#### The Black-Clawson Co., Appellant, *v.*Evatt, Tax Commr., Appellee. (Four cases.)

(Nos. 28626, 28627, 28628 and 28629

Decided December 17, 1941.)

*102
      *Messrs. Taft Stettinius & Hollister*and *Mr. Leonard A. Wealdey,*for appellant.

*Mr. Thomas J. Herbert,*attorney general, and *Mr. Perry L. Graham,*for appellee.

Williams, J.

Appellant contends that the words “accounts payable” used in Section 5327, General Code, should be given the meaning in which they are used in advanced accounting practice and so should be construed as synonymous with the accounting term “current liabilities”; that the advanced payments on the agreed purchase of a machine to be constructed or in process of construction are sums held for the purchasers and, being payable to them, are accounts payable within the meaning of the statute; and that not treating the payments as accounts payable would lead to double taxation, a result which could not have been within the contemplation of the Legislature.

Section 5327, General Code, reads thus:

> “The term ‘credits’ as so used, means the excess of the sum of all current accounts receivable and prepaid items used in business when added together estimating every such account and item at its true value in money, over and above the sum of current accounts payable of the business, other than taxes and assessments. ‘Current accounts’ includes items receivable or payable on demand or within one year from the date of inception, however evidenced. ‘Prepaid items’ does not include tangible property. In making up the sum of such current accounts payable there shall not be taken into account an acknowledgment of indebtedness, unless founded on some consideration actually received, and believed at the time of making such acknowledgment to be a full consideration therefor; nor *103an acknowledgment for the purpose of diminishing the amount of credits to be listed for taxation.”

Under the Uniform Sales Act the machines in process of construction constitute “future goods” (Section 8456, General Code) and title thereto remains in the seller until completion. Section 8399, rule 4 (1), General Code; *McKee*v. *Ward,*289 Pa., 414, 137 A., 599. Here a differentiation should be made. Conditional sales in which title is reserved in the seller are exceedingly common. In such cases, however, the sale ordinarily involves a finished product; in the instant case appellant’s contention applies to future goods only. The inquiry is therefore narrow and pointed.

The fallacy which underlies the theory that the payments received and credited constitute accounts payable, is apparent from this language in appellant’s brief: “So long as appellant retains in its possession funds which have been advanced to it by customers, and so long as it has not appropriated the completed machine to the discharge of the contract, appellant is in the position of having in its hands money belonging to another party, namely, its customer, and therefore is in the position of owing to that customer the sum of money advanced.”

If that assertion is sound, the amounts paid would be held by the seller in trust for the buyer and the seller could not use them in his business. Surely a trust relation does not arise, for the amounts were not received by the seller as deposits; nor does even the relation of debtor and creditor. If there is any liability on the part of the seller to the buyer, it is assuredly contingent. Yet we must, ever hark back to the reality that there is no liability until the contingency arises. That contingency is the breach of the sale contract by the seller and the resulting liability is founded not on an account but on the breach. "What boots it that the measure of recovery may be based in whole or in part upon the total amount paid on the *104contract price? Obviously there is no subsisting liability until the breach occurs, for normally the seller’s contractual obligation is to be discharged by the delivery of the finished product and not by cash. Even though the payment be set up on the books of the seller as an account, there would be nothing payable on it, as such, at any time.

After all the test is not what is good accounting practice but what is the meaning and intent of the taxational provision. We must look then to the statute. In the above-quoted Section 5327, General Code, are these words: “ ‘Current accounts’ includes items receivable or payable on demand or within one year from the date of inception, however evidenced.” The import of the language is clear and is entitled to full weight in determining the question presented. Yet we realize that we should not pick out one sentence and disassociate it from the context. We should look rather to the four comers of the enactment and thus determine the intent of the enacting body.

