Clarke v. State, 3 Div. 597

• Court: Supreme Court of Alabama
• Writing for the Court: SIMPSON; SIMPSON; LIVINGSTON
• Citation: 255 Ala. 431,51 So.2d 882
• Parties: CLARKE et al. v. STATE.
• Docket Number: 3 Div. 597
• Decision Date: 22 February 1951

Page 882

51 So.2d 882 255 Ala. 431 CLARKE et al.
v.
STATE. 3 Div. 597. Supreme Court of Alabama. Feb. 22, 1951.
Rehearing Denied April 12, 1951.

[255 Ala. 432] Ball & Ball and Fred S. Ball, Jr., all of Montgomery, for appellants.

A. A. Carmichael, Atty. Gen., and H. Grady Tiller, Asst. Atty. Gen., for appellee.

SIMPSON, Justice.

Appeal by taxpayers from a decree of the circuit court, in equity, sustaining the State's demurrer to their bill filed under the appeal procedure from an assessment of income tax by the State Department of Revenue against them.

The bill substantially shows: Appellants had filed with the Department of Revenue on or about March 15, 1944, a state income tax return for the calendar year 1943, showing income of $96,699.98 and total deductions of $64,013.94, computed on an accruel basis, leaving a net income for tax computation of $32,686.04. Figured in the deductions to produce the net income was the amount of federal income tax accrued during the calendar year 1943 in the amount of $59,648.54, under § 385, Title 51, Code 1940, permitting such a deduction; that they filed a return for the calendar year 1942, in which they reported a deduction for federal income taxes accrued of $50,080.63; and that as of September 1, 1943, in accordance

Page 883

with the Current Income Tax Payment Act of 1943, seventy-five per cent of said federal taxes for 1942 were cancelled and the remaining twenty-five per cent added to the 1943 tax to make up the total federal tax for 1943.

The bill further alleged that the State Department of Revenue made a final assessment against appellants for additional state income tax for 1943 in the amount of $1,877.51, based on a calculation which, in effect, taxed the appellant with additional income for 1943 in the amount of the federal income taxes cancelled for 1942 by said federal act, and although this seventy-five per cent which was cancelled was deducted by appellants on their 1942 state income tax return, the department made no attempt to make an additional assessment for 1942, upon which year the statute of [255 Ala. 433] limitations provided by § 412, Title 51, Code 1940, had run, but has attempted to assess appellants with an additional 1943 tax contrary to law. Appellants further allege that on their 1943 return they had deducted only the federal taxes actually accrued in 1943, and did not attempt to take advantage of the additional twenty-five per cent of the 1942 tax which they actually paid as a part of the 1943 tax.

The State's demurrer to this bill was sustained by the trial court, and it is from this ruling that this appeal is effected.

The problem presented is a determination of the nature of the transaction involving the cancellation by the federal act of seventy-five per cent of the 1942 federal income tax on September 1, 1943, and its effect, if any, on the income of the taxpayers for 1942, or for 1943, as the case may be, taking into consideration the pertinent fact that taxpayers made return on an accrual basis.

It should be first pointed out that the Department of Revenue, in its assessment, has not grouped together the transