Court Opinion

ID: 6867185
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:56:09.699607+00
Date Added: 2024-06-11T16:05:20.645431
License: Public Domain

THOMPSON, Circuit Judge
(dissenting).
I am constrained to disagree with the reasoning and conclusions set out in the majority opinion.
Section 41 of the Revenue Act of 1928 (26 U.S.C.A. § 41 and note) determines the general rule for computing net income: “The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed' does not clearly reflect the income, the computation shall be made in accordance-with such method as in the opinion .of the-commissioner does clearly reflect the income. * * * ”
Emphasis is placed on the method of' accounting regularly employed by" the taxpayer. The income tax return which the-respondent filed on behalf of the testatrix was computed on the cash receipts and disbursements basis, the method of accounting regularly employed in keeping the-books of the testatrix as well as those of' her guardians. »
Section 43 of the Revenue Act of 1928 (26 U.S.C.A. § 43 and note) limits the period during which deductions and credits-may be taken as follows: “The deductions and credits provided for in this title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ depend— *729ent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.”
The taxable period extended from January 1, 1929, to November 13, 1929, the date of the testatrix’ death. The guardians’ expenses were paid during the period from December 27, 1929, to February 6, 1930. It seems clear that section 43 means that, when the cash receipts and disbursements method is used, deductions and credits may be taken for the taxable year in which they were paid, but not for the period in which they accrued.
Article 341 of Regulation 74, promulgated by the Treasury Department in connection with section 43, provides: “The terms ‘paid or incurred’ and ‘paid or accrued’ will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. (See section 48 (c), 26 U.S. C.A. § 48 (c) and note.) The deductions and credits provided for in Title I must be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was ‘paid or accrued’ or ‘paid or incurred,’ he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner together with a complete statement of the facts upon' which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually ‘paid or incurred,’ or ‘paid or accrued,’ as the case may be. Upon the audit of the return, the Commissioner will decide whether the case is within the exception provided by the Act, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable.”
In my view, this regulation is reasonable and should be upheld. Universal Battery Co. v. United States, 281 U.S. 580, 50 S.Ct. 422, 74 L.Ed. 1051. Taxing statutes and regulations should be applied to the facts in accordance with their expressed terms. I cannot agree that the supposed equities . of a particular case should be applied to vary the plain terms of a statute or of a reasonable regulation.
In United States v. Mitchell, 271 U.S. 9, 46 S.Ct. 418, 419, 70 L.Ed. 799, the Supreme Court, construing the Revenue Act of 1918 (40 Stat. 1057), held that a taxpayer who kept his books on the cash receipts and disbursements basis was not entitled to deduct from his 1919 gross income an estate tax which accrued during 1919 but was not actually paid until 1920. The language of the Supreme Court is especially apt: “The return shows that it was made on the basis of income actually received in 1919. This indicates that the accounts were kept on the basis of actual receipts and disbursements, and there is nothing in the record to show that any other method was employed. The burden is on the executors to establish the invalidity of the tax. United States v. Anderson, supra [269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347], They have not shown that their books were kept on the accrual basis. Assuming, as we must, that the accounts of the estate were kept on the basis of actual receipts and disbursements, the executors were required to make return on that basis. Notwithstanding the option given taxpayers, it is the purpose of the Act to require returns that clearly reflect taxable income. That purpose will not be accomplished unless income received and deductible disbursements made are treated consistently. It was not the purpose of the Act to permit gross income actually received to be diminished by taxes or other deductible items disbursed in a later year, even if accrued in the taxable year. It is a reasonable construction of the law that the same method be applied to both sides of the account.”
In the instant case, the Commissioner acted in accordance with the regulations which he was authorized by statute to make. I am not persuaded that the book entries as to payments to the guardians should be construed as though they had been made within the taxable period, when such is not the fact. I have been unable to discover any authority for holding that a liability accruing during a taxable period to a taxpayer reporting on the cash receipts and disbursements basis, but not actually paid by him during that period, may be deducted as of the time when it accrued.
I think that the order of redetermination of the Board of Tax Appeals should be reversed.