Appellant urges that if the advance payments are not classified as accounts payable, double taxation will result and that such doubleness could not have been within the legislative intent. In pursuing the argument, it is said by appellant that the seller’s inventory increases as the work progresses and that upon both the increased inventory and the cash received in payment, a personal-property tax is paid. It is asserted that in order to avoid this doubleness of taxation, which the Legislature could not have intended, the deduction should be allowed. Presumably one reason for requiring payment pending construction would be to defray the cost thereof. If the amount of cash payments were used to defray the cost of material and labor employed in producing the purchased article, the cash would be dissipated in the process. Only the un*105completed product would "be left and to that alone would the personal-property tax attach. A seller may contract for payments to be made only as they are needed for defraying cost of construction as it progresses, apply the payments to such cost and avoid chance of doubleness, if any, in taxation. If he elects to follow a different course, it is his own lookout. Since what appellant claims to be doubleness may be avoided by the seller, the imposition of a personal-property tax on both cash and inventory affords no substantial aid in determining the intent of the Legislature.

What, then, is the correct interpretation? What is the plain meaning of the statute when viewed in the light of the object to be accomplished? When the machine is partially completed and partially paid for there is still payable to the seller the balance at the specified time or times. Such balance must be listed by the buyer as accounts payable if due on demand or within one year. Then, are the payments previously made also accounts receivable which the buyer must list? Certain it is that if the advance payments be accounts payable, as claimed by the appellant, they are payable to the buyer and must be listed in the buyer’s return as accounts receivable. The result would be that the buyer would be listing the part of the price paid as owing to and receivable by him. An interpretation which leads to that result Would be an anomaly. When the language of the statute is considered in its fullness and at the same time in its plain meaning, it admits of but one interpretation. The advance payments cannot be listed as accounts payable and deducted from the sum of accounts receivable and prepaid items in determining credits.

*106For the reasons given the decisions of the Board of Tax Appeals are affirmed.

*Decisions affirmed.*

Weygandt, C. J., Turner, Hart, Zimmerman and Bettman, JJ., concur.

Matthias, J., dissents.

Turner, J.,

concurring. Appellant seeks a construction of Section 5327, General Code, which would ignore the amendment effective when these instant cases arose. Section 5327 was amended in 115 Ohio Laws, 553, effective July 18, 1933. As to the purpose of this amendment, I agree with the comment of the editor of Page’s Ohio General Code in annotating this section, to wit :

> ‘‘ The definition of credits by the amendment to this section has been revised so as to narrow its scope as to business accounts, also, to eliminate a certain overlapping with investments under certain circumstances and, further, to prevent fictitious deductions.”

Prior to this amendment, it had been held in the case of *Tax Commission*v. *Kelly Springfield Tire Co.,*38 Ohio App., 109, 175 N. E., 700, decided January 19, 1931, and used as an authority in 38 Ohio Jurisprudence, 807, that Section 5327, General Code, as it then stood, permitted the deduction from credits of the sum total of debts and obligations. On March 25,1931, this court overruled a motion to certify the record in that case.

It is the duty of the court in interpreting an amendment under such circumstances to try to find on the face of the amendment the purpose thereof. It seems clear to me that the purpose of the Legislature was to narrow the interpretation which the- courts had previously put upon the section. Now the test of whether a liability is deductible is: Does it come within the definition of a current account payable?

*107Section 5327, General Code, as it stood at all times in question in the cases here under consideration, defines the term “credits” as meaning the excess of the sum of all accounts receivable and prepaid items over and above the sum of current accounts payable of the business, other than taxes and assessments. *Ecopressio unius est eccclusio alterius.*

“Current accounts” is defined to include all items receivable or payable on demand within one year from the date of inception, however evidenced. What the appellant is contending for in this case is an interpretation of the term “current accounts payable” which would make that term synonymous with all current liabilities.

Counsel for appellant say in their brief: “In its broad, general sense, the term ‘accounts payable’ is synonymous with the more commonly used accounting term of‘current liabilities,’ * * However, on the same page, counsel quote Budd and Wright, The Interpretation of Accounts, page 340: “ ‘Accounts Payable’ should include only debts which arise through the purchase of goods or services from outsiders; it should not include such items as accrued wages, accrued taxes or similar debts of the business. * * *”

Counsel also quote from Accountants Handbook (Rev. Ed.), page 839, as follows: “In the narrowest usage this term maybe restricted to trade creditors’ accounts, consisting primarily of liabilities created through the purchase of merchandise, materials and supplies on account.”

