United States v. Anderson Same v. Yale Towne Mfg Co

• Decision Date: 04 January 1926
• Docket Number: 420,Nos. 337,s. 337
• Parties: UNITED STATES v. ANDERSON et al. SAME v. YALE & TOWNE MFG. CO
• Court: U.S. Supreme Court

269 U.S. 422

46 S.Ct. 131

70 L.Ed. 347

UNITED STATES

v ANDERSON et al.

SAME

v. YALE & TOWNE MFG. CO.

Nos. 337, 420.

Argued Nov. 20, 1925.

Decided Jan. 4, 1926.

The Attorney General and Mr. W. D. Mitchell, Sol. Gen., of Washington, D. C., for the United States.

[Argument of Counsel from pages 423-425 intentionally omitted] Mr. John W. Davis, of New York City, for appellees Anderson and others.

[Argument of Counsel from pages 426-433 intentionally omitted]

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Mr. Louis H. Porter, of New York City, for appellee Yale & Towne Mfg. co.

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Mr. Justice STONE delivered the opinion of the Court.

The appellees in both cases brought suit in the Court of Claims to recover payments of corporate income taxes alleged to have been erroneously exacted. From judgments in their favor the government brings the cases to this court on appeal. Judicial Code, § 242 (Comp. St. § 1219), before amendment of 1925.

For the purpose of discussing the main question raised by both appeals, No. 420 will first be considered, and such

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additional questions as are involved in No. 337 will then be taken up.

The appellee, Yale & Towne Manufacturing Company, a Connecticut corporation, was, in 1916, engaged in the manufacture of munitions. The tax imposed by the United States on the profits on munitions manufactured by it and sold during that year, became due and was paid in 1917. In making its return for income tax for the year 1917, the appellee deducted from its gross income the amount of the munitions tax thus paid. Later the Commissioner of Internal Revenue held that the munitions tax paid in 1917 should have been deducted from the appellee's gross income in its return for 1916. There was in consequence an adjustment of the income taxes payable in those years, resulting in a net increase of the tax payable for the year 1917 of $116,044.40, which was assessed and paid under protest and is the amount for which suit was brought.

The correctness of the determination of the Commissioner depends upon the construction of the Revenue Act of 1916 and its application to the particular method employed by the taxpayer in keeping its books of account and in making return for income tax for 1916. The pertinent provisions of the statute are sections 10, 12(a), 13(a) and (d), and 300 of the Revenue Act of 1916, c. 463 (39 Stat. 756, 765, 767, 768, 770, 771, 780, 781 (Comp. St. § 6336j, 6336l, 6336m, 6336 1/4 a)). The act imposes a tax on net income and profits ascertained as provided by section 12(a), by deducting from gross income, expenses paid, losses sustained, interest and taxes paid during the calendar year. Section 13(d), however, provides that:

'A corporation * * * keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its

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accounts are kept, in which case the tax shall be computed upon its income as so returned. * * *'

In the year 1916 the appellee set up on its books of account all the obligations or expenses incurred during the year whether they fell due and whether they were paid during that year. It entered in an account, 'Reserves for Taxes,' items of various kinds of taxes, liability for which was incurred by reason of its operations for that year, whether paid or payable during the year. Included in the reserves for taxes for 1916 were items aggregating $247,763.19 for taxes on profits from the sale of munitions during the year. The return for the munitions tax was made by the appellee in 1917, and the tax, after revision and an additional assessment, was paid in 1917, the year when it was due.

In making up its income tax return for 1916, appellee deducted from gross income all the items appearing on its books as losses sustained and obligations and expenses incurred during the year, except that it omitted from the return the items of munitions tax, likewise carried on its books, as an obligation or expense incurred or accrued in the year.

It is urged by the government that the appellee, not having kept its books or made its tax return on the basis of receipts and disbursements, has elected to avail itself of the privilege afforded by section 13(d) of making its return on what was referred to in the briefs and argument as 'the accrual basis'; that, having so elected, it is required consistently to deduct from gross income all items appearing on its books as expenses accruing or incurred during the taxable year, including its reserve for munitions taxes, whether payable or not.

It is not denied by the appellee that its method of keeping its accounts and setting up a reserve for munitions taxes reflected its true income for 1916 or that its amended return on that basis accurately reflects it income and

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profits for the year. But it contends that the munitions tax was deductible only in 1917 because under the Revenue Act of 1916 only taxes actually paid during the year were deductible in determining net income for the year; and that in any case the provisions of that act and the regulations made by the Commissioner, authorizing the taxpayer to make his returns on an 'accrual' basis if his books are so kept, could have no application to tax deductions, since a tax does not accrue until it is due and payable.

While section 12(a) taken by itself would appear to require the income tax return to be made on the basis of actual receipts and disbursements, it is to be read with section 13(d) which we have quoted and which obviously limits in some respects the operation of section 12(a) by providing in substance that a corporation keeping its books on a basis other than receipts and disbursements, may make its return on that basis provided it is one which reflects income.

Standing by themselves and taken at their face value, these sections would seem to require the taxpayer to make his return on the basis of receipts and disbursements, or, in the alternative, on the basis of its own books of account if they reflect true income, under such regulations as the Commissioner may make, and indeed to require the latter alternative if the taxpayer is unable to make his return on that basis.

So interpreting the statute, the Commissioner, with the approval of the Secretary of the Treasury, on January 8, 1917, before appellee made its income tax return for 1916, promulgated Treasury Decision 2433 which provides in part that under section 13(d) it—

'will be permissible for corporations which accrue on their books monthly or at other stated periods amounts sufficient to meet fixed annual or other charges to deduct from their gross income the amounts so accrued, provided such accruals approximate

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as nearly as possible the actual liabilities for which the accruals are made, and provided that in cases wherein deductions are made on the accrual basis as hereinbefore indicated, income from fixed and determinable sources accruing to the corporations must be returned, for the purpose of the tax, on the same basis.'

It also provided in substance that when the taxpayer, following a consistent accounting practice, sets up reserves to meet liabilities, the 'amount of which or date of maturity' is not definitely determinable, such reserve may be deducted from gross income. The decision also laid down a procedure for readjusting such reserves when the amount actually required for that purpose was definitely ascertained, and provided that if returns upon this basis of 'accrual or reserves' did not reflect true net income, the taxpayer would not be permitted to make its return on any other basis than that of 'actual receipts and disbursements.'

We think that the statute was correctly interpreted by the Commissioner and that his decision referred to was consistent with its purpose and intent.

The Revenue Acts of 1909 (36 Stat. 11) and 1913 (38 Stat. 114) authorized a method of computing the income of corporations, which did not differ materially from that provided by section 12(a) of the Act of 1916. They required in terms that net income should be ascertained by deducting from gross income received, interest, expenses and taxes actually paid and losses actually sustained, but contained no provision corresponding to section 13(d) of the Act of 1916 by which a return might be made on the basis of the taxpayer's books of account. Corporation Excise Tax Act Aug. 5, 1909, c. 6, § 38, 36 Stat. 11, 112; Corporation Income Tax Act Oct. 3, 1913, c. 16, § II, subd. G, 38 Stat. 114, 172.

It was pressed upon us in argument by appellees that it was found impracticable to comply strictly with the

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requirements of the 1909 and 1913 acts for computing income on the basis of receipts and disbursements and that under both acts the administrative practice was established, by appropriate Treasury Regulations, permitting the use of inventories and authorizing deduction of expenses constituting a liability of the taxpayer, whether paid or not, in ascertaining net income, but that those regulations did not permit the deduction of taxes except in the year...