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De Soto Securities Co. v. Commissioner of Internal Revenue

August 9, 1956

DE SOTO SECURITIES COMPANY, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



Author: Schnackenberg

Before FINNEGAN, LINDLEY and SCHNACKENBERG, Circuit Judges.

SCHNACKENBERG, Circuit Judge.

Petitioner asks us to reverse a decision of the Tax Court which sustained respondent's determination of a deficiency of $16,964.29 in the personal holding company surtax of petitioner for the fiscal year ending June 30, 1950. The Tax Court's opinion*fn1 found all of the facts as the parties stipulated them.

During the fiscal year in question petitioner was a personal holding company. In addition to the federal income taxes accrued as of June 30, 1950,*fn2 petitioner paid out of net income during the fiscal year ending on that date federal income taxes amounting to $54,002.83, all of which accrued in prior years. Petitioner deducted said amount in computing subchapter A net income for the fiscal year in question. Respondent disallowed that deduction and this litigation followed.

In computing its subchapter A net income in each of the said prior years, petitioner deducted only federal income taxes paid during each such year and it did not deduct any federal income taxes accrued but not paid during said prior years.

For the fiscal year ending June 30, 1950 petitioner filed its corporation income tax and personal holding company returns on a cash basis.

The contested issue is whether taxpayer in computing its subchapter A*fn3 net income, may deduct, under § 505(a) (1)*fn4 of the Internal Revenue Code of 1939, federal income taxes paid during its fiscal year ended June 30, 1950 in satisfaction of its tax liabilities for prior taxable years.

1. Section 505 of the Internal Revenue act of 1939 reads in its pertinent parts as follows:

"For the purposes of this subchapter the term 'Subchapter A Net Income' means the net income with the following adjustments:

"(a) Additional deductions. There shall be allowed as deductions -

"(1) Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year to the extent not allowed as a deduction under section 23; but not including the tax imposed by section 102, section 500, or a section of a prior income-tax law corresponding to either of such sections. * * *" (Emphasis supplied.)

Counsel show concern about real or seeming conflicts in several cases dealing with the foregoing statutory language. They are Clarion Oil Co. v. Commissioner, 1 T.C. 751; Commissioner of Internal Revenue v. Clarion Oil Co., 80 U.S.App.D.C. 41, 148 F.2d 671, certiorari denied 325 U.S. 881, 65 S. Ct. 1575, 89 L. Ed. 1997; Oak Commercial Corp. v. Commissioner (Aramo-Stiftung v. Commissioner), 9 T.C. 947; Aramo-Stiftung v. Commissioner of Internal Revenue, 2 Cir., 172 F.2d 896; Joan Carol Corp. v. Commissioner, 13 T.C. 83; Joan Carol Corporation v. Commissioner of Internal Revenue, 2 Cir., 180 F.2d 751; Loetscher Co. v. Birmingham, D.C., 95 F.Supp. 892, affirmed 8 Cir., 188 F.2d 78, and Wm. J. Lemp Brewing Co. v. Commissioner, 18 T.C. 586. Under these circumstances, we shall resort to basic principles of statutory construction, relying on the reasoning of the cited cases insofar as it aids us. We shall attempt to ascertain the intention of congress by considering all the words used in § 505(a) (1), as well as significant language in other parts of the act. Courts have no right, in the guise of construction of an act, to either add words to or eliminate words from the language used by congress. We may also consider pertinent legislative history pertaining to events both before and after the passage of the act being construed. We have no right to first determine the legislative intention and then proceed to change the words used in an attempt to justify the predetermined conclusion.

Section 505(a) (1) uses the words "paid or accrued". The Tax Court's decision has in effect construed the phrase "paid or accrued" so as to eliminate the word "paid". We will not excide "paid" or any other word which congress placed in the act. We shall determine the intention of congress in conformity with the words it has used and not in the face of those words.The courts can only interpret congressional acts. They cannot legislate.

After the respondent was led by his reading of court decisions to the conclusion that the statutory language failed to correctly state the intention of congress, he should have called the attention of congress to the matter. In the meantime he was bound by what congress said and he had no ...


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