Court Opinion

ID: 9639742
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:46:46.497381+00
Date Added: 2024-06-11T18:05:05.986973
License: Public Domain

PHILLIPS, Circuit Judge
(dissenting).
The Security Flour Mills Company will be referred to as the taxpayer. The taxpayer kept its books on an accrual basis.
Section 23 of the Revenue Act of 1934 in part provides:
“In computing net income there shall be allowed as deductions: * * *
“Taxes paid or accrued within the taxable year, * * *.”
The question presented is not whether the entire amount received from sales of flour by the taxpayer, including the amount embraced in the composite price to cover processing taxes, was income to the taxpayer in 1935. Manifestly it was. We are concerned rather with a deduction of taxes accrued under an unconstitutional statute, the validity of which was not determined until a subsequent year; and the deduction of amounts returned by the taxpayer to its purchasers.
While it has been held that an unconstitutional statute is void ab initio,1 the rule is not without certain qualifications. In Chicot County Drainage District v. Baxter State Bank, 308 U.S. 371, 374, 60 S.Ct. 317, 318, 84 L.Ed. 329, the court said:
“It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to such a determination, is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects, — with respect to particular relations, individual and corporate, and particular conduct, private and official. Questions of rights claimed to have become vested, of status, of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination.”
See, also, Phipps v. School District of Pittsburgh, 3 Cir., 111 F.2d 393, 395.
The taxpayer here certainly was under compulsion while the validity of the Agricultural Adjustment Act remained undetermined to accrue the tax liability and provide funds for its discharge throughout the entire year of 1935.
I, therefore, conclude that the taxpayer, in its income tax return for 1935, had the right to deduct as taxes accrued in 1935, the $93,974.40 which it accrued on its books for processing tax liability for the period *170May 1, to November 30, 1935, and paid to the depository, and the $9,896.66 which it accrued on its books, for processing tax liability for December, 1935, but did not pay to the depository. This view is supported by Davies’ Estate v. Commissioner, 6 Cir., 126 F.2d 294, certiorari denied Oct. 12, 1942, 63 S.Ct. 32, 87 L.Ed. -, and J. A. Dougherty’s Sons, Inc., v. Commissioner, 3 Cir., 121 F.2d 700.
Thereafter, when on January 6, 1936, the Agricultural Adjustment Act was declared unconstitutional in United States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R. 914, it became the duty of the taxpayer to accrue on its books as income for 1936, the $93,974.40 in the hands of the depository and the $9,896.66 accrued for processing taxes for December, 1935. See Nash v. Commissioner, 7 Cir., 88 F.2d 477.
It has been held, however, that the Commissioner may cancel a deduction taken in one year for a tax which the taxpayer has accrued or paid, when the tax has been refunded in a later year because it was unlawfully imposed.2
However, if what occurred in 1936 is to be related back to 1935, then it would seem that the payments made to customers by the taxpayer in 1936, 1937, and 1938 should likewise be related back to 1935, under the provisions of Sec. 43 of the Revenue Act of 1934, 48 Stat. 694, 26 U.S.C.A. Int.Rev.Code, § 43.3 Otherwise, the actual income of the taxpayer for 1935 will not be clearly reflected.
1 cannot agree that the broad language of the “unless” provision in Section 43 should be narrowly limited to cases where “the taxpayer pays in one year interest or rental or other items for a period of years.” The provision is couched in general terms and it contains nothing to indicate that its meaning was to be so limited. Rather, it justifies the interpretation that it is intended to apply to all deductions where its application is necessary to truly reflect the income.
Throughout the calendar year 1935, the taxpayer, from a realistic point of view., was under compulsion to regard the Act as subjecting it to a tax of $1.38 per barrel of flour processed. The selling price consisted of the usual items of cost, plus a normal profit, and included, in addition, an amount sufficient to cover the processing tax. The result was that the taxpayer’s apparent gross income for 1935 was enhanced by approximately $100,000. This unnatural increment to gross earnings was due entirely to invalid processing taxes. As of December 31, 1935, it was offset by an accrued liability for processing taxes. However, on January 6, 1936, the Agricultural Adjustment Act was adjudicated unconstitutional and the taxpayer’s processing tax liability was absolved. Thereupon, business necessity required that the taxpayer reimburse its vendees for