1928 BTA LEXIS 3498">*3498 1. The effect of section 23 of the Merchant Marine Act is to give to those who comply with its terms an additional deduction in computing net income subject to excess-profits and war-profits taxes.
2. The amount of the excess-profits and war-profits taxes which may be taken as a credit in computing net income subject to income tax is the amount of profits tax which is imposed upon the net income after allowing the deduction from income permitted by the Merchant Marine Act, and not the amount of profits tax which would have been payable had there been no such deduction.
12 B.T.A. 606">*606 This proceeding is for a redetermination of deficiencies in income taxes for the calendar years 1920 and 1921, amounting to $5,882.47 and $655.58, respectively. The proceeding was submitted upon the pleadings and upon a written stipulation of facts.
12 B.T.A. 606">*607 FINDINGS OF FACT.
Petitioner is a Delaware corporation with an office at 82 Wall Street, New York City. The business of the petitioner is the operation of steamships between New York, Porto Rico and foreign1928 BTA LEXIS 3498">*3499 ports. The petitioner duly filed its income and profits-tax return for the year 1920, which showed a net income of $393,103.26 and an excessprofits tax of $58,824.73. Under the authority of the Merchant Marine Act of 1920, the petitioner set aside in accordance with the rules and regulations of the United States Shipping Board the sum of $58,824.73 for the construction of a new vessel, which sum represented the amount of the excess-profits tax that would have been payable by the petitioner for the year 1920 without the benefit of section 23 of the Merchant Marine Act of 1920, and the Secretary of the Treasury issued his certificate to the Shipping Board as provided in said Act. The petitioner's income and profits-tax return for the year 1920 showed the profits tax imposed by the Revenue Act, the deduction of an equivalent amount which represented the special fund set aside under the authority of the said Merchant Marine Act, and in computing the income tax of the petitioner the profits taxes imposed by the Revenue Act were also taken as a deduction.
The petitioner duly filed its income and profits-tax return for the year 1921, which showed a net income of $153,169.83 and an excess-profits1928 BTA LEXIS 3498">*3500 tax of $6,555.84. Under the authority of the Merchant Marine Act of 1920 the petitioner set aside in accordance with the rules and regulations of the United States Shipping Board the sum of $6,555.84 for the construction of a new vessel, which sum represented the amount of the excess-profits tax that would have been payable by the petitioner for the year 1921 without the benefit of section 23 of the Merchant Marine Act of 1920, and the Secretary of the Treasury issued his certificate to the Shipping Board as provided in said Act. The petitioner's income and profits-tax return for the year 1921 showed the profits tax imposed by the Revenue Act, the deduction of an equivalent amount which represented the special fund set aside under the authority of the said Merchant Marine Act, and in computing the income tax of the petitioner the profits taxes imposed by the Revenue Act were also taken as a deduction.
A desk audit of the petitioner's income and profits-tax returns for the years 1920 and 1921 was made by the Commissioner of Internal Revenue for the purpose of reviewing the deductions claimed and made by the petitioner under the Merchant Marine Act for the two years in question1928 BTA LEXIS 3498">*3501 and for no other purpose. In connection with said audit the Commissioner of Internal Revenue allowed the amount 12 B.T.A. 606">*608 claimed and deducted in the petitioner's return for each year as a deduction for the purpose of ascertaining the petitioner's net income subject to war-profits and excess-profits taxes imposed by the Revenue Act, but disallowed the amount thereof as a deduction in the computation of the petitioner's income tax. The grounds stated by the Commissioner for disallowing the excess profits taxes as a deduction in the computation of the income tax were:
(a) That in allowing the petitioner to deduct the amount set aside as aforesaid from its excess-profits tax the petitioner had thereby been allowed the full benefit of section 23 of the Merchant Marine Act of 1920; and
(b) That since no imposition of war-profits and excess-profits taxes did in fact occur, a credit against total net income of the "equivalent of war-profits and excess-profits taxes that would have been payable" could not be allowed.
The Merchant Marine Act of 1920 was approved June 5, 1920, and section 23 of such Act reads as follows:
That the owner of a vessel documented under the laws of the1928 BTA LEXIS 3498">*3502 United States and operated in foreign trade shall, for each of the ten taxable years while so operated, beginning with the first taxable year ending after the enactment of this Act, be allowed as a deduction for the purpose of ascertaining his net income subject to the war profits and excess profits taxes imposed by Title III of the Revenue Act of 1918 an amount equivalent to the net earnings of such vessel during such taxable year, determined in accordance with rules and regulations to be made by the board; Provided, That such owner shall not be entitled to such deduction unless during such taxable year he invested, or set aside under rules and regulations to be made by the board in a trust fund for investment, in the building in shipyards in the United States of new vessels of a type and kind approved by the board, an amount, to be determined by the Secretary of the Treasury and certified by him to the board, equivalent to the war profits and excess profits taxes that would have been payable by such owner on account of the net earnings of such vessels but for the deduction allowed under the provisions of this section: Provided further, That at least two-thirds of the cost1928 BTA LEXIS 3498">*3503 of any vessel constructed under this paragraph shall be paid for out of the ordinary funds or capital of the person having such vessel constructed.