Counsel for appellant state their position in their brief as follows: “Inpresent day accounting practice, the obligation represented by advancements of customers is generally treated as a current liability.” I agree with that statement without reservation, but “current liability” is a wider term than “current account payable.”

Counsel cite seven leading authorities on accounting *108practices, not one of whom, with possibly a single exception, treats advance payments as current accounts payable. The one possible exception is Professor Saliers, who lists “deposits” under accounts payable. However, the term “deposits” is usually used to indicate such items as meter deposits, water -deposits, and other public utility deposits, although sometimes used to describe payments in advance. On page 691 of the Accountants’ Handbook, Professor Saliers says: “Deposits — Balances representing deposits made with the concern under audit should be stated separately from regular creditors’ balances unless the amounts are comparativély small. The amounts of these balances should be confirmed by the depositors.” Professor Saliers, in making his detailed listings, is recommending the same for the purposes of auditing.

Counsel use two pages of quotations from Hester’s “Accounting Theory and Practice — Advanced Accounting” in support of their argument, but not a single line of the quotation sustains the position of appellant. For instance, Mr. Hester says: “Accounts payable to trade creditors are usually the current items * * Counsel then quote and italicize as follows: *“Another group of accounts payable of a more or less current type consists of deposits of various sorts.*The business may accept deposits from customers or employees for various purposes. Consumers’ deposits with gas and electric light companies as guaranty to cover payment of bills and possible damage to meters or other company property; deposits covering locker privileges, breakage of materials, keys issued, and the like, are examples of this kind.”

Counsel then quote what Mr. Hester has to Say on guaranties, and emphasize the part hereinafter put in italics, to wit:

> “Sometimes goods are purchased and only partly paid for, a portion of the purchase price being retained as a guaranty of quality until opportunity is given for *109adequate examination and acceptance or rejection. Similarly, in the case of construction work done by contract or subcontract, the owner — or, if a subcontract, the general contractor — retains a certain percentage of the contract price as a guaranty of performance of the whole according to contract agreement. *This liability for the portion retained is a current liability, as a usual thing, and is to be listed under accounts payable with suitable subtitle.”*

The author is here talking about the reverse of what we have to consider in the instant case, and instead of referring to the seller’s account is referring to the buyer’s account, showing that the thing contracted for has not yet been paid for.

Professor William Morse Cole, who taught accounting at Harvard University for many years, says in his book “The Fundamentals of Accounting,” at page 115: “Miscellaneous liabilities not for principal *purchases*of quickly convertible assets are not credited to Accounts Payable but to one of the accounts discussed in the next paragraph.” (Italics mine.)

Discussing further the quotations of accounting authorities by counsel for appellant, Bliss in “Management Through Accounts,” page 368, says: “Generally these deposits or advances from customers should be treated as *current liabilities*and shown as a separate item in that section of the balance sheet.” (Italics mine.) This is far from saying that these items should be treated as current accounts payable.

Professor Sanders in “Reports to Stockholders,” page 25, under the heading of ‘ * Other Current Liabilities,” says: “It is desirable that this caption, if used, be accompanied by explanatory or descriptive information indicating the nature of the items; for example, customers’ deposits, accrued payrolls and other current expense items, advance billing and advance payments, etc.” The very heading “Other Current Liabilities” shows that Professor Sanders is differentiating *110these items from accounts payable and bills or notes payable.

In counsel’s quotation from Montgomery, “Auditing Theory and Practice,” page 303, it is said: “There are certain deposits received which should be classified as liabilities, such as funds which have been deposited as guaranty of good faith as part payment on account of a purchase or as security for an undischarged obligation, and deposits made to insure the return of containers.”

In counsel’s quotation from Patón, who relies on Bliss as an authority, it is said at page 247 of “Accountants’ Handbook”: “Where advances are made by customers for a considerable time in advance of delivery, as often happens in manufacturing, it is not good practice to treat the transaction as a sale in the accounting records. Instead the amount received should be credited to the customer’s account and to a special account entitled ‘advances on sales contracts,’ ‘unfilled paid orders, ’ or by other appropriate caption. ’ ’

I am not unmindful that there is a real and subsisting liability on the part of the manufacturer to the customer who has made advance payments for machinery to be delivered, which liability should be reflected on the manufacturer’s books as a liability and on the customer’s books as an asset.

