Citizens Nat. Trust & Savings Bank v. Welch

• Court: U.S. Court of Appeals — Ninth Circuit
• Writing for the Court: DENMAN, MATHEWS, and STEPHENS, Circuit
• Citation: Citizens Nat. Trust & Savings Bank v. Welch, 119 F.2d 717 (9th Cir. 1941)
• Decision Date: 30 June 1941
• Docket Number: No. 9712.,9712.
• Parties: CITIZENS NAT. TRUST & SAVINGS BANK OF LOS ANGELES v. WELCH.

119 F.2d 717 (1941)

CITIZENS NAT. TRUST & SAVINGS BANK OF LOS ANGELES v. WELCH.

No. 9712.

Circuit Court of Appeals, Ninth Circuit.

May 14, 1941.

Rehearing Denied June 30, 1941.

Frank Mergenthaler, of Los Angeles, Cal., for appellant.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Arnold Raum, J. Louis Monarch, and Arthur L. Jacobs, Sp. Assts. to Atty. General, and Wm. Fleet Palmer, U. S. Atty., and Edward H. Mitchell, Asst. U. S. Atty., both of Los Angeles, Cal., for appellee.

Before DENMAN, MATHEWS, and STEPHENS, Circuit Judges.

MATHEWS, Circuit Judge.

This appeal is from a judgment dismissing an action for the recovery of taxes alleged to have been illegally collected.

On March 31, 1928, Citizens Trust & Savings Bank, a bank incorporated under the laws of the State of California and hereafter called the State bank, was consolidated with The Citizens National Bank of Los Angeles, a national banking association, under the association's charter, pursuant to § 3 of the Act of November 7, 1918, c. 209, as added by § 1 of the Act of February 25, 1927, c. 191, 44 Stat. 1225, 12 U.S. C.A. § 34a.¹ The association — which, after the consolidation, was called Citizens National Trust & Savings Bank of Los Angeles — was plaintiff in this action.

At the time of the consolidation the State bank owed debts aggregating $228,232.07, itemized as follows: Interest on savings accounts, $188,758.28; insurance premiums, $23,041.15; consolidation expenses, $12,500; State and county taxes, $3,932.64. The consolidation agreement provided, inter alia, that these debts should be paid by plaintiff (the association), and they were so paid between March 31, 1928, and December 31, 1928.

Plaintiff filed two income tax returns for 1928. One (hereafter called the State bank's return) was a return of income received by the State bank in 1928. One (hereafter called plaintiff's return) was a return of income received by plaintiff in 1928. In the State bank's return plaintiff, in computing the State bank's net income, deducted the aforesaid items aggregating $228,232.07. In plaintiff's return none of these items was deducted. The State bank's return showed a tax liability of $876.22. Plaintiff's return showed a tax liability of $14,800.61. Plaintiff paid both amounts, a total of $15,676.83.

The Commissioner of Internal Revenue disallowed the deductions taken in the State bank's return — that is to say, he disallowed them in computing the State bank's net income for 1928 — and, in consequence of such disallowance, determined that, in respect of such income, there was a tax liability of $27,833.38 instead of $876.22, and hence a deficiency of $26,957.16. The Commissioner, however, allowed these deductions, aggregating $228,232.07, in computing plaintiff's net income for 1928² and, in consequence of such allowance, determined that, in respect of such income, there was no tax liability.³ The net result of the Commissioner's action was that plaintiff's total income tax liability for 1928⁴ was determined to be $27,833.38 instead of $15,676.83.

Plaintiff paid the difference, $12,156.55, with interest,⁵ on May 31, 1930, to defendant, Galen H. Welch, who at that time was Collector of Internal Revenue for the Sixth District of California. Plaintiff filed a claim for refund⁶ on May 26, 1932. The claim was denied on April 12, 1935. This action was commenced on February 10, 1937. Defendant answered, jury trial was waived, and the case was tried by the court without a jury. The court heard evidence,⁷ made and filed its findings of fact and conclusions of law, and thereupon entered judgment dismissing the action. This appeal followed.

The question is whether the above mentioned items aggregating $228,232.07 were properly deductible in computing the State bank's net income for 1928.

Section 23 of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Acts, page 356,⁸ provides that, in computing net income, there shall be allowed as deductions all the ordinary and necessary expenses "paid or incurred" during the taxable year in carrying on any trade or business and, with inapplicable exceptions, all interest and taxes "paid or accrued" within the taxable year. Section 41, 26 U.S.C.A. Int.Rev.Acts, page 363, provides that net income shall be computed in accordance with the method of accounting regularly employed in keeping the taxpayer's books. Section 43, 26 U.S.C.A. Int.Rev.Acts, page 363, provides that deductions 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, they should be taken as of a different period. Section 48(c), 26 U.S.C.A. Int.Rev.Acts, page 366, provides that the terms "paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed.

It is conceded that the above mentioned items aggregating $228,232.07 were deductible — by someone in some year — under § 23, supra; that the items were paid in the taxable year (1928); and that the method of accounting which was regularly employed by the State bank in keeping its books, and upon the basis of which its net income was computed, was the cash receipts and disbursements method, not the accrual method. It does not, however, necessarily follow that the items were deductible in computing the State bank's net income for 1928....