Source: https://www.legalcrystal.com/case/96023/brown-vs-helvering
Timestamp: 2017-02-24 20:50:41
Document Index: 478372163

Matched Legal Cases: ['§ 212', '§ 213', '§ 214', '§ 214', '§ 214', '§ 955']

Brown Vs Helvering - Citation 96023 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize Brown Vs. Helvering - Court Judgment	LegalCrystal Citationlegalcrystal.com/96023CourtUS Supreme CourtDecided OnJan-15-1934Case Number291 U.S. 193AppellantBrownRespondentHelveringExcerpt:.....the taxpayer to adhere to a method of accounting previously used in the business deduction of the return commissions accrued during the tax year from the "overriding commissions" accrued during that year if, in the commissioner's opinion, the older method would more clearly reflect the net income. p.
291 u. s. 202
5. it was likewise within the province of the commissioner to reject an alternative method proposed by the taxpayer --
a prorating of the overriding commissions over the lives of the policies and deduction of return commissions as they accrued. p.
291 u. s. 203
certiorari, 290 u.s. 607, to review the affirmance, on appeal, of an order of the board of tax appeals (22 b.t.a. 678), sustaining three deficiency..... Judgment:
Brown v. Helvering - 291 U.S. 193 (1934)
1. That the deduction were not "expenses paid or incurred" in the taxable years. Section 214, Revenue Acts of 1921, 1924, and 1926. P.
2. Although a liability accrued may be treated as an expense incurred, a contingent liability is not an accrued liability unless so designated specifically by statute. P.
291 U. S. 200
3. The reserve set up is not akin to the reserves required of insurance companies, nor is it to be classed with the reserves voluntarily established as a matter of conservative accounting which are specifically authorized by the Revenue Acts. P.
291 U. S. 201
4. Under § 212(b), it was within the discretion of the Commissioner to require the taxpayer to adhere to a method of accounting previously used in the business deduction of the return commissions accrued during the tax year from the "overriding commissions" accrued during that year if, in the Commissioner's opinion, the older method would more clearly reflect the net income. P.
An unincorporated concern known as Edward Brown & Sons, of San Francisco, has since 1896 acted as Pacific
Coast General Agent for fire insurance companies. [
] In 1923, Arthur M. Brown conducted the concern alone. In 1925 and 1926, he and his son Arthur M. Brown, Jr., conducted it as partners. The general agent receives as compensation from its principals, among other things, a so-called "overriding commission" on the net premiums derived from business written through the local agents. The question for decision is how the income of the petitioner, Arthur M. Brown, derived from overriding commissions during the years 1923, 1925, and 1926, should be calculated for purposes of the federal income tax. The Commissioner of Internal Revenue held that, in determining income, the gross overriding commissions on business written during the year should not be subjected to any deduction on account of cancellations expected to occur in later years. The taxpayer contends that either the gross overriding commissions should be subjected to such a deduction, or that parts of the gross overriding commissions should be allocated as earnings of future years.
Prior to 1923, overriding commissions on new business were accounted income of the year in which the business was written, and refunds of overriding commission on account of cancellations were accounted expenses of the year of cancellation. The books of the general agent have at all times been kept on the accrual basis. Although no change was made in the method of accounting between the general agent and its principals, there was
The ratio of cancellations to premiums receivable having been 22.38 percent for the five years ending in 1923, the gross income from overriding commissions on business written in 1923, amounting to $236,693.31, was subjected on the books to a deduction of $52,971.96, and this amount was credited to the "Return Commission" account. Similarly, at the close of each of the years 1924, 1925, and 1926, the credit balance in the "Return Commission" account was adjusted so that it bore the same relation to the overriding commissions on business written during the year as the total fire insurance premiums cancelled in the preceding five-year period bore to the gross premiums on business written during those years. The ratio of cancellations for the five years ending in 1925 having been 21.55 percent, and the total overriding commissions $244,597.88, a deduction of $3,292.98 was made, representing the net addition to the "Return Commission" account in 1925. The ratio of cancellations to premiums for the five-year period ending in 1926 having been 21.13 percent, and the total overriding commissions
$258,677.57, a deduction was made of $1,947.77 representing the net addition to the "Return Commission" account in 1926. [
In making his federal income tax return for the years 1923, 1925, and 1926, Brown claimed as deductions the benefit of the credits so made to the "Return Commission" account. The Commissioner of Internal Revenue disallowed these deductions, and accordingly assessed to Brown for 1923 a deficiency of $17,923.03; for 1925, a deficiency of $1,520.19, and for 1926, a deficiency of $944.30. [
] The Commission's determinations were sustained by the Board of Tax Appeals, 22 B.T.A. 678, and its order was affirmed by the Circuit Court of Appeals. 63 F.2d 66. Certiorari was granted by this Court because of alleged conflict with the decision of the Circuit Court of Appeals for the Fourth Circuit in
