Court Opinion

ID: 9460598
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:55:17.865551+00
Date Added: 2024-06-11T17:36:41.985739
License: Public Domain

OAKES, Circuit Judge
(concurring):
While I agree with the majority that United States v. Merrill, 211 F.2d 297 (9th Cir. 1954), is readily distinguishable, I do not think that we need give Merrill any precedential value in this circuit. In my view, Merrill was erroneously decided, perhaps because it was a point decided without the benefit of adversary argumentation.1
I believe Merrill runs contrary to the theory underlying the concept of annual accounting, at least in the case of cash basis taxpayers. The whole purpose of treating each tax year separately is so as to affect only the timing of the tax consequences for a given transaction: where a taxpayer concludes a particular transaction in Year One he will receive the tax treatment prescribed therefor in that year, while a second taxpayer who concludes the same transaction in Year Two will receive that same tax treatment in the second year. Thus, at the end of two years the two taxpayers will be equal, each having the same tax treatment in the appropriate tax year ir, respect to identical economic events. If Taxpayers A and B each receive money erroneously in January of Year One, but Taxpayer A assumes an obligation to repay in December of Year One and Taxpayer B assumes such an obligation in January of Year Two, at the end of the second year the two taxpayers have done exactly the same things and are in the same economic position with the result that equitably and otherwise they should be in the same position taxwise. Merrill, however, puts Taxpayer A in a different position; he pays no tax on the receipt of income while Taxpayer B must pay a tax (in Year One) and is denied any offsetting deduction. Nor is it any answer to say that Taxpayer B can ultimately expect to be brought into equality if and when B effects repayment; A is in the favored position under Merrill because Merrill treats the income as not being received merely on the basis of A’s agreement to repay whether or not that agreement is in fact performed.
In short, giving credence in the case of a cash basis taxpayer to an agreement to repay, whether in the same year of receipt, is a gross misuse of the annual accounting concept; a repayment agreement per se should be viewed as a nullity for tax purposes. It should make no difference whether the amount was received illegally or under a “claim of right”; the subsequent agreement to repay should have no tax consequences. North American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613 (1932), which contains the most familiar statement of the “claim of right” doctrine, is of course not to the contrary; all that doctrine does is establish that income received under a claim of right without restriction as to disposition is taxable in the year received and that a subsequent obligation to refund *850that income entitles the taxpayer to a deduction in the year actually refunded. See § 1341, Int.Rev.Code of 1954.2
To sum up, I see no reason to distinguish Merrill-, I would decline to follow it in any event. Since I reach the same result of the majority, I happily join with it in voting to reverse the Tax Court.

. This argument in Merrill was made for the first time on appeal by the taxpayer in his answering brief. The Commissioner filed no a reply brief, simply arguing that the point could not be raised for the first time on appeal. See 211 F.2d at 302-303.

. The mere acknowledgment of the erroneous nature of the receipt and of the obligation to repay will not support a deduction except to the extent and in the year when repayment is actually effected. Cf. Helvering v. Price, 309 U.S. 409, 60 S.Ct. 673, 84 L.Ed. 836 (1940) (guarantor’s loss deductible only in year in which funds are actually paid over); Whitaker v. Commissioner, 259 F.2d 379, 382 (5th Cir. 1958) (prepayment of stud fee contingent on birth of live foal constitutes income in year in which prepayment made). Merrill, of course, established a special exception to this rule where the obligation to repay becomes fixed before the end of the year in which the amounts were re-” ceived.
It is true that Merrill has been followed both by the majority of the Tax Court below and by the Tax Court in Gaddy v. Commissioner, 38 T.C. 943 (1962). The Fifth Circuit, in Gaddy v. Commissioner, 344 F.2d 460, 462 (1965), while quoting in part the Tax Court’s treatment of the Merrill question, is not really authoritative support of Merrill because this portion of the Tax Court’s decision was not appealed by the Commissioner. I do not find Curran Realty Co. v. Commissioner, 15 T.C. 341 (1950), in any way persuasive from an accounting viewpoint; it seemed to reach the Merrill result without even mentioning the claim of right rule or any exception thereto.