Whether the manufacturer sets up a reserve against inventory or work in process, or uses the method pursued in the instant case, is a matter of accounting practice but does not change the fact that the Legislature has limited the liabilities which may be deducted from current accounts receivable and prepaid items to current accounts payable.

These advance payments are not recoverable in the ordinary course by the customer. Where a customer has made an advance payment and the manufacturer has failed to deliver or has breached any warranty of the sales contract, the customer has (a) a cause of action *111for damages for nondelivery (Section 8447, General Code), (b) a cause of action for specific performance (Section 8448, General Code), or (c) a cause of action for a breach of warranty (Section 8449, General Code), which includes rescission.

By the great weight of accounting authority, none of these rights of action may be classed as a current account payable by the manufacturer. The fact that the books of the parties should reflect the respective contingent asset or liability does not alter the situation.

In the case of *Sadler*v. *Pure Oil Co.,*172 S. C., 220, 222,173 S. E., 640, 641, it was necessary that the basis of that suit should be an account receivable. The alleged violation of a sales contract as to the price of gasoline was the bone of contention, and á claim fox-damages for alleged overcharges was being made by the retailer plaintiff against the wholesaler. In that case, the court said: “We may be going somewhat beyond the scope of this appeal in declaring that in *no*sense can damages for an alleged breach of contract be considered an accouxxt receivable. In 1st C. J., 730, it iydt said that an account receivable is an obligation owing to a person on open account, and in *National Bank of Newport*v. *National Herkimer County Bank, 225*U. S. [178], at page 184, 32 S. Ct., 633, 56 L. Ed., 1042, it is said that accounts receivable are assets owing on open account.” (Italics mine.) Accounts payable are the reverse of accounts receivable.

I agree that taxing statutes should be construed where possible in favor of the taxpayer, but we must not lose sight of the purpose of the Legislature in narrowing the deductions which may be made in ascertaining the aggregate amount of “credits” to be returned for taxation.

The single issue in this case is whether the liabilities in question may be treated as current accounts pay*112able and deducted from current accounts receivable and prepaid items.

While the claim was made in brief and argument that the decision of the Board of Tax Appeals results in double taxation, the record does not show this. During the oral argument, counsel for appellant made the statement that he thought the record would show that no deduction had been made from goods in process or manufactured inventory. However, careful reading of the record fails to disclose any such evidence.

The decision of the Board of Tax Appeals, being neither unlawful nor unreasonable, should be affirmed.

Matthias, J.,

dissenting. I dissent from the decision of the majority. Deposits or advance payments made to and accepted by the appellant became liabilities of that company, and the decision of the court that they are not liabilities disregards the opinion of the Board of Tax Appeals- to the contrary. An obligation arises on the part of the company to either cancel this indebtedness by delivery of the machine or return the money advanced. It is not correct to assume that the liability of the appellant is one arising in an action for breach of contract, for clearly the purchaser for good cause, could rescind the contract and recover back the money advanced, in an action not based on a contract breached, but upon a rescission.

Being liabilities payable upon a demand or within one year (for it is conceded that delivery on the contracts are made within a year), they are deductible from current accounts receivable as current accounts payable. Current accounts payable are defined in Section 5327, General Code, by means of designating the exclusions therefrom. They shall not include “taxes and assessments” or “an acknowledgment of indebtedness, unless founded on some consideration actually received, and believed at the time of making such acknowledgment to be a full consideration therefor; *113nor an acknowledgment for the purpose, of diminishing the amount of credits to be listed for taxation.” The decision of the majority has amended the statute by adding another exclusion — “advance payments on sales.”

It is a general rule that a taxing statute is to be construed most strictly against the sovereign. The very elementary rule of construction, *“expressio unius est exolusio alterius,”*also clearly applies here. In my opinion, the construction of the statute by the majority is clearly erroneous and results in an injustice to the taxpayer.