Virginia-Lincoln Furniture Corp. v. Commissioner,
56 F.2d 1028, and other cases.
The Commissioner properly disallowed the deduction on account of the credits to the "Return Commission"
account. Under the Revenue Acts, taxable income is computed for annual periods. If the accounts are kept on the accrual basis, the income is to be accounted for in the year in which it is realized, even if not then actually received, and the deductions are to be taken in the year in which the deductible items are incurred. What is taxable as income is provided by the Revenue Act of 1921, c. 136, 42 Stat. 227, 237, 239. [
] Section 212(a) declares: "That in the case of an individual the term
net income' means the gross income as defined in § 213 less the deductions allowed by § 214." Section 214(a) declares:
The only relevant deductions allowable by law are those provided for in § 214, and the burden rests upon the taxpayer to show that he was entitled to the deduction claimed.
Reinecke v. Spalding,
280 U. S. 227
The overriding commissions were gross income of the year in which they were receivable. As to each such commission, there arose the obligation -- a contingent liability -- to return a proportionate part in case of cancellation. But the mere fact that some portion of it might have to be refunded in some future year in the event of cancellation or reinsurance did not affect its quality as income.
Compare American National Co. v. United States,
. When received, the general agent's right to it was absolute. It was under no restriction, contractual or otherwise, as to its disposition, use, or enjoyment.
286 U. S.
Page 291 U. S. 200
] The refunds during the tax year of those portions of the overriding commissions which represented cancellations during the tax year had, prior to the tax return for 1923, always been claimed as deductions, and they were apparently allowed as "necessary expenses paid or incurred during the taxable year." The right to such deductions is not now questioned. Those which the taxpayer claims now are of a very different character. They are obviously not "expenses paid during the taxable year." They are bookkeeping changes representing credits to a reserve account.
These charges on account of credits to the "Return Commission" reserve account are claimed as deductions on the ground that they are expenses "incurred . . . during the taxable year." It is true that, where a liability has "accrued during the taxable year," it may be treated as an expense incurred, and hence as the basis for a deduction, although payment is not presently due,
Aluminum Castings Co. v. Routzahn,
, and although the amount of the liability has not been definitely ascertained.
United States v. Anderson, supra.
Compare Continental Tie & Lumber Co. v. United States,
286 U. S. 296
. But no liability accrues during the taxable year on account of cancellations which it is expected may occur in future years, since the events necessary to create the liability do not occur during the taxable year. Except as otherwise specifically provided by statute, a liability does not accrue as long as it remains contingent.
271 U. S.
Page 291 U. S. 201
Ewing Thomas Converting Co. v. McCaughn,
43 F.2d 503;
Highland Milk Condensing Co. v. Phillips,
34 F.2d 777.
The liability of Edward Brown & Sons arising from expected future cancellations was not deductible from gross income, because it was not fixed and absolute. In respect to no particular policy written within the year could it be known that it would be cancelled in a future year. Nor could it be known that a definite percentage of all the policies will be cancelled in the future years. Experience taught that there is a strong probability that many of the policies written during the taxable year will be so cancelled. But experience taught also that we are not dealing here with certainties. This is shown by the variations in the percentages in the several five-year periods of the aggregate of refunds to the aggregate of overriding commissions. [
Brown argues that, since insurance companies are allowed to deduct reserves for unearned premiums which may have to be refunded, he should be allowed to make the deductions claimed as being similar in character. The simple answer is that the general agent is not an insurance company, and that the deductions allowed for additions to the reserves of insurance companies are technical in character, and are specifically provided for in the Revenue Acts. These technical reserves are required to be made by the insurance laws of the several states.
