Court Opinion

ID: 9639115
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:05:11.083797+00
Date Added: 2024-06-11T18:10:12.522542
License: Public Domain

WOODROUGIT, Circuit Judge
(dissenting).
As I view the record in this ease the majority conclusion means that the railroad company will not have to pay any income taxes upon $2,461,397.23 of income which it received in 1923. It is clear that it got the income and the same was taxable against it, but it is found to follow from the way it *635keeps its books on the accrual basis that it can accrue the income which it got in 1923 back to years beyond the period of the statute of limitations, and so escape paying any income tax on account thereof.
Its properties were taken over by the government for the war and so operated in 1918, 1919, and two months of 1920. As compensation to the railroad for the use of the properties the Federal Control Act provided for annual payments at the so-called “standard return rate,” but, at the same time, empowered the President to agree upon whatever additional amount he found to be just. The company also had its constitutional rights to judicial determination of what was just. The railroad at all times reserved its right to judicial determination of its just compensation, but prosecuted negotiations with the government for several years and consummated amicable settlement in 1923. The amount then paid by the government being the above-stated sum of $2,461,397.23 in excess of the standard return.
As stated in the majority opinion, it would seem that the government admitted and was contending for the amount of the standard return as being just compensation to this railroad and there was controversy over the excess. Such controversy obviously made it impossible for the taxpayer to return any specific income represented by any such excess for taxation, and neither could the Commissioner determine a deficiency in regal'd to it. The taxpayer merely had an unadjusted claim against the government. That being so, there was actually no income until the adjustment was made and the money received. When it was received, it was income on which tax ought to be paid.
It is true the courts hold that, in the cases of railroads which made adjustment and were paid in excess of the standard return so shortly after the period of federal control that the Commissioner' still had jurisdiction to review the returns for those years 1918, 1919, and 1920, the income derived from the settlement could be and ought to be accrued back and allocated to those years. So, in the Second Circuit, a railroad company was permitted to prorate (or accrue) its excess income from government operation above the standard return over the three years of war control and to pay the tax on such excess income so allocated. But, it is apparent from the court’s opinion that the whole period covered by the allocation was within the statutory period of tax administration, so there, was no question of a tax not being collected, and that this consideration weighed with the court is clearly reflected in the last paragraph of the opinion: “No practical difficulties in the administration of the taxing acts will occur by permitting the accrual of just compensation of the carriers as income of the years of federal control in which earned. The Commissioner has five years after the return is filed to audit the returns for the years in question. Section 256 (d), Revenue Act of 1918 (40 Stat. 1083). The amount of just compensation was determined in 1921, and at that time the returns of 1918, 1919, and 1920 were still subject to review. The determination is approved.” Commissioner v. Old Dominion S. S. Co. (C. C. A.) 47 F.(2d) 148, 150.
The Tenth Circuit later followed the same rule under the same circumstances and permitted a railroad company to pay its tax on the excess income allocated the same way. Commissioner v. Midland Valley R. Co. (C. C. A.) 57 F.(2d) 1042.
There was reasoning by the Supremo Court in Continental Tie & Lumber Co. v. United States, 286 U. S. 290, 52 S. Ct. 529, 76 L. Ed. 1111, not discordant.
Neither of these cases, however, proceed upon any general idea that because a claim against the government for expropriation of private properties in war time is a just claim that, therefore, the accrual of the mere claim is the same thing as the actual receipt of income. They meant to hold that, where the whole period of the accrual of the claim and the realization thereon was within the jurisdiction of the tax administration, it moro nearly conformed to the intent of Congress to spread the income for taxing purposes as indicated. It was not within the purview of either opinion that the taxpayer could defeat its just tax altogether by the mere accrual fiction of accountancy. Section 212 (b) of the Revenue Act of ”1918 (see 26 US CA § 953 (b), provides that, if the method of accounting employed by a taxpayer does not reflect the income clearly, computation must be made in such a manner as to do so (“in the opinion of the Commissioner”). The plain meaning is that, if a taxpayer actually gets a taxable income, as this taxpayer did, he cannot avoid the tax by any mere system of bookkeeping, no matter what the system is.
Much of the brief is devoted to the argument that there will be discrimination if railroads who effected a prompt settlement are permitted to accrue the income back to the war operation period and roads whose settlements were delayed are not. That is true, *636but certainly, if the latteT roads are allowed to evade the tax altogether, the discrimination is worse. Doubtless the payment of many just war claims has been and will be delayed, hut the result need not be to extinguish the income tax laws in relation thereto'. The sensible course is to recognize the flexibility of the tax statute while the administration conformable to the intent and spirit is within the time limits of the Tax Commissioner’s jurisdiction. But if adjustment and payment of a war claim and resultant taxable income come too late for the exercise of such administrative jurisdiction, then the income tax law should be enforced as written.
It was contended in this case, in oral argument at the bar, that our record from the Board of Tax Appeals does not affirmatively show avoidance of this tax by the railroad company. Of course no such direct statement is made in the record, but there is no other rational inference. The only year of war control within the statute limitation of tax administration was the year 1920. The bookkeeping for that year was before the Board and shows no accounting of any part of this taxable income, and the claims of the railroad against the government being unadjusted, no accountant could enter the true amount on his books. Neither is it to he imagined that he either could or did in the preceding years-of 1918 or 1919. By accruing the income, back to 1918, 1919, and 1920, as has been done by the Board of Tax Appeals, the government does get an insignificant part, of its tax for two months of 1920, but I conclude that the whole tax on the $2,461,397.23 of income received in 1923 through the settlement of the controverted claim for excess compensation ought to be paid, and the case reversed, with such direction.