Fawcus MacHine Co. v. United States

Background

A corporation that kept its books on the accrual method sued to recover an alleged overpayment of excess-profits tax for 1919. In its 1919 tax return the company did not subtract taxes for 1918 from the invested capital figure used to compute excess-profits tax. The Treasury Commissioner recalculated invested capital by treating the 1918 income taxes as having been paid out of 1918 income (under Article 845 of Treasury Regulations), and reduced the company’s 1919 invested capital accordingly. The Court of Claims sided with the Government, and the case came here for review.

Reasoning

The central question was whether the Treasury regulation requiring accrual accounting treatment of income taxes as belonging to the year they were levied was reasonable and consistent with the statute’s definition of invested capital. The Court explained that a corporation cannot truly claim net income for a year until taxes accrued for that year are provided for. The statutory definition of invested capital did not expressly exclude accrued taxes, the regulation was issued under the Treasury’s rulemaking authority, and contemporaneous administrative practice supported it. The petitioner argued the rule was unfair because the 1918 statute was passed in 1919 and changed rates, but the Court found prior law and Treasury guidance made accrual treatment foreseeable. For these reasons the Court upheld the regulation and affirmed the judgment for the Government.

Real world impact

The decision lets Treasury treat prior-year income taxes as liabilities of the year they are levied for tax-base calculations. Corporations using accrual accounting may see reduced invested capital when taxes are accrued, affecting excess-profits tax outcomes and refund claims. This ruling resolves the dispute between these parties and enforces the Treasury regulation at issue.