See Maryland Casualty Co. v. United States,
251 U. S. 350
United States v. Boston Ins. Co.,
. The "Return Commission" reserve here in question was voluntarily established. Only a few reserves voluntarily established
as a matter of conservative accounting are authorized by the Revenue Acts. Section 214 mentions only the reserve for bad debts (in the discretion of the Commissioner), provided for in paragraph 7; those for depreciation and depletion, provided for in paragraphs 8 and 10, and the special provision concerning future expenses in connection with casual sales of real property, provided for in paragraph 11 of § 214(a) as amended by the Revenue Act of 1926. 26 U.S.C. § 955. Many reserves set up by prudent business men are not allowable as deductions.
See Lucas v. American Code Co.,
Brown argues also that the Revenue Acts required him to make his return "in accordance with the method of accounting regularly employed in keeping the books," [
] and that, in making the deductions based on the credits to "Return Commission" account, he complied with this requirement. The Commissioner's oft-quoted [
] instruction of January 8, 1917 (No. 2433, 19 Treas.Dec.Int.Rev. 5) is relied upon:
The accrual method of accounting had been regularly employed by Edward Brown & Sons before 1923, but no "Return Commission" account had been set up. Moreover, the method employed by the taxpayer is never conclusive. If, in the opinion of the Commissioner, it does not clearly reflect the income, "the computation shall be made upon such basis and in such manner" as will, in his opinion, do so.
269 U. S. 439
Lucas v. Ox Fibre Brush Co.,
Lucas v. Structural Steel Co.,
] In assessing the deficiencies, the Commissioner required, in effect, that the taxpayer continue to follow the method of accounting which had been in use prior to the change made in 1923. To so require was within his administrative discretion.
Compare Bent v. Commissioner,
56 F.2d 99.
The Board of Tax Appeals did not err in refusing to allocate to future years part of the overriding commissions on business written during the taxable year. Brown urges that the overriding commission is compensation for services rendered throughout the life of the policy that the compensation to be rendered in later years cannot be considered as earned until the required services have been performed, and that the Revenue Acts contemplate
This proposed alternative method of computing the income from overriding commissions was not employed by Edward Brown & Sons either before or after 1923. Moreover, the Board concluded that there "is no proof that the overriding commissions contain any element of compensation for services to be rendered in future years." The whole of the overriding commissions has at all times been treated as income of the year in which the policy was written. The Commissioner was of opinion that the method of accounting consistently applied prior to 1923 accurately reflected the income. He was vested with a wide discretion in deciding whether to permit or to forbid a change.
56 F.2d 99. It is not the province of the court to weigh and determine
the relative merits of systems of accounting.
The deductions here claimed, not being authorized specifically either by the Revenue Acts or by any regulation applying them, were properly disallowed. So far as the decision in
56 F.2d 1028, may be inconsistent with this opinion, it is disapproved.
See also Vang v. Lewellyn,
35 F.2d 283.
See also Uncasville Mfg. Co. v. Commissioner,
55 F.2d 893, 895;
Ocean Accident & Guarantee Corp. v. Commissioner,
47 F.2d 582.
Compare Commissioner v. Old Dominion S.S. Co.,
47 F.2d 148.
Compare Barde Steel Products Corp. v. Commissioner
40 F.2d 412, 416;
Spring Canyon Coal Co. v. Commissioner,
43 F.2d 78.
274 U. S. 101
Niles Bement Pond Co. v. United States,
281 U. S. 357
281 U. S. 359
See also Industrial Lumber Co. v. Commissioner,
58 F.2d 123;
Jennings & Co. v. Commissioner,
59 F.2d 32.