ALDRICH, Circuit Judge.
This is a petition by Polaroid Corporation, hereinafter called taxpayer, to review a decision of the Tax Court holding that certain income received during the years 1951, 1952 and 1953 did not constitute “abnormal income” within the meaning of § 456(a) (2), Internal Revenue Code of 1939, 64 Stat. 1186 (1951), so as to qualify for the relief provided therein from the Korean War excess profits tax.
The taxpayer also contests a ruling that, in computing its net abnormal income for 1951 under § 456(a) (3) of the Int.Rev.Code of 1939, the interest with which it was credited in 1951 upon its successful claim for an excess profits tax refund for the years 1942: and 1943 must be reduced by the interest it was charged on income tax deficiencies which resulted from the reduced excess profits tax. All facts were stipulated, and the only questions are of law.
Turning to the first issue, it appears that taxpayer .was incorporated in 1937. In argument before this court it described itself as “a discovery company,”" exclusively engaged in exploiting its own discoveries. Edwin H. Land, its President and Director of Research, is internationally known for inventions in the optical and photographic fields, perhaps the most notable of which is the Polaroid Land Camera and film, income from the manufacture and sale of which constitutes the principal matter herein involved.
The camera and film together
(they cannot be used separately) are termed by taxpayer the Polaroid Land process. This process is unique in that it enables any user to develop his own pictures and obtain positive prints anywhere, sixty seconds after exposure. Taxpayer describes this process as a “revolutionary discovery.” We shall regard that characterization as accurate. Because of numerous patents, taxpayer has no competitors. The result has been a very substantial return of income.
Taxpayer, under Land’s direction, started to develop its process in 1944. Much expenditure of time and money was required before its satisfactory achievement in 1947. Unfortunately for taxpayer, large scale production and commercial success coincided with the Korean War years, as a consequence of which income attributable in part to activities in earlier years fell within the provisions of the KW Act. The Act contains several relief provisions. Taxpayer asserts that one in particular is applicable. The Commissioner has disagreed, and the Tax Court has sustained him.
Under the provisions of § 456 of the KW Act, income is regarded as “abnormal income,” and as such is relieved from the full incidence of the excess profits provisions by reallocation to other tax years, if it falls into certain specified “classes,” and meets certain additional requirements which were here concededly met. The principal issue here is whether the income falls within that class described in § 456(a) (2) (B): “Income resulting from exploration, discovery or prospecting, or any combination of the foregoing, extending over a period of more than 12 months; *
Taxpayer asserts that the word “discovery” is broad enough to encompass its process. The government contends that in the context of the Act it relates only to discovery of coal, oil, gas and other natural resources. It bases this in part upon internal evidence, and in part upon legislative history.
Starting with subparagraph (B), standing alone, we note that the word “discovery” admits of so many meanings that some interpretation is called for.
The possibility of a num
ber of meanings for one word is a species of ambiguity. We then observe that the word is not isolated, but is sandwiched between the words “exploration” and “prospecting.” The government, accordingly, invokes the doctrine of
noscitur a sociis.
In case of ambiguity this is an “appropriate and reasonable,” though not always determinative test. Russell Motor Car Co. v. United States, 1923, 261 U.S. 514, 519, 43 S.Ct. 428, 430, 67 L.Ed. 778. On a proper occasion “such association justifies, if it does not imperatively require,” the application of a restricted meaning. Neal v. Clark, 1877, 95 U.S. 704, 709, 24 L.Ed. 586. It is particularly appropriate where one meaning of each of the grouped words has a readily apparent common denominator. Thus the words “barrel,” “lock” and “stock” have each, individually, a number of quite different meanings. But if used in the phrase, “lock, stock and barrel” there could be little difficulty in determining which particular one of the several meanings was intended. The word “discovery” is clearly identified with the mining industry. See note 4, supra. So also are “exploration” and “prospecting.” Accordingly we find a consistent, integrated unit, each portion of which casts light upon the other.
Taxpayer makes no response to this (other than that set forth in the footnote), except a bare statement that the doctrine of
noscitur a sociis
is inapplicable. Its position is that since the dictionary permits it, “discovery” must be taken to comprehend inventions, or at least major “basic” inventions. If “discovery” is to have that breadth of meaning we could not accept any distinction based upon degrees of invention.
