American Viscose Corp. v. Commissioner

*938 Respondent determined deficiencies for the calendar year 1926 against the three corporate petitioners separately as follows:

The three appeals, separately filed, were consolidated for hearing and decision, the petitioners being affiliated corporations and having filed a consolidated return for the year 1926. At the hearing it was agreed that the total amount due from the affiliated*2296 companies, if any, is included in the deficiency determined against the American Viscose Corporation and represented in the appeal under Docket No. 33953, and evidence was submitted only upon the appeal of this petitioner, it being agreed that any ultimate deficiency or any overpayment, found upon a redetermination to exist as to the consolidated companies, might be determined as a liability of or credit due this petitioner. There is only one issue as finally framed and presented, this being whether an amount received by the Viscose Company in 1926, and representing interest paid by the United States upon refunds made in that year of overpayments of income and profits taxes by it in prior years, represented "interest upon the obligations of the United States" within the meaning of section 213(b)(4) of the Revenue Act of 1926, and as such not to be included in the consolidated taxable income of the affiliated corporations for that year.

FINDINGS OF FACT.

The petitioner, the American Viscose Corporation, is a Delaware corporation with its principal office at Wilmington.

In the year 1926 as a consequence of a determination of this Board, the Commissioner of Internal Revenue*2297 refunded to the Viscose Co., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, whose capital stock then was and now is owned by the American Viscose Corporation, the sum of $3,896,663.14 income and profits taxes illegally assessed and collected from that company for the calendar years 1917, 1918, and 1919, and at the same time the Commissioner, pursuant to the statute providing for refunds of overpaid taxes, paid interest on such refund in the amount of $1,409,856.46. Such interest was not included as income in the consolidated return of the American Viscose Corporation, the Viscose Co. and the Viscose Corporation of Virginia for the year 1926, although it was therein stated to have been received, with the accompanying assertion that it was not subject to taxation and such claim has ever since been maintained.

Of the total deficiency of $198,141.47, determined against the American Viscose Corporation, $190,330.62 represents the tax, computed *939 at 13 1/2 per cent, upon the amount of the aforesaid interest received by the Viscose Co. On or about the 24th day of December, 1927, the American Viscose Corporation paid, under protest, *2298 to the collector of internal revenue the full amount of said deficiency, together with interest thereon to the date of payment.

OPINION.

TRUSSELL: The issue in this case is one of law, whether an amount of interest received from the Government in the taxable year, pursuant to section 1116 of the Revenue Act of 1926, upon the amount of a refund of Federal income and profits taxes is "interest upon obligations of the United States" and, therefore, is exempt from the tax under the provisions of section 213(b)(4) of that act.

In , we had the question as to whether interest paid by the United States, under requirements of the statute, upon awards of just compensation for railroad properties used by it during the period of Federal control, constituted interest upon obligations of the United States in the sense in which that term is used in section 213(b)(4) of the Revenue Act of 1918, which is similar to the provision of the 1926 Act here involved. In holding that the obligation of the United States to pay just compensation was not the character of obligation referred to in the cited section and that the interest paid*2299 thereon was not subject to the exemption provided, we said:

* * * The apparent purpose for exempting from taxation the interest upon obligations of the United States was to facilitate the flotation of low-interest-bearing Government securities, thus partially compensating for the higher interest rates of competitive private issues. The reason for the exemption does not apply to interest on obligations, construing that word in the broad sense for which the petitioner contends.

* * *

The Congress first exempted obligations of the United States in general terms. It later saw fit to expressly exempt securities under the provisions of the Federal Farm Loan Act and bonds issued by the War Finance Corporation. We do not believe, however, that it intended to distinguish between bonds and securities, as such, and obligations of the United States, or to broaden the scope of that provision beyond the already understood and generally accepted meaning of that term. It merely sought to add to, by way of definiteness, the securities, of the Federal Farm Loan Board and War Finance Corporation, leaving the term "obligations of the United States" to cover all other bonds or other similar*2300 evidences of indebtedness issued by the United States but not specifically mentioned in the Act.

We can see no reason to depart from the conclusion reached in the cited case, and the reasons there expressed for that conclusion apply with equal force to the situation here presented. We hold that the *940 interest in question received by the Viscose Co. in 1926 should have been included in the consolidated income of the affiliated petitioners.

Judgment of no deficiency will be entered in Dockets Nos. 39112 and 39113. In Docket No. 33953 judgment will be entered for the respondent.