Court Opinion

ID: 9448963
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:51:11.64998+00
Date Added: 2024-06-11T17:31:37.850952
License: Public Domain

WHITAKER, Judge
(dissenting in part).
It is erroneous to say that the return to the taxpayer of the processing and floor stock taxes paid by it in a former year was a “return of capital.” In the prior year the taxpayer paid these taxes as a part of the cost of doing business; so, it seems to me, the return of them in a later year was a return of an expense item, using the word “expense” in a broad sense, that is, the cost of realizing income. It was not the “return of capital,” but the return of an expense item.
This distinction is clearly drawn by the Supreme Court in Burnet v. Sanford & Brooks Co., 282 U.S. 359, at 363, 51 S.Ct. 150, at 151, 75 L.Ed. 383, where the Court said:
“That the recovery made by respondent in 1920 was gross income for that year within the meaning of these sections cannot, we think, be doubted. The money received was derived from a contract entered into in the course of respondent’s business operations for profit. While it equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses incurred in the prosecution of the work under the contract, for the purpose of earning profits. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income. See Doyle v. Mitchell Brothers Co., supra, p. 185 of 247 U.S. [179] 185 [38 S.Ct. 467, 62 L.Ed. 1054].”
This case was quoted with approval by the Supreme Court in Dobson v. Commissioner, 320 U.S. 489, at page 504, 64 S.Ct. 239, at page 247, where the Court said:
“The Government relies upon Burnet v. Sanford & Brooks Co., 282 U.S. 359 [51 S.Ct. 150, 75 L.Ed. 383], for the proposition that losses of one year may not offset receipts of another year. But the case suggested its own distinction: ‘While [the money received] equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses * * *. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income.’ 282 U.S. at 363-64 [364, 51 S.Ct. at 151].”
Our decision in Perry v. United States, 160 F.Supp. 270, 142 Ct.Cl. 7, does not depart from this distinction. There the taxpayer offered certain property to the Town of Fitzwilliam, New Hampshire, on condition that it would be devoted to a certain purpose. The town was unwilling to devote it to this purpose, and returned the property to the taxpayer. The taxpayer insisted that the return of the property to it was a “return of capital,” but it admitted liability for taxes on the income which had accrued in the interim on the corpus offered to the town. We said in this case that the taxpayer merely got back property which it had offered *248on condition, because the donee was unwilling to comply with the condition and, therefore, was a “return of capital.”
This differs from the case at bar. Here, in the prior year taxes, a necessary element of the cost of earning income, were paid, and were later returned. This does not seem to me to be “return of capital,” but the return of an expense item.
As evidence of this, I cite the difficulty which the majority opinion had in avoiding the rule that the expense of the recovery of capital is not deductible from ordinary income, but is to be treated as a capital expenditure, to be added to the cost of the capital item, in determining the gain realized on a later sale of it. It seems to me to be altogether anomalous to say that the recovery of the process and floor stock taxes was not income, and at the same time allow the taxpayer a deduction for the cost of recovering it.
Although I do not agree that the return of these taxes was a return of capital, but an income item, I do agree that they are not to be included in taxable income, since in the prior year the taxpayer had received no tax benefit from the deduction of them. If they are not to be included in taxable income, the cost of their recovery is not deductible because of the provisions of section 24(a) (5) of the Internal Revenue Code of 1939. This section says that “Any amount otherwise allowable as a deduction [such as legal expenses] which is allocable to one or more classes of income * * * wholly exempt from the taxes imposed by this chapter,” is not allowable as a deduction in computing that income.
For these reasons I respectfully dissent from the allowance of the legal expenses as a deduction from plaintiff’s taxable income.