This was a suit begun by the United States on the twenty-ninth of March, 1875, to recover of the Little Miami & Columbus & Xenia Railroad Company a tax of 5 per centum on alleged profits of the company 'carried to the account of any fund or used in construction,' provided for by the act of June 30, 1864, c. 173, § 122, (13 St. 284,) amended by the act of July 13, 1866, c. 184, (14 St. 139.) A jury was waived and the trial had by the court. The case comes here on a finding of facts. From this finding it appears 'that during the period covered by the petition, viz., from the first day of July, 1864, to the thirtieth day of November, 1869, inclusive, the defendant, in good faith, regularly made returns of earnings, profits, income, and gains, and of profits carried to the account of any fund, or used for construction, arising or accruing to it during said period, intended and believed by it to embrace all such profits, incomes, and gains, and all such profits carried to the account of any fund, or used for construction, which by law it was bound to return; which returns were received and accepted, and for the amount of which assessments from time to time were made of the taxes payable thereon, which taxes were regularly paid by it to the officer lawfully authorized by law to collect the same.' In addition to this it also appears 'that over and above the amount so returned, on which taxes were paid as aforesaid, the defendant did in fact make additional earnings, which by it were carried to the account of some fund, or used for constructon during said period, amounting in all to the sum of $168,707.22, on which no tax has been paid.' The finding also shows that during the year 1869 the defendant carried to the debit of profit and loss on its books various items, amounting in all to $184,395.06. In this way the books show no profits between July 1, 1864, and November 30, 1869, beyond the amount on which taxes were paid in the regular course of business. Of the sum so charged up, one item of $51,155.44 was for loss and depreciation on book-accounts and other choses in action, acquired by the company prior to July 1, 1864, and which had been standing on the books until 1869 at their par value; another item of $22,000 was for the depreciation in the value of bonds purchased after July 1, 1864; another item of $106,014.62 was for the depreciaton in value of what was known as the 'street-connection track;' and another item of $5,225 was for losses on a purchase in 1867 of shares of capital stock in a cotton-press company. Upon these facts, so found, the company claimed that, in ascertaining the amount of profits liable to taxation, there should be deducted from the earnings, during the period for which the tax was claimed, these several items of loss and depreciation; but the court ruled, as a matter of law, 'that for the purpose of taxation the defendant is not entitled by law to make the deduction as claimed,' and gave judgment for 5 per cent. on the whole sum of $168,707.22.
In our opinion there was error in this ruling. The tax in question is not upon earnings 'carried to the account of any fund or used for construction,' but upon profits. Earnings used to pay interest or dividends are taxable, whether actual profits or not; but earnings used for construction, or carried to the account of a fund, are not to be taxed, unless they represent profits of the company in its business as a whole; that is to say, the excess of the aggregate of gains from all sources over the aggregate of losses. The law evidently contemplated an annual statement of accounts, and in this way an annual striking of balances between gains and losses. When, in such statements, it appeared that a part of the excess of gains over losses had been used for construction or added to some fund, then a tax was to be paid on what had been so used or appropriated. This was part of the system adopted for the taxation of the 'profits, income, or gains' of railroad corporations, which, as was said in Railroad Co. v. Collector, 100 U.S. 598, it was the object of this statute to provide. A tax was put on dividends, interest paid in the ordinary way, and profits used for construction or carried to some fund. This was a classification of the income of the corporation for the purposes of taxation.