On Petition for Rehearing.
Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
The Diamond Alkali Company filed a petition for rehearing on two points and seeks:
1. To have the tax rate of 54.54 per cent. and 18.31 per cent., determined by the Commissioner in a special assessment to be the fair and just rate for this corporation for 1918 and 1919, respectively, applied to its income as reduced by the decision of this court.
2. A deduction for depreciation on so much of its war facilities as were not amortized.
These questions will be considered in the above order.
1. The taxes for 1918 and 1919 are involved. The Commissioner allowed a deduction for 1918 for amortization of war facilities of $315,956.89 and for 1919 a deduction of $71,267.51. But this court on reversing the redetermination of the Board of Tax Appeals allowed a deduction for 1918 of $790,187.16 and a deduction for 1919 of $175,838.94, making a total allowance for both years of $966,026.10, instead of $327,224.40 allowed by the Commissioner. The net income of the petitioner, as determined by the Commissioner for 1918, was $3,921,143.63 and for 1919, $2,708,248.07. Applying the rate of 54.54 per cent. to the income of 1918 as determined by him, the Commissioner found that the company owed a profits tax of $2,084,324.26 for that year, and applying the rate of 19,31 per cent. to the income for 1919, he found it owed a profits tax of $495,871.87 for that year.
The net income of the petitioner for the two years was reduced by our former decision by $578,801.70, yet the Commissioner insists, and we held, that the total amount of the tax should not be reduced. If it is not reduced it would result in a tax rate of 61.62 per cent. for 1918 and a rate of 19.05 per cent. for 1919, instead of 54.54 per cent. and 18.31 per cent. for those years, respectively, as fixed by the Commissioner. This new rate would in effect be fixed by the court, which allowed deductions, but refused to apply the rate fixed by the Commissioner to the reduced income. In other words, if the contention of the collector prevails, the petitioner will pay the same tax for the two years that it would have paid if its taxable income had not been reduced by $578,801.70. The collector contends that although the corporation's income was reduced more than one-half million dollars, its tax must nevertheless remain the same for the reason that this court is without power to review the Commissioner's determination of the taxpayer's liability for taxes inasmuch as the taxes were determined by a special assessment.
The allowance or denial of a special assessment provided for in sections 327 and 328 of the Revenue Act of 1918 (40 Stat. 1093) is an administrative question committed to the discretion or judgment of the Commissioner of Internal Revenue, subject, however, to review by the Board of Tax Appeals. Whether or not there are abnormal conditions affecting capital, as alleged in this case, or income which would work upon the corporation an exceptional hardship without the benefit of a special assessment; what are representative corporations to be used as comparatives, engaged in a like or similar trade or business; whether or not they are similarly circumstanced with respects to income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances -- are questions for the sole determination of the Commissioner. Blair v. Oesterlein Machine Co., 275 U.S. 220, 48 S. Ct. 87, 72 L. Ed. 249; Williamsport Wire Rope Company v. United States, 277 U.S. 551, 559, 48 S. Ct. 587, 72 L. Ed. 985. They have been committed by Congress to his judgment and discretion which may not be exercised by the court. He has considered all these questions and in the light of all the facts has determined rates which must be accepted by the court as fixed, fair and just. In holding that the rates fixed by him shall be applied to the petitioner's true income, the court does not usurp the discretionary functions expressly conferred upon him.
The collector raises the objection that if the Commissioner had not made a mistake in not allowing proper depreciation, other representative corporations might have been selected from which a different rate might have been fixed. This may or may not be true. It is purely supposititious. But when the Commissioner applied these rates found and fixed by him as the proper ones to an improper income and thus unjustly increased the taxes of the petitioner, the court does have power to order that the proper rate be applied to the proper income so that the taxpayer will pay only a proper and just tax. The power of the Commissioner to determine an abnormality, to select representative corporations as comparatives, to allow a special assessment, and fix the rate thereof, does not carry with it, power so to fix the income on which the profits tax must be computed that an admittedly unjust amount of the tax is put beyond the review of the court. It is a bare possibility that the reduction of the income to the proper and just amount might have some conceivable effect on the selection of representative corporations. That was a matter for the Commissioner, but when he found the correct rate, he could not apply it to an incorrect and false income and produce an unjust tax.
2.The second question is whether or not the taxpayer should have been allowed depreciation on so much of the war facilities as were not amortized.
The taxpayer's contention is tersely presented in the following statement:
1. Facilities Based on Production of Soda Ash
1917 cost less depreciation $543,082.60
Amortization allowed, 49.803%
Unamortized cost $272,609.00