Citizens Hotel Co. v. Commissioner of Internal Rev.

• Decision Date: 06 April 1942
• Docket Number: No. 10109.,10109.
• Citation: 127 F.2d 229
• Parties: CITIZENS HOTEL CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

127 F.2d 229 (1942)

CITIZENS HOTEL CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 10109.

Circuit Court of Appeals, Fifth Circuit.

April 6, 1942.

G. W. Parker, Jr., and A. E. Brooks, both of Fort Worth, Tex., for petitioner.

F. E. Youngman and J. Louis Monarch, Sp. Assts. to Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Rollin H. Transue, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before FOSTER, SIBLEY, and HUTCHESON, Circuit Judges.

SIBLEY, Circuit Judge.

The question is whether in income tax returns on an accrual basis, annual State, County and City taxes on property in Texas used in making the income must be treated as accruing in a lump sum on January first, or may be prorated when the return is for a part of the year.

The taxpayer, Citizens Hotel Company, had a fiscal year ending March 31. With the Commissioner's consent in the early part of 1937 the fiscal year was changed so as to end January 31. In the fall of 1937 with the Commissioner's consent change was made to a calendar year to begin January 1, 1938. Under Sect. 47(a), Revenue Act of 1936, 26 U.S.C.A.Int.Rev.Code, § 47(a), a short period return was made for the time from April 1, 1936, through January 31, 1937, and another for the time from February 1, 1937, through December 31, 1937. The taxpayer kept its books and made returns on an accrual basis and for many years had accrued the annual property taxes on its books one-twelfth each month. It took prorata deductions for taxes in this manner on its short term tax returns. The Commissioner held that the taxes all accrued at one time, on January 1st of each year, and must be so deducted, so that no deduction was allowed on the return for the period from February 1, 1937, to December 31, 1937. The Board of Tax Appeals upheld that view.

It is true that in Texas property taxes are a personal liability of the owner measured by the value of the property which he owns on January 1. The assessments of values are made up at a later time in the year, as are the rates of County and City tax for the year, and then the amount of tax due by each taxpayer is arrived at and put on the tax rolls. The County tax rate was not fixed in this instance till August 16, 1937, and the City tax rate September 29, 1937. If a strict date of accrual must be adhered to, it would have to fall after the tax rates were fixed, for until then a necessary ingredient of the tax liability was lacking, and no tax demand could be formulated. But we think no such strict date can be insisted on. As is fully explained in United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 133, 70 L.Ed. 347, the accrual basis for income tax returns was introduced to facilitate a true reflection of business incomes according to sound accounting principles; and the taxpayer's bookkeeping, if in accordance with such principles and truly reflecting net income, is allowed to be used as a basis of returns. Thus Sect. 41 of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev. Code, § 41, provides that net income shall be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, but if it does not clearly reflect the income, the Commissioner may so compute...