268 F. 377 | D.N.J. | 1920
The plaintiff, a New Jersey corporation, has brought suit against the collector of internal revenue for the First district of New Jersey to recover an excess profits tax for the year 1917, alleged to have been improperly levied, assessed, and collected, and the defendant has moved to strike out the complaint, for the reason that—
“A corporation whose sole income is received from licensed patents is a corporation having more than a nominal capital, within the meaning of sec*378 tion 209 of the Revenue Act of October 8, 1917” (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336%j).
The complaint discloses that the plaintiff was incorporated in 1903, with an authorized capital stock of $100,000. At the time of its incorporation its officers contemplated engaging in the business of manufacturing pneumatic vehicle tires of a peculiar and unusual construction. The Company experimented at great expense over á period of years, until it was determined that the manufacture of its tires was not commercially possible. One of the officers of the company during the period of experimentation developed a new form of mold for vulcanizing pneumatic tires, which mold was of general utility, and a patent was secured, which was assigned to the company for $1, together with other patents relating to tire-manufacturing apparatus.
In 1911 the Company ceased conducting any other business than that of granting licenses under its patents. Its capital was reduced to $10,000. During the year 1917 the capital and surplus were $10,000 and $2,000, respectively, or a total invested capital of $12,000, which capital was used as a fund from which to advance salaries, wages, etc., and to provide office furniture, accommodations, and equipment. The company was in much the same position as an individual who, having invented a machine desired by others, received royalties for the use of his invention and kept sufficient money on hand to provide for his needs during periods when royalties would not be received. The company’s net income during the year 1917 was $105,650.29. It is clear, therefore, that the patents had real value.
The plaintiff concluded that it was entitled to be assessed under section 209 of the Revenue Act of 1917, on the theory that it was a corporation “having no invested capital or not more than a nominal capital.” The Treasury Department, however, acting under section 210 of the act (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336%k), on the theory that it was unable to satisfactorily determine the invested capital of the plaintiff, assessed an additional tax, which was paid by the plaintiff under protest, and for the recovery of which this action is brought.
Section 201 of the Revenue Act of 1917 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336%b) provides that, in addition to an income tax, every corporation, except those specifically exempted, of which the plaintiff is not one, shall pay the additional tax upon its net income. The tax was graduated, and was a certain percentage of the net income, not in excess of certain fixed percentages of the invested capital. Under section 207 of the act (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 6336%h) the term “invested capital” is defined.\ It appears from this section that the plaintiff’s patents would not be included in the term “invested capital,” for the reason that no stock of the plaintiff company was issued therefor, nor were these patents specifically paid for in cash or tangible property. The only invested capital of the plaintiff was the $12,000 of capital and surplus, which was not used in the production of the net income of the plaintiff, but
In determining the question whether such a corporation, deriving its income solely from royalties or licenses from patents, can be said to be a corporation “having no invested capital or not more than a nominal capital,” within the meaning of section 209, reference is made in behalf of the collector to the Congressional Record of October 6, 1917, containing a statement by Hon. Claude Kitchin, who was at that time chairman of the Ways and Means Committee. It appears from this statement that the Excess Profits Tax Law, as contained in the House Bill, applied only to corporations and partnerships, and not to individuals. The Senate brought within the scope of the law individuals in trade or business, but excluded lawyers, doctors, professional men, and officers of corporations, as well as governmental officers. The House conferees, it would seem from Mr. Kitchin’s statement, opposed the inclusion of individuals, unless they were all brought in. The Senate insisted upon the exemptions, and section 209 of the act resulted, which, it is the claim of the collector, was intended to apply to a definite class of persons; i. e., lawyers, doctors, professional men, and high-salaried officers of corporations and the government.
If this idea of providing especially for those rendering a personal service was all that was in the minds of the conferees, there seems to be no reason why they should not have used more exact language to convey their meaning, and further there is no reason at all why Congress should have specifically provided that, in a case of a trade or business “having no invested capital or not more than a nominal capital,” there should be assessed a ta-x other than the tax to which such trade or business would otherwise be liable under section 201, unless there was to be a distinction between those employing “invested capital” and these employing “nominal capital.” These terms admit of exact definitions.
“Wealth employed in or available for production.” Funk & Wagnalls New Standard Dictionary.
*380 “That part of the production of industry which, in the form either of national or of individual wealth, is available for further production.” The Century Dictionary and Cyclopedia.
The late J. S. Mill, the eminent economist, defines “capital" as follows :
“What capital does for production is to afford shelter, protection, tools, and materials which the work requires, and to feed and otherwise maintain the laborers during the process. Whatever things are destined for this use, destined to supply productive labor with these various prerequisites, are capital.” Political Econoiny, i, iv, § I. (The italics are mine.)
Taking this last definition, which embodies the thought of all the others, it seems clear that patents do not fall within the term “capital” ; and it also seems to be clear that this is what was in mind when Congress made the distinction between “invested capital,” which is defined under section 207 to include the actual cash value of patents paid for in stock or shares, and also such other intangible property, which had been paid for in money or stock, and also what was in mind when the word “capital” is used alone in section 209, preceded by the word “nominal”; that is, in the sense of something in name only employed in or available for production. The distinction is between those employing those stored-up concrete things, essential to productive labor, and those employing these things existing in name only. Patents were never capital in an economic sens.e. Congress included them within the term “invested capital” to the extent only of the investment in them; if no investment in them, then they remain in the same class as that intangible something which makes for the wealth of the professional man, the broker, or others engaged in a personal service, which could never be “capital,” except in name only.
The motion to strike is dismissed.