Sohio Corp. v. Comm'r of Internal Revenue

• Decision Date: 31 July 1946
• Docket Number: Docket No. 7192.
• Citation: 7 T.C. 435
• Parties: SOHIO CORPORATION, A DELAWARE CORPORATION, AND SOHIO PETROLEUM COMPANY, AN OHIO CORPORATION, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

7 T.C. 435

SOHIO CORPORATION, A DELAWARE CORPORATION, AND SOHIO PETROLEUM COMPANY, AN OHIO CORPORATION, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 7192.

Tax Court of the United States.

Promulgated July 31, 1946.

Petitioner was required, under heavy penalties, by an Illinois statute to collect a 3 per cent tax from vendors of oil to it, and remit the tax, less its expenses of not more than 2 per cent of the amount of the tax, to the state. Petitioner did so under protest, filed suit at once denying the constitutionality of the tax, and later, after the law was held invalid, returned to its vendors the amount of the tax returned by the state to it, plus the amount it had retained as expenses. The actual expenses incurred by petitioner in connection with the collection and remittance to the state treasurer of the tax were reflected as expense deductions in its income tax returns filed for the taxable years and such deductions were allowed by the Commissioner in his determination of the deficiencies. Held, the petitioner properly included the 2 per cent retained in its gross income for each of the taxable years; held, further, petitioner is not entitled to accrue an offsetting deduction of an equal amount to the amounts retained, for the reason that it was under no legal obligation in either of the taxable years to make refunds which it made to customers in subsequent years. Security Flour Mills Co. v. Commissioner, 321 U.S. 281. M. E. Newcomer, Esq., for the petitioner.

M. W. Kerr, Esq., for the respondent.

OPINION.

BLACK, Judge:

This case involves income tax for the year 1941 and excess profits tax liability for the year 1942. Deficiencies were determined in the respective amounts of $919.69 and $23,954.40. Several items entering into such deficiencies have been disposed of by stipulation and will be reflected in decision under Rule 50. This leaves for consideration only the question as to whether there should be included in petitioner's gross income in each of the taxable years certain amounts retained by the petitioner as compensation for the collection and payment to the State of Illinois of a tax levied on oil purchased by the petitioner. The petitioner was required by law to retain the compensation out of a tax which it was required to deduct from the purchase price of oil. The petitioner protested the tax and it was later held unconstitutional; after which the petitioner refunded to its vendors of oil the amounts so retained.

The facts are found as stipulated. The following summary of the facts will suffice for the purpose of decision of the only issue presented.

Petitioner Sohio Corporation was a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at Cleveland, Ohio. Petitioner Sohio Petroleum Co. is the successor by merger of petitioner Sohio Corporation. Such merger became effective as of January 1, 1944. The Sohio Corporation, which was the taxpayer in connection with the transactions involved herein, is referred to as the petitioner. The corporation income and excess profits tax returns for the taxable years were filed with the collector for the eighteenth district of Ohio, at Cleveland, Ohio.

The pertinent facts are that in 1941 and 1942 petitioner was purchasing oil in large quantities from various oil producers in Illinois; that the Assembly of the State of Illinois passed a law, effective on July 1, 1941, requiring the petitioner, among others, to retain from the amounts owing to its vendors of oil a tax of 3 per cent of the value of the oil, and to remit it to the State of Illinois, deducting reasonable compensation, subject to the approval of the state, for such collection and payment of the tax, the expense not to exceed 2 per cent of the amount of the tax so retained from vendors of oil and remitted to the state. The act imposed heavy penalties for failure to comply therewith. The petitioner was required to keep records, make monthly returns, secure a revocable registration certificate in order to receive oil, and retain and remit the tax on oil. Failure to comply with such provision subjected the corporate officers to criminal penalties, and failure to make the monthly return and pay the tax to the Department of Finance of Illinois subjected the petitioner to liability of cancellation of certificate and a penalty of 50 per cent of the tax due, and interest of 1 per cent per month. In addition, injunction could be applied for by the state to prevent the petitioner from purchasing oil in Illinois if the act or the regulations were violated. The petitioner retained such tax from the amounts due its vendors and remitted it, under protest, to the state treasurer, through the taxable years after passage of the act, retaining 2 per cent of the amount collected as its expenses. The 2 per cent amounted to $15,701.95 in 1941 and $23,151.02 in 1942. It was not set aside in any escrow or trust fund, but was commingled with petitioner's common income from all sources.