taxes collected from them as a part of the sale price of flour if it could do so and not become liable for unjust enrichment taxes thereon. In 1936,' 1937, and 1938, after the taxpayer had obtained a ruling on its unjust enrichment liability from the Treasury, it repaid to its vendees, $45,865.90, in compromise of claims asserted by such vendees. Obviously, these payments had absolutely no relation to the cost of earning income in the years of payment. Equally apparent is the fact that they had direct relation to the taxpayer’s 1935 gross income. They represented refunds to vendees of amounts paid to the taxpayer in 1935 as a part of the sale price of flour because of the processing tax. They, in fact, resulted in a reduction of taxpayer’s gross income from 1935 sales. Only by relating them to the year 1935 can the income for that year be truly reflected. It seems to me that it was to relieve against just such a situation that Sec. 43 was enacted. The following from the opinion of the Eighth Circuit, in Helvering v. Cannon V. M. Co., 129 F.2d 642, 646, is apposite:
‘.‘Application. In the months of May and June, 1935, this taxpayer collected the processing tax as a part of its sales prices. In *171its tax return for that year, the amount of such collections was included in its gross income and was entirely offset by a claimed tax deduction. The result was that the collections had no effect upon its net income. Three years later, the Commissioner redetermined the tax by disallowing the deduction. Since this disallowance left the gross income (which included the collections) undisturbed, the result would be that the net income would be increased by the amount of the collections. It was not until 1936 that the contingency (validity vel non of the A. A. Act) was resolved and the right of taxpayer to the accrued income from the collections was determined. Therefore, the disallowance by the Commissioner was a relation back to the tax year 1935 of an accrual which had become fixed in a later year. At the time of the redetermination, it was established that only a part of the collections had remained the property of the taxpayer and a part of its income. All that taxpayer seeks is to have related back from 1937, the disbursements which reduced the collections in order that its net income for 1935 will be ‘clearly’ and truly stated. Both the deduction and the reimbursements relate to the same transactions in 1935. Clearly, to disallow the deduction and to refuse the decrease thereof by the reimbursements will distort the taxable income for that year. To permit the Commissioner to open up the item of deduction only to the extent it serves his purposes and to deny the taxpayer the effect of the reimbursements affecting the same item resulting in its paying a higher tax than it justly owes is an, injustice to the taxpayer.”
With respect to the second issue determined by the Board, for like reasons it seems to me the item of $2,649.25 should be treated as income in 1935. I do not think the closing agreement precludes an examination of the factual situation upon which it was predicated.
One subsidiary question remains: Noncompliance by the taxpayer with Art. 43 (1), Tr.Reg. 86, promulgated under the Revenue Act of 1934. In the first place, there was no occasion for the taxpayer to claim in its subsequent returns the deductions which it had taken in its 1935 return. In the second place, the rulings of the Commissioner fairly indicate that it would have been futile for the taxpayer to have claimed the deductions in its subsequent returns as of the year 1935. Finally, the issue was not raised at the hearing before the Board and that precludes its consideration here.4 The case does not fall within the exception recognized in Hormel v. Helvering, 312 U.S. 552, 61 S.Ct. 719, 85 L.Ed. 1037, and Helvering v. Richter, 312 U.S. 561, 61 S.Ct. 723, 85 L.Ed. 1043.
For the reasons indicated I think the decision of the Board should be affirmed.

 Norton v. Shelby County, 118 U.S. 425, 442, 6 S.Ct. 1121, 30 L.Ed. 178; Chicago, I. & L. R. Co. v. Hackett, 228 U.S. 559, 566, 33 S.Ct. 581, 57 L.Ed. 966.

 See Ben Bimberg & Co. v. Helvering, 2 Cir., 126 F.2d 412, 413; Inland Products Co. v. Blair, 4 Cir., 31 F.2d 867; Leach v. Commissioner, 1 Cir., 50 F.2d 371; Bergan v. Commissioner, 2 Cir., 80 F.2d 89.

 Section 43 of the Revenue Act of 1934, 48 Stat. 694, in part, reads:
“The deductions and credits * * * provided for in this title [chapter] shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent 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. * * * ”

 New Amsterdam Cas. Co. v. Farmers Co-op. Union, 8 Cir., 2 F.2d 214, 218; New York Life Ins. Co. v. Doerksen, 10 Cir., 75 F.2d 96, 101; American Home Fire Assur. Co. v. Hargrove, 10 Cir., 109 F.2d 86, 87; Liberty Petroleum Co. v. California Co., 10 Cir., 114 F.2d 980, 981.