Aluminum Castings Co. v. Routzahn
| Decision Date | 30 November 1927 |
| Docket Number | No. 13751.,13751. |
| Citation | 24 F.2d 230 |
| Parties | ALUMINUM CASTINGS CO. v. ROUTZAHN, Collector of Internal Revenue. |
| Court | U.S. District Court — Northern District of Ohio |
M. B. & H. H. Johnson, of Cleveland, Ohio, for plaintiff.
A. E. Bernsteen, U. S. Atty., of Cleveland, Ohio, for defendant.
This action is to recover back taxes paid under protest. All jurisdictional conditions precedent are admitted. Jury trial has been waived in writing. The controversy involves the year in which should be deducted certain taxes on munitions manufactured by plaintiff. The answer turns on the proper construction of sections 12 (a) and 13 (d), Internal Revenue Act of 1916 (39 Stat. 767, 771). This act was passed and became effective September 9, 1916. During the remainder of that year, plaintiff manufactured and sold munitions, from which it derived certain profits, the tax on which, at the prescribed rate, aggregates $246,275.63. It paid these taxes in July, 1917, and included the same as a deduction from its income return for the year 1917, instead of 1916. The Commissioner of Internal Revenue later, upon auditing these returns, held that the tax should have been deducted from the income for the year 1916. The result of this transfer, together with certain corrections and credits for refunds, was an additional payment of $148,364.46, amounting, with interest, to $166,910.90, for which this action is brought.
The case is submitted partly on an agreed statement of facts and partly on oral and documentary testimony. The dispute between the parties is as to whether plaintiff's accounts during 1916 were kept upon an accrual basis, and whether plaintiff made its return upon that basis, rather than upon the basis of actual receipts and disbursements. The facts on which this issue turns are not really in dispute. The difference between counsel turns rather upon an appreciation of well-established facts, or inferences properly deducible therefrom.
In my opinion, this case is in principle controlled by United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347. The distinction between that case and the present case is based upon slight differences in the facts, which are not controlling. One of the major points then in dispute was whether section 12 (a), despite section 13 (d), required munition taxes to be deducted from the year in which they were paid. It was strongly urged that the fourth paragraph of section 12 (a) did so require, and that the provisions of section 13 (d), authorizing income returns to be made upon the basis on which books were kept — i. e., an accrual basis — did not require the same to be deducted for the year during which the income subject thereto was being earned. It was held that, if the return was made on an accrual basis, as is permitted by section 13 (d), and not on the basis of actual receipts and disbursements, the deduction should be made for the year in which the income was earned, and not in which it was paid. This major question of doubt being thus put at rest, nothing now is left for determination, except whether plaintiff's books of account for the year 1916 were kept on an accrual basis and its income return made on that basis.
My conclusion, briefly stated, is that plaintiff's books were so kept, and its income return was so made, and that its munition tax on profits earned in 1916 was properly deductible from its income for that year, even though not paid until in 1917. Books are kept on an accrual basis whenever entries are made of credits and debits as the liability arises, whether then received or disbursed. In so keeping books, many entries will appear on the basis of actual receipts and disbursements. In a business of any complexity, books must be so kept, in order to disclose correctly the actual state of business. In order to keep books on the basis of actual receipts and disbursements, credits yet to become due or obligations yet to be paid would have to be ignored. Likewise, in taking and entering inventory, work finished, but not sold, or work in process, supplies acquired, but not yet used, could not be included on a basis showing added value not yet received. Plaintiff's books were so kept.
The abstracts of counsel's argument and the opinion of Mr. Justice Stone in the Anderson Case set forth fully the history of the law as it bears on this controversy, and deal fully with all considerations necessary to be considered. It would serve no useful purpose to go over the same ground. It will be sufficient to state plaintiff's present contentions, as I understand them. Plaintiff admits that its books were kept on a mixed basis; i. e., partly of actual receipts and disbursements, and partly of accrued earnings and expenses. It contends, however, that its income return was made on the basis of actual receipts and disbursements, as is provided in section 12 (a); that section 13 (d) confers merely an option on the taxpayer to make his return otherwise than on the basis of actual receipts and disbursements; that it exercised this option to make its return on this basis, correcting, for that purpose, such entries in its books as were in the nature of accruals; and that, having so exercised this option, it was not within the power of the Commissioner of Internal Revenue to audit and correct its returns, so as to conform the same to a return made on an accrual basis, as contemplated by section 13 (d), even though its books of account, uncorrected, might have permitted a return on that basis. In support of these contentions are urged various considerations, of which only the most weighty need be noticed.
First, plaintiff, in its income return, declares that it is made on the basis of actual receipts and disbursements. Obviously, the taxpayer's declaration that his income return...
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