Collins Co. v. Commissioner , 3 B.T.A. 1213 ( 1926 )

Phillips,

dissenting: I can not agree with the conclusion which has been reached in the prevailing opinion. In levying the excess-profits tax, the statute lays down a rule for the computation of invested capital the intent of which can not be mistaken. There is to be included in invested capital, speaking in general terms, the investment made by the stockholders, together with the undistributed earnings. All assets representing this investment are divided by the statute into admissibles and inadmissibles. There is to be deducted from invested capital a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of the total assets. Inadmissible assets are defined by the statute as follows:

See. 325. (a) * ⅜ * The term “inadmissible assets” means stocks, bonds, and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income, but where the income derived from such assets consists in part of gain or profit derived from the sale or other disposition thereof, or where all or part of the interest derived from such assets is in effect included in the net income because of the limitation on the deduction of interest * * ⅜, a corresponding part of the capital invested in such assets shall not be deemed to be inadmissible assets; * * *.

The plain intent of the statute is to include in invested capital that portion of the assets the income from which is to be included in computing the taxable income, and to exclude from invested capital that portion of the assets the income from which is not to be included in the computation of taxable income. This appears particularly from those clauses which permit a part of the inadmissibles to be included where income is derived from the sale or other disposition thereof, or where the interest therefrom, ordinarily exempt, must be included in the computation of the income.

One of the material elements in the computation of income is the cost of the goods sold. One of the factors which goes into this computation is the cost of the power used in producing these goods. Whether power is secured through the acquisition of a power plant or through the purchase of stock in a cooperative enterprise which owns a plant, the cost of the power necessarily includes the cost ór value of the use of the capital invested. Where, as here, the cost of the goods sold does not inclúde any allowance for a return on the capital invested in a power plant, there is included in the net taxable income, in effect, an amount - equal to a reasonable return upon such capital; in effect, interest or dividends upon such capital investment is included in computing taxable net income. Because the investment took the form of a purchase of stock the dividends upon which would, if paid, be tax exempt, the conclusion is reached that the capital invested is inadmissible. Dividends are not expressly declared or interest paid, it is true, but the effect on the net income is the same as though dividends had been declared or interest paid and such dividends or interest had been included in taxpayer’s income.

If the prevailing opinion be right, if we may not look to the intent of-the law but must give regard only to its words, if we may not regard the substance but only the apparent form, then an error has been made in allowing this taxpayer any deduction whatever for the cost of its water power, for such cost was paid by an- assessment on the stock, a capital transaction. Merely- to state that proposition shows its fallacy, for- who: can doubt that the power cost this taxpayer not only the amount of the assessment but also the use of the investment. There can be no doubt that income from this investment is included in computing the net, income of the taxpayer and, the income from the investment being reflected in the taxable, net income, it is error to classify the investment as'an “ inadmissible asset.”

I do not believe that such a construction does violence even to the words of the statute. The words “ dividends or interest ” are,' I believe, used in the sense of “ income,” and that clause of the definition which reads “ the dividends or interest from which is not included in computing net income” is to be interpreted as “the income from which is not (to be) included in computing net income.”

It is argued that the power company might at any time become a profit-earning corporation. This could only be done-by increasing the charge for power supplied, thereby increasing the taxpayer’s deductible expense. That such is the case shows conclusively that the difference between the rate charged and a profit-making rate is reflected in the taxpayer’s taxable income. When and if the power company charges a rate in excess of the actual cost of production, the situation will b,e changed to the extent that the earnings from the in-Yéstment are no longer reflected in the taxable net income through the expense account, and the investment in the stock will become inadmissible, not only within the definition of the statute but also within its intent. ■ Until that time comes, however, it seems to be necessary only to point out that for 60 years the same uniform custom has been followed by the taxpayer.

On reference to the Board, GReen, Lansdon, and Trusseli. concur in the dissent.