While we agree that basic inventions can be described as discoveries, so may any invention, no matter how minor, if it is of sufficient consequence to be entitled to a patent. Cf. United States Constitution, Art. I, § 8, Cl. 8; 35 U.S.C. §§ 100(a), 101. If the word “discovery” is to be taken as broad enough to include inventions, we see no reason for including some and excluding others. We are normally reluctant to adopt a. construction of a taxing statute which would create difficult administrative problems.
We are entirely unwilling to do so here where the act makes no suggestion of any standard.
However, there is an equally serious difficulty if “discovery” is to include all processes and patented inventions. What, then, is the purpose of subparagraph (C), “Income from the sale of patents, formulae, or processes,” of § 456(a) (2) ? See, supra, note 3. True, that subparagraph relates only to income from the
sale
of the patent or process. But sub-paragraph (B) relates to
all
income. If “discovery” in subparagraph (B) includes inventions, what is the role of subparagraph (C) ? If there is a big hole in the fence for the big cat, need there be a small hole for the small one?
The existence of subparagraph (C) casts further light upon the intended meaning and scope of subparagraph (B). Suppose that instead of manufacturing under its patents, taxpayer had licensed its process to others.
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ALDRICH, Circuit Judge.
This is a petition by Polaroid Corporation, hereinafter called taxpayer, to review a decision of the Tax Court holding that certain income received during the years 1951, 1952 and 1953 did not constitute “abnormal income” within the meaning of § 456(a) (2), Internal Revenue Code of 1939, 64 Stat. 1186 (1951), so as to qualify for the relief provided therein from the Korean War excess profits tax.
The taxpayer also contests a ruling that, in computing its net abnormal income for 1951 under § 456(a) (3) of the Int.Rev.Code of 1939, the interest with which it was credited in 1951 upon its successful claim for an excess profits tax refund for the years 1942: and 1943 must be reduced by the interest it was charged on income tax deficiencies which resulted from the reduced excess profits tax. All facts were stipulated, and the only questions are of law.
Turning to the first issue, it appears that taxpayer .was incorporated in 1937. In argument before this court it described itself as “a discovery company,”" exclusively engaged in exploiting its own discoveries. Edwin H. Land, its President and Director of Research, is internationally known for inventions in the optical and photographic fields, perhaps the most notable of which is the Polaroid Land Camera and film, income from the manufacture and sale of which constitutes the principal matter herein involved.
The camera and film together
(they cannot be used separately) are termed by taxpayer the Polaroid Land process. This process is unique in that it enables any user to develop his own pictures and obtain positive prints anywhere, sixty seconds after exposure. Taxpayer describes this process as a “revolutionary discovery.” We shall regard that characterization as accurate. Because of numerous patents, taxpayer has no competitors. The result has been a very substantial return of income.
Taxpayer, under Land’s direction, started to develop its process in 1944. Much expenditure of time and money was required before its satisfactory achievement in 1947. Unfortunately for taxpayer, large scale production and commercial success coincided with the Korean War years, as a consequence of which income attributable in part to activities in earlier years fell within the provisions of the KW Act. The Act contains several relief provisions. Taxpayer asserts that one in particular is applicable. The Commissioner has disagreed, and the Tax Court has sustained him.
Under the provisions of § 456 of the KW Act, income is regarded as “abnormal income,” and as such is relieved from the full incidence of the excess profits provisions by reallocation to other tax years, if it falls into certain specified “classes,” and meets certain additional requirements which were here concededly met. The principal issue here is whether the income falls within that class described in § 456(a) (2) (B): “Income resulting from exploration, discovery or prospecting, or any combination of the foregoing, extending over a period of more than 12 months; *
Taxpayer asserts that the word “discovery” is broad enough to encompass its process. The government contends that in the context of the Act it relates only to discovery of coal, oil, gas and other natural resources. It bases this in part upon internal evidence, and in part upon legislative history.
Starting with subparagraph (B), standing alone, we note that the word “discovery” admits of so many meanings that some interpretation is called for.