That during the period of ten years from the enactment of this Act any person a citizen of the United States who may sell a vessel documented under the laws of the United States and built prior to January 1, 1914, shall be exempt from all income taxes that would be payable upon any of the proceeds of such sale under Title I, Title II, and Title III of the Revenue Act of 1918 if the entire proceeds thereof shall be invested in the building of new ships in American shipyards, such ships to be documented under the laws of the United States and to be of a type approved by the board.
Petitioner owned and operated during each of the years 1920 and 1921 five steamships named "Philadelphia," "Caracas," "Zulia," "Maracaibo," and "Merida." Commissioner's original allowance for depreciation on these vessels for the year 1920 was $23,076, and for the year 1921 was $75,136.72. The Commissioner admits that 12 B.T.A. 606">*609 he erred in refusing to allow adequate depreciation on such vessels for the years in question and that petitioner is entitled to1928 BTA LEXIS 3498">*3504 deduct as depreciation on such vessels $99,222.39 for the year 1920 and $99,222.39 for the year 1921. After deducting such depreciation, petitioner's net income for the years 1920 and 1921 is reduced to $316,956.87 and $129,084.16, respectively.
OPINION.
PHILLIPS: Section 230 of the Revenue Act of 1918 provides:
That * * * there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax at the following rates: (1) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 236; and (2) For each calendar year thereafter, 10 per centum of such excess amount.
Section 236 provides:
That for the purpose only of the tax imposed by section 230 there shall be allowed the following credits: * * * The amount of any taxes imposed by Title III for the same taxable year.
The provisions of the Revenue Act of 1921 are similar to those of the 1918 Act. It is the contention of the petitioner that taxes of $58,824.73 were imposed upon it for 1920 by Title III of the Revenue Act of 1918 and that, in computing net income subject to income tax, it is entitled to a credit of that amount. 1928 BTA LEXIS 3498">*3505 The respondent has denied such credit upon the ground that no tax was imposed upon petitioner under Title III, since the petitioner took advantage of the provisions of section 23 of the Merchant Marine Act, which is set forth in the stipulation of the parties and incorporated in the findings of fact.
It is conceded that the petitioner complied with the provisions of that Act. The wording of the stipulation, however, indicates a misapprehension of the effect of the Merchant Marine Act. That Act does not provide that the amount set aside shall be a deduction or credit against the profits tax otherwise due, as the stipulation would appear to indicate was the belief of those who drafted it; it provides that if the terms of the statute are met the owner of the vessel "shall * * * be allowed as a deduction for the purpose of ascertaining his net income subject to the war profits and excess profits taxes imposed by Title III * * * an amount equivalent to the earnings of such vessel during such taxable year." The effect is not to exempt the owner of the vessel from profits tax, or to provide a credit to be applied in reduction of the tax otherwise due. The statute provides for a deduction1928 BTA LEXIS 3498">*3506 in computing the income subject to tax, to be granted upon compliance with the terms of the statute. The petitioner complied with the statute, became entitled to claim this deduction from 12 B.T.A. 606">*610 its income, it was allowed, and the taxable income was thereby reduced to the point where no profits taxes became due.
The claim of the petitioner and the argument in the brief filed by his counsel rest upon the theory that the Revenue Act of 1918 imposes a profits tax and that the Merchant Marine Act allows a deduction against such tax of an amount equivalent to such tax; that under the Revenue Act the tax liability continues but that under the Merchant Marine Act the remedy for enforcing payment is voluntarily surrendered. We can see nothing to justify any such theory. The two Acts must be read together. Having complied with the conditions of the Merchant Marine Act, which was effective before any tax for 1920 became due under the Revenue Act, petitioner became entitled to a certain additional deduction in computing its net income subject to tax under Title III. The Revenue Act imposed a tax only upon net income, and the net income of petitioner could not have been properly computed1928 BTA LEXIS 3498">*3507 without taking the deduction which the Merchant Marine Act provided should be allowed under the Revenue Act. The tax imposed was to be computed upon this net income, not upon what the income would have been had the Revenue Act stood alone, or had the petitioner not taken the necessary steps to entitle it to this additional deduction. The result in this case is that there was not sufficient net income subject to profits tax to result in the imposition of any tax and consequently in computing net income subject to income tax there was no credit to be claimed on the ground that a profits tax was imposed on petitioner by the Revenue Act. The decision of the respondent upon this point is sustained.
The parties entered into a stipulation with respect to depreciation which will require a recomputation of the deficiency.
Reviewed by the Board.
Decision will be entered under Rule 50.