Shortly after the effective date of the act of the Illinois Assembly, and upon September 17, 1941, petitioner filed action in court, as did others, seeking to have the act of the assembly declared invalid as unconstitutional, and to restrain the state treasurer from transferring the funds collected into the general revenue fund of the state. The petitioner's complaint alleged, inter alia, that it had become obligated by the act to collect the tax, had done so, had retained 2 per cent thereof to compensate it for the cost of collecting and remitting, and had paid the remainder under protest, to the state, to prevent the imposition of the penalties provided by the act for failure to collect the tax and pay to the state. Reciting the penalties provided by the act, the complaint alleged that petitioner was threatened with loss of its business in Illinois should it have failed to pay the tax as provided, and that it intended to collect the tax and pay it to the state, under protest, so long as it was threatened with the penalties of the act for failure to do so.

Promptly after filing the action to have the law declared invalid, the petitioner gave notice, in writing, of the filing of the action to those from whom it was collecting the oil production tax, stating that the suit was filed to protect their interests as well as petitioner's and that it was petitioner's opinion that the law would be declared unconstitutional and the taxes would be refunded.

On March 21, 1944, the Supreme Court of Illinois, in Ohio Oil Co. v. Wright, 386 Ill. 206; 53 N.E.(2d) 966, declared the whole act invalid for unconstitutionality, and in pursuance of its mandate the Circuit Court of Sangamon County, in which petitioner had filed its case, directed the state treasurer to refund the entire amount of the production taxes collected by petitioner and remitted to him by the petitioner, upon condition that petitioner distribute the full amount thereof to the parties from whom it was collected. Accordingly, the state treasurer refunded the entire amount received by him from petitioner, and the petitioner returned the moneys, together with the 2 per cent it had retained as compensation for collection and remittance, to the parties from whom it had been retained. In accordance with the decree of the Circuit Court, the petitioner on July 7, 1945, filed a report with that court. It reported distribution made by it of all moneys retained from those from whom it purchased oil, including the 2 per cent retained for services.

In the computation of its income and excess profits tax liabilities, the petitioner deducted the actual expenses incurred in connection with the collection of the Illinois oil production tax and remittance thereof to the Finance Department of Illinois, and such deductions were allowed. These deductions are not separately designated. Petitioner included the $15,701.95 and $23,151.02 in its gross income, but upon receipt of the deficiency notice it, by letter, requested the Commissioner to correct and adjust the deficiency to eliminate such amounts from income. This request the Commissioner denied, and he included the amounts in gross income. The petition here alleges that petitioner erred in including the amounts in income and that the Commissioner erred in refusing to reduce the reported income accordingly.

The petitioner's argument is, in effect, that it never had a right to any of the funds involved and never asserted any such right, but at all times denied such right; that in retaining the 2 per cent it acted only under threat of heavy penalties for violation of the Illinois statute; and that later in 1944 it repaid the money, so that its gross income should not be held to include it. The respondent in substance argues that in the computation of petitioner's income and excess profits tax liabilities for the years 1941 and 1942 the petitioner properly included the $15,701.95 and $23,151.02, respectively, as part of its gross income and the actual expenses incurred by the petitioner in connection with the collection of the Illinois production tax and remittance of the same to the treasurer of the State of Illinois were reflected as expense deductions in said returns and said deductions were properly allowed by the respondent in the computation of the deficiencies here involved. ‘In other words,‘ says respondent, ‘although the petitioner protested the constitutionality of the tax in question, in all other respects the income was unquestionably treated as though it was received under a claim of right.‘ In support of his contentions respondent cites North American Oil Consolidated v. Burnet, 286 U.S. 417; Burnet v. Sanford & Brooks Co., 282 U.S. 359; Blum v. Helvering, 74 Fed.(2d) 482; D. H. Byrd, 32 B.T.A. 568; S. B. Heininger, 47 B.T.A. 95; and Security Flour Mills Co. v. Commissioner, 321 U.S. 281. We think respondent must be sustained. In the...