The possibility of a num
ber of meanings for one word is a species of ambiguity. We then observe that the word is not isolated, but is sandwiched between the words “exploration” and “prospecting.” The government, accordingly, invokes the doctrine of
noscitur a sociis.
In case of ambiguity this is an “appropriate and reasonable,” though not always determinative test. Russell Motor Car Co. v. United States, 1923, 261 U.S. 514, 519, 43 S.Ct. 428, 430, 67 L.Ed. 778. On a proper occasion “such association justifies, if it does not imperatively require,” the application of a restricted meaning. Neal v. Clark, 1877, 95 U.S. 704, 709, 24 L.Ed. 586. It is particularly appropriate where one meaning of each of the grouped words has a readily apparent common denominator. Thus the words “barrel,” “lock” and “stock” have each, individually, a number of quite different meanings. But if used in the phrase, “lock, stock and barrel” there could be little difficulty in determining which particular one of the several meanings was intended. The word “discovery” is clearly identified with the mining industry. See note 4, supra. So also are “exploration” and “prospecting.” Accordingly we find a consistent, integrated unit, each portion of which casts light upon the other.
Taxpayer makes no response to this (other than that set forth in the footnote), except a bare statement that the doctrine of
noscitur a sociis
is inapplicable. Its position is that since the dictionary permits it, “discovery” must be taken to comprehend inventions, or at least major “basic” inventions. If “discovery” is to have that breadth of meaning we could not accept any distinction based upon degrees of invention.
While we agree that basic inventions can be described as discoveries, so may any invention, no matter how minor, if it is of sufficient consequence to be entitled to a patent. Cf. United States Constitution, Art. I, § 8, Cl. 8; 35 U.S.C. §§ 100(a), 101. If the word “discovery” is to be taken as broad enough to include inventions, we see no reason for including some and excluding others. We are normally reluctant to adopt a. construction of a taxing statute which would create difficult administrative problems.
We are entirely unwilling to do so here where the act makes no suggestion of any standard.
However, there is an equally serious difficulty if “discovery” is to include all processes and patented inventions. What, then, is the purpose of subparagraph (C), “Income from the sale of patents, formulae, or processes,” of § 456(a) (2) ? See, supra, note 3. True, that subparagraph relates only to income from the
sale
of the patent or process. But sub-paragraph (B) relates to
all
income. If “discovery” in subparagraph (B) includes inventions, what is the role of subparagraph (C) ? If there is a big hole in the fence for the big cat, need there be a small hole for the small one?
The existence of subparagraph (C) casts further light upon the intended meaning and scope of subparagraph (B). Suppose that instead of manufacturing under its patents, taxpayer had licensed its process to others. Would it be contended that the royalties could be claimed as abnormal income under subparagraph (B), although admittedly, should there be a sale of the process, the proceeds would fall under subparagraph (C) ? Rather, it seems more reasonable to hold that Congress, having specifically provided for sales, did not intend by some more general clause to cover income of a similar nature but of less magnitude, i. e., income from a single year’s use. There is an even more compelling argument. It is to be noted that § 456 does not group together all sources of abnormal income, but is constructed so that the income-percentage requirements must be separately applied as to each classification or group. In determining whether, for example, abnormal income resulting from a judgment (A) is of sufficient size to qualify for relief, it is not possible to take into account abnormal income from prospecting (B). There could be no purpose to this unless each classification or group was intended to have some homogeneity within itself. This is an additional reason for applying the doctrine of
noscitur a soeiis
within each group, and at the same time for differentiating one group from another. Taking the statute as a whole, we cannot accept the contention that subparagraph (B) was intended to encompass taxpayer’s manufacturing income resulting from its process. On the contrary, we think it clear that “discovery” as used in that subparagraph relates to the mining industries, and to nothing else.
Ordinarily we would stop here, but since the opposite conclusion was reached in G. D. Searle & Co. v. Jarecki, 7 Cir., 1960, 274 F.2d 129, supra note 8, we will deal briefly with the legislative history to which the government has devoted its brief. This history falls into two parts; the use since 1918 of the words “exploration," “discovery,” and “prospecting” in conjunction, solely with relation to the mining industry, and the particular changes effected by the KW Act over its predecessor, the World War II Act.
