Source: https://caselaw.findlaw.com/us-supreme-court/321/281.html
Timestamp: 2019-04-25 20:53:36+00:00

Document:
SECURITY FLOUR MILLS CO. v. C.I.R.
[321 U.S. 281, 282] Messrs. Robert C. Foulston and John F. Eberhardt, both of Wichita, Kan., for petitioners.
The Circuit Court of Appeals has held1 that the Board of Tax Appeals erred in deciding2 that the petitioner was entitled, in reporting its income tax for the year 1935, to deduct payments made by it in 1936, 1937, and 1938. Because of a conflict of decision3 we granted certiorari. 320 U.S. 724 , 64 S.Ct. 69.
The petitioner, which conducts a flour mill, reports its net income on the accrual basis. As a first domestic processor of wheat it was subject to the processing tax levied under the Agricultural Adjustment Act of 1933, 7 U.S.C.A. 601 et seq. In the early months of 1935 it paid processing taxes, and claimed, and was allowed, the amount so paid as a deduction from gross income in its federal income tax return for 1935. The amount thus paid is not involved.
The petitioner set up on its books a suspense account covering the items above mentioned under the title 'Reserve for Processing Tax, Claims, etc.' The petitioner refunded various sums to its customers, totaling over $ 45,000 in 1936, 1937, and 1938 to reimburse customers for processing tax included in the sales price of flour sold them in 1935 and not paid to the Collector of Internal Revenue as processing taxes. In its 1935 tax return petitioner deducted from gross income the total of the amounts impounded and accrued but not paid the Collector in the year 1935 as accrued tax liability. The Commissioner found a deficiency by disalllowing the petitioner's deduction for taxes accrued but not paid in 1935.
It is settled by many decisions that a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent, and this principle is fully applicable to a tax, liability for which the taxpayer denies, and payment whereof he is contesting. 5 Here the petitioner, in figuring its costs and its sales price to consumers, added the amount of the processing tax, but it collected its purchase price as such and designated no part of it as representing the tax. The petitioner received the purchase price as such. Its tax liability, if any, to the United States did not differ from other debts. Since it denied liability for, and failed to pay, the tax during the taxable year 1935, it was not in a position in its tax accounting to treat the Government's claim as an accrued liability. As it admittedly received the money in question in 1935 and could not deduct from gross income and accrued liability to offset it, the receipt, it would seem, must constitute income for that year.
Petitioner nevertheless insists that Section 43 of the Revenue Act, which requires that deductions be taken for the taxable year in which the amount was paid or accrued, creates an exception applicable to this case by its concluding clause, 'unless in order to clearly reflect the income the [321 U.S. 281, 285] deductions or credits should be taken as of a different period.' In short, the petitioner's position is that the Commissioner and the Board of Tax Appeals are authorized and required to make exceptions to the general rule of accounting by annual periods wherever, upon analysis of any transaction, it is found that it would be unjust or unfair not to isolate the transaction and treat it on the basis of the long term result. We think the position is not maintainable.
From these reports it is clear that the purpose of inserting the qualifying clause was to take care of fixed liabilities payable in fixed installments over a series of years. For example, a tenant would not be compelled to accrue, in the first year of a lease, the rental liability covering the entire term nor would he be permitted, if he saw fit to pay all the rent in advance, to deduct the whole payment as an expense of the current year. But we think it was not intended to upset the well understood and consistently [321 U.S. 281, 286] applied doctrine that cash receipts or matured accounts due on the one hand, and cash payments or accrued definite obligations on the other, should not be taken out of the annual accounting system and, for the benefit of the Government or the taxpayer, treated on a basis which is neither a cash basis nor an accrual basis, because so to do would, in a given instance, work a supposedly more equitable result to the Government or to the taxpayer.
The question is not whether the Board, within its discretion, made a determination of fact. Compare Dobson v. Helvering, 320 U.S. 489 , 64 S.Ct. 239. It is rather whether, as matter of law, the Board misconstrued the extent of the power conferred by the Revenue Act.
But the petitioner urges that Section 43 has altered the rule so that a hybrid system, partly annual and partly transactional, may, within administrative discretion, be substituted for that of annual accounting periods. It urges that the change was due to the desire of Congress to prevent distortion of true income. This must mean distortion of true income, not of a given year, but, in the light of ultimate gain, from a series of transactions over a period of years, growing out of, or in some way related to, an initial transaction in the taxable year. The very section on which petitioner relies, however, reiterates the adherence of Congress to the system of annual periods of computation.
We are of opinion that the purpose of the language which Congress used was not to substitute, whenever in the discretion of an administrative officer or tribunal such a course would seem proper, a divided and inconsistent method of accounting not properly to be denominated either a cash or an accrual system.
Mr. Justice DOUGLAS and Mr. Justice JACKSON, are of opinion that the case is governed by Dobson v. Helvering, 320 U.S. 489 , 64 S.Ct. 239, and that the judgment should, for the reasons therein stated, be reversed.
[ Footnote 1 ] 135 F.2d 165.
[ Footnote 2 ] 45 B.T.A. 671.
[ Footnote 3 ] Helvering v. Cannon Valley Milling Co., 8 Cir., 129 F.2d 642.
[ Footnote 4 ] c. 277, 48 Stat. 680, 688, 694, 236 U.S.C.A. Int.Rev.Acts, pages 671, 679.
[ Footnote 5 ] See Dixie Pine Products Co. v. Commissioner, 320 U.S. 516 , 64 S.Ct. 364, where this rule of law was reaffirmed and applied by the Board of Tax Appeals, the Fifth Circuit Court of Appeals, and by this court, and cases cited.
[ Footnote 6 ] c. 136, 42 Stat. 227, 240, 255.
[ Footnote 7 ] 43 Stat. 253, 254, 26 U.S.C.A. Int.Rev.Acts, page 2.
[ Footnote 8 ] H.R. 179, 68th Cong., 1st Sess., pp. 10, 11; S.R. No. 398, 68th Cong., 1st Sess., pp. 10, 11.
[ Footnote 9 ] Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363 , 51 S.Ct. 150, 151.
[ Footnote 10 ] Id., 282 U.S. at page 365, 51 S.Ct. at page 152.
[ Footnote 11 ] See e.g. Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 120 , 50 S.Ct. 273, 274; Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 306 , 51 S.Ct. 418, 420; Woolford Realty Co. v. Rose, 286 U.S. 319, 326 , 52 S.Ct. 568, 569; Tait v. Western Maryland R. Co., 289 U.S. 620, 624 , 53 S.Ct. 706, 707; Brown v. Helvering, 291 U.S. 193 , 54 S.Ct. 356; Guaranty Trust Co. v. Commissioner, 303 U.S. 493, 498 , 58 S.Ct. 673, 676.
[ Footnote 12 ] See the cases cited Notes 5, 9 and 11.

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