Source: https://supreme.justia.com/cases/federal/us/269/422/
Timestamp: 2019-04-25 20:08:41+00:00

Document:
"a corporation . . . keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations of the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as returned."
Held, that where the taxpayer's books, reflecting its income, were kept upon an "accrual" basis -- i.e., by charging against income earned during the taxable period (1916) the expenses incurred in and attributable to the process of earning income during that period -- and made its return upon that basis and not the basis of actual receipts and disbursements, it was permitted under the statute, as correctly construed by a Treasury regulation, to include in its deductions the amount of a "reserve" entered on its books for taxes imposed by the United States on the profits of munitions made and sold by the taxpayer during that year, although the tax had not "accrued" in the sense of having been assessed and become due, and that it was not permissible, as the taxpayer attempted, to defer deduction of the tax until the income return for the following year, during which the tax became due and was paid. Pp. 269 U. S. 438, 269 U. S. 441.
2. Findings considered and held to show that the books of a taxpayer were kept on the basis of accruals and reserves to meet liabilities incurred. P. 269 U. S. 442.
3. In a suit to recover a tax erroneously exacted, the burden is on the plaintiff to prove the facts establishing invalidity of the tax. P. 269 U. S. 443.
60 Ct.Cls. 100, id., 440, reversed.
Appeals from judgments of the Court of Claims in two suits brought by the Trustees in dissolution of the Burton-Richards Company, a corporation, and by the Yale & Towne Manufacturing Company to recover income taxes alleged to have been erroneously exacted under the Revenue Act of 1916.
The appellees in both cases brought suit in the Court of Claims to recover payments of corporate income taxes alleged to have been erroneously exacted. From judgments in their favor, the government brings the cases to this Court on appeal. Judicial Code, § 242, before amendment of 1925.
additional questions as are involved in No. 337 will then be taken up.
The appellee, Yale & Towne Manufacturing Company, a Connecticut corporation, was, in 1916, engaged in the manufacture of munitions. The tax imposed by the United States on the profits on munitions manufactured by it and sold during that year became due and was paid in 1917. In making its return for income tax for the year 1917, the appellee deducted from its gross income the amount of the munitions tax thus paid. Later, the Commissioner of Internal Revenue held that the munitions tax paid in 1917 should have been deducted from the appellee's gross income in its return for 1916. There was in consequence an adjustment of the income taxes payable in those years, resulting in a net increase of the tax payable for the year 1917 of $116,044.40, which was assessed and paid under protest and is the amount for which suit was brought.
accounts are kept, in which case the tax shall be computed upon its income as so returned. . . ."
In the year 1916, the appellee set up on its books of account all the obligations or expenses incurred during the year, whether they fell due and whether they were paid during that year. It entered in an account "Reserves for Taxes" items of various kinds of taxes liability for which was incurred by reason of its operations for that year, whether paid or payable during the year. Included in the reserves for taxes for 1916 were items aggregating $247,763.19 for taxes on profits from the sale of munitions during the year. The return for the munitions tax was made by the appellee in 1917, and the tax, after revision and an additional assessment, was paid in 1917, the year when it was due.
It is urged by the government that the appellee, not having kept its books or made its tax return on the basis of receipts and disbursements, has elected to avail itself of the privilege afforded by § 13(d) of making its return on what was referred to in the briefs and argument as "the accrual basis;" that, having so elected, it is required consistently to deduct from gross income all items appearing on its books as expenses accruing or incurred during the taxable year, including its reserve for munitions taxes, whether payable or not.
profits for the year. But it contends that the munitions tax was deductible only in 1917, because, under the Revenue Act of 1916, only taxes actually paid during the year were deductible in determining net income for the year, and that, in any case, the provisions of that Act and the regulations made by the Commissioner authorizing the taxpayer to make his returns on an "accrual" basis if his books are so kept could have no application to tax deductions, since a tax does not accrue until it is due and payable.
While § 12(a), taken by itself, would appear to require the income tax return to be made on the basis of actual receipts and disbursements, it is to be read with § 13(d), which we have quoted and which obviously limits, in some respects, the operation of § 12(a) by providing in substance that a corporation keeping its books on a basis other than receipts and disbursements may make its return on that basis provided it is one which reflects income.
as nearly as possible the actual liabilities for which the accruals are made, and provided that, in cases wherein deductions are made on the accrual basis as hereinbefore indicated, income from fixed and determinable sources accruing to the corporations must be returned, for the purpose of the tax, on the same basis."
It also provided in substance that, when the taxpayer, following a consistent accounting practice, sets up reserves to meet liabilities, the "amount of which or date of maturity" is not definitely determinable, such reserve may be deducted from gross income. The decision also laid down a procedure for readjusting such reserves when the amount actually required for that purpose was definitely ascertained, and provided that, if returns upon this basis of "accrual or reserves" did not reflect true net income, the taxpayer would not be permitted to make its return on any other basis than that of "actual receipts and disbursements."
We think that the statute was correctly interpreted by the Commissioner, and that his decision referred to was consistent with its purpose and intent.
The Revenue Acts of 1909 and 1913 authorized a method of computing the income of corporations which did not differ materially from that provided by § 12(a) of the Act of 1916. They required in terms that net income should be ascertained by deducting from gross income received, interest, expenses, and taxes actually paid and losses actually sustained, but contained no provision corresponding to § 13(d) of the Act of 1916 by which a return might be made on the basis of the taxpayer's books of account. Corporation Excise Tax Act Aug. 5, 1909, c. 6, § 38, 36 Stat. 11, 112; Corporation Income Tax Act Oct. 3, 1913, c. 16, § II, subd. G, 38 Stat. 114, 172.
requirements of the 1909 and 1913 Acts for computing income on the basis of receipts and disbursements, and that, under both Acts, the administrative practice was established, by appropriate Treasury Regulations, permitting the use of inventories and authorizing deduction of expenses constituting a liability of the taxpayer, whether paid or not, in ascertaining net income, but that those regulations did not permit the deduction of taxes except in the year when paid. From this it is argued that Congress, by reenacting in § 12(a) of the Act of 1916 the corresponding provisions of the earlier Acts, adopted the settled administrative practice, and that accordingly, under that Act as well as under the earlier Acts and Treasury Regulations, taxes could be deducted only in the year when paid.
This argument would have force had Congress stopped with the enactment of § 12(a). By thus adopting, without material change, the corresponding provisions of earlier Acts, Congress might have been deemed to have recognized and adopted the established practice of the Department interpreting and applying them. National Lead Co. v. United States, 252 U. S. 140. But, in the Act of 1916, Congress added § 13(d), which did not have its counterpart in earlier legislation. This section went further than any previous regulations by authorizing the tax return to be made on the basis on which the taxpayer's books were kept, provided only that the basis was one reflecting income and the return complied with regulations made by the Commissioner.
the right of the Commissioner to require the return to be made on the basis of receipts and disbursements.
A consideration of the difficulties involved in the preparation of an income account on a strict basis of receipts and disbursements for a business of any complexity, which had been experienced in the application of the Acts of 1909 and 1913 and which made it necessary to authorize by departmental regulation, a method of preparing returns not in terms provided for by those statutes, indicates with no uncertainty the purpose of §§ 12(a) and 13(d) of the Act of 1916. It was to enable taxpayers to keep their books and make their returns according to scientific accounting principles, by charging against income earned during the taxable period the expenses incurred in and properly attributable to the process of earning income during that period, and indeed, to require the tax return to be made on that basis if the taxpayer failed or was unable to make the return on a strict receipts and disbursements basis.
The appellee's true income for the year 1916 could not have been determined without deducting from its gross income for the year the total cost and expenses attributable to the production of that income during the year. The reserve for munitions taxes set up on its books for 1916 must have been deducted from receivables for munitions sold in that year before the net results of the operations for the year could be ascertained. The taxpayer, being unable to make its return on a strict receipts and disbursements basis and not having attempted to do so, could not have complied with § 13(d) and Treasury Decision 2433 by deducting either accruals of interest or expenses alone without the other, or without deducting other reserves made on its books to meet liabilities, such as the munitions tax, incurred in the process of creating income.
sold in 1916 did not accrue until 1917. In a technical legal sense, it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that, in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee's books. In the economic and bookkeeping sense with which the statute and Treasury decision were concerned, the taxes had accrued. It should be noted that § 13(d) makes no use of the words "accrue" or "accrual," but merely provides for a return upon the basis upon which the taxpayer's accounts are kept, if it reflects income -- which is precisely the return insisted upon by the government. We do not think that the Treasury Decision contemplated a return on any other basis when it used the terms "accrued" and "accrual" and provided for the deduction by the taxpayer of items "accrued on their books."
whether the deductions to be made from the testator's gross estate were ascertainable for the purpose of determining the estate tax. The question which we now have to determine was not raised, considered, or decided in that case.
We conclude that the reserves for taxes which appeared on appellee's books in 1916 were deductible under § 13(d) of the Act of 1916 and Treasury Decision 2433 in its income tax return on the accrual basis for that year.
munitions tax was returned and ultimately assessed and paid in the sum of $112,419.54.

References: § 242
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 § 38
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