In Title III, “War-Profits and Excess-Profits Tax,” of the Revenue Act
of 1918, c. 18, 40 Stat. 1057 (1919), we find a limit placed on the excess profits tax that could be imposed on the proceeds from “a bona fide sale of mines, oil or gas wells, * * * where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer * * Section 337, 40 Stat. 1096. An identical provision in the income tax portion of the statute, § 211(b), 40 Stat. 1064, limited the surtax upon such income in the case of individual taxpayers. Congressional history discloses that these provisions were designed to encourage the search for oil and ore deposits during wartime, and to offset the unfairness of taxing in a single year income which was possibly the result of many unprofitable years of prior search. See S.Rep. No. 617, 65th Cong., 3d Sess. 6 (1918) (1939 — 1 Cum.Bull. (Part 2) 117,120-21). They were repeated in the income tax and the excess profits tax titles of the Revenue Act of 1921, c. 136, §§ 211(b), 337, 42 Stat. 237, 277. There was no further excess profits taxation until 1940, but these words continued to appear in the income tax statutes, with one exception,
until excess profits tax imposition returned with World War II. By that time, in the light of this repeated and almost continuous application to the mining industry (and no other), we think that these words had become well-recognized words of art.
The World War II excess profits tax act exhibits a major schematic change from the earlier acts, but again we find the words “exploration,” “prospecting,” and “discovery” used together in a relief provision. The here relevant portion (noticeably similar, as will be seen, to § 456 of the KW Act) was § 721(a) (2> (C):
“Income resulting from exploration, discovery, prospecting, research, pr development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; * Discussion on the floor of Congress indicates that the mining industry was intended as one of the primary beneficiaries of this relief. See, e. g., 86 Cong. Rec. 12174-77, 12350, 12919 (1940); 87 Cong.Ree. 1636 (1941). With the Korean War enactment, subparagraph (C) of § 721(a) (2) was split in two. It is. interesting to note the form of this division. The words “exploration, discovery, prospecting” were taken as one group, and placed in subparagraph (B> of the new law, while “patents, formulae, or processes” were placed together' in subparagraph (C), and at the same time the words “research, or development, of tangible property” were dropped. These changes “redefined and restricted”' the types of income to which this special treatment was to be afforded. H.R.Rep.. No. 3142, 81st Cong., 2d Sess. 63 (1950) (1951 — 1 Cum.Bull. 187, 231), U.S.Code Cong.Service 1950, p. 4093. The House and Senate reports described the excised portion as a “potential loophole of major dimensions,” and stated that it was. being omitted “because there appeared to be no means of restricting such an adjustment to truly meritorious cases other than by the introduction of a large degree of administrative discretion of the type required by the general relief' clause of the World War II law (section 722), and because the need for a reallocation of such income seemed to be materially less than in the other classes
•of income described * * Id. at 13 (1951 — 1 Cum.Bull. at 195); S.Rep. No. 2679, 81st Cong., 2d Sess. 14 (1950) (1951 — 1 Cum.Bull. 240, 249), U.S.Code 'Cong.Serviee 1950, pp. 4040, 4128. Thus even “meritorious cases” that would have come under this now excluded phrase were deliberately sacrificed in the interest of administrative simplification.
In the face of this history, it would be difficult for us to feel that there was introduced into the newly created sub-paragraph (B) with the word “discovery” a scope of meaning which would include manufacturer’s profits from inventions, whether those inventions were revolutionary, or otherwise. Taken in conjunction with internal evidence within the statute itself, we find it impossible.
We turn next to taxpayer’s contention that even if it is not entitled to classify the income in question as ■“discovery” income under § 456(a) (2) (B), it is nonetheless entitled to relief under the last sentence of subsection (a) (2). This reads, “The classification of income of any class not described in sub-paragraphs (A) to (D), inclusive, shall be subject to regulations prescribed by the Secretary.” Note 3, supra. The relevant regulations are set forth below.
