (b) that 33.7692 per cent of $131,727.98, the tax at 1918 rates aforesaid, or $44,483.49, was the tax attributable to Government contracts; (c) that the profits tax attributable to Government contracts was $44,483.40; (d) that the profits tax on the remaining net income at 1918 rates was $43,622.25; (e) that the profits tax on net income not attributed to Government contracts at 1919*2709 rates was $20,986.54, or a total war and excess-profits tax for petitioner's fiscal period ended June 30, 1919, of $109,092.28.

Petitioner's war and excess-profits taxes for its fiscal year ended June 30, 1919, computed on the basis of treating income derived from Government contracts during such period in the same manner as its income from other sources, but in other respects on the same basis as the Commissioner's computation, would be $97,550.96, or $11,541.32 less than such taxes as computed by the Commissioner.

For its fiscal year ended June 30, 1920, petitioner reported net income of Form 1120 in the sum of $771,603.89. The Commissioner revised such reported net income by decreasing same to $598,387.54, $66,815.73 of which is attributed by respondent to income from Government contracts. After deducting from such revised net income the war-profits credit as determined by respondent, of $528,898.86, the Commissioner imposed the war-profits rate of 80 per cent upon the difference of $69,488.68, producing war-profits tax of $55,590.94. Further, the Commissioner determined that that proportion of said $55,590.94 which petitioner's net income derived from Government contracts*2710 bears to its total net income - 11.166 per cent, or $6,207.28, was the amount of war-profits tax on such income, and that proportion of the excess-profits tax of $34,933.69 which petitioner's net income not derived from Government contracts bears to its total net income (88.834 per cent), or $31,032.99, was the amount of profits tax on such income, or a total war-profits and excess-profits tax of $37,240.27.

*1224 Petitioner's war and excess-profits taxes for its fiscal year ended June 30, 1920, computed on the basis of treating income derived from Government contracts during such period in the same manner as its income from other sources, but in other respects on the same basis as the Commissioner's computation, would be $34,857.57, or $2,382.70 less than such taxes as computed by the Commissioner.

OPINION.

LETTLETON: Petitioner contends (1) that in so far as the Revenue Act of 1918 purports for 1919 and subsequently to tax income from "Government contracts," as defined in section 1 thereof, at a different and higher rate than the ordinary income from other sources, the Act is not a taxing act, is not enacted under the taxing power of Congress and is confiscatory, *2711 taking the property of taxpayers without due process of law and without just compensation in contravention of the Fifth Amendment to the Constitution of the United States; and (2) that if it be held that the exaction for 1919 and subsequently in the Revenue Act of 1918 at a higher rate, from persons receiving income from Government contracts, is a tax and not a penalty, then the classification of income from Government contracts at a different rate from income from other sources is so wholly arbitrary and unreasonable and produces such a gross and patent inequality as to bring the Act within the prohibition of the Fifth Amendment, and it is unconstitutional and void.

This claim was made in R. Hoe & Co.,7 B.T.A. 1277, and, upon review, the United States Circuit Court of Appeals for the Second Circuit in Hoe & Co. v. Commissioner, 30 Fed.(2d) 630, stated:

The contention that the Act laying a high tax on Government war contracts is unconstitutional is without merit. The profits earned under war contracts were in general abnormally high so that it was reasonable to impose higher rates upon them than on the profits of contracts made at a later*2712 time. There was a special reason to single out government contracts. The Government was likely to have to pay more than a responsible private corporation because of difficulty in dealing with it in the event of any dispute and the delays which might occur in obtaining payment for lack of adequate appropriations. And there was, moreover, always the chance, which befell the taxpayer in this case, of the cancellation of contracts due to the sudden ending of the war. All contractors of the same class were taxed under the Act upon the same basis, and as there was a real difference between government and non-government contractors, we have no doubt that the classification was a justifiable one and that the Act was constitutional. Flint v. Stone Tracy Co.,220 U.S. 107; Brushaber v. Union Pac. R.R.,240 U.S. 1.

The opinion of the court in the above case disposes of the claim made here.

Judgment will be entered for the respondent.