We agree with taxpayer that this sentence may be taken as giving the Secretary the authority to accept classifications outside of the express provisions of subparagraphs (A)-(D). But the language is permissive, and we have found nothing in the historical background indicating that the Secretary’s role in agreeing to additional classifications was to be one of obligation rather than of discretion. We therefore reject any contention that the Secretary, or Commissioner, was required to grant relief on the basis of a classification suggested by a taxpayer merely because the taxpayer has income which meets the other tests of abnormality. Nor do the regulations themselves assist the taxpayer. First, any classification by a taxpayer is “subject to approval by the Commissioner,” and such approval was
not
given here. Secondly, under this regulation the classification must be “similar to those specified in subparagraphs (A)-(D) * If “discovery” relates to mining and natural resources, taxpayer’s classification is not “similar.” It may be similar (if in fact it is not completely described by the phrase) to “research or development,” but the regulations, in accord with the legislative history already discussed, specifically state that income of this class is not subject to relief. The last sentence of the regulations, on which taxpayer places great emphasis, furnishes it no support. That sentence merely provides that income otherwise properly includible within a class is not to be excluded merely because it happens to constitute income from research and devel
opment. However, we are unable to find, either in the statute or in the regulations, any class in which to place taxpayer's income other than a classification which is specifically excluded.
One matter remains. Taxpayer, prior to the instant case, pursued a claim for relief under § 722 of the WW II Act for overassessments of excess profits taxes for the years 1942 and 1943. In 1951 it was successful. In connection with the settlement it was credited with interest. The government agrees that this interest was abnormal income in 1951. Section 456(a) (2) (A). However, under the WW II Act, the reduction of taxpayer’s excess profits income correspondingly increased its normal-tax income, resulting in a deficiency for those years, and an interest charge thereon. The Commissioner held, and was sustained by the Tax Court, that in computing 1951 net abnormal income this interest charge should be subtracted from the abnormal income (i. e., the interest credit) as one of the “costs or deductions relating to such abnormal income, allowable in determining the normal-tax net income for the taxable year * *
It is true that the interest charge was a result of, and therefore attributable to, the overassessment to which the interest credit was also attributable. Therefore, in a broad sense, they were “related.” It is also true that this charge would, in the general compass of the word, constitute a “deduction” “allowable in determining the normal-tax net income.” Int.Rev.Code of 1939, § 23(b), 26 U.S.G.A. § 23(b). There is one little cloud. What is the word “costs” doing there ? Having in mind the broad meaning that might be given to “deductions”' standing alone (as, indeed, including costs), does the presence of the word, “costs” suggest that “deductions relating” was intended to mean something-relating in the same manner as costs? In H.R.Rep. No. 3142, 81st Cong., 2d Sess. 63 (1951 — 1 Cum.Bull. 187, 231),. U.S.Code Cong.Service 1950, p. 4093, it is stated that the clause here in question, was intended principally as a “clarification of the technical provisions” of § 721 (a) (3) of the WW II Act. Examination, of this earlier statute
discloses that whatever clarity it may have lacked in other respects, it was entirely clear with, regard to the present question. There the phrase corresponding to “deductions relating” (“to such abnormal ineome”) was “expenses, * * * through the expenditure of which” (“such abnormal income was in whole or in part derived”). This was a limited, causative relationship, entirely compatible with the word “costs,” and falling far short of the-meaning contended for here by the government. It is true that we are to apply § 456(a) (3) and not § 721(a) (3). On the other hand, by reading § 456(a) (3) in the manner contended by the government we find an awkwardness in, and' apparent absence of purpose for, the presence of the word “costs,” while we find none if this statute is construed to read like its predecessor. In view of the legislative history, we will adopt that construction.
It may be that from an “equitable” standpoint it would be appropriate for taxpayer’s interest out to be offset against its interest in. But as the government was quick to assert when the shoe was on the other foot, we are applying tax statutes, not principles of equity. See Babcock & Wilcox Co. v. Pedrick, 2 Cir., 1954, 212 F.2d 645, certiorari denied 1955, 348 U.S. 936, 75 S.Ct. 355, 99 L.Ed. 733. This ruling of the Tax Court must be set aside.
Judgment will enter vacating the decision of the Tax Court, and remanding the case for further proceedings in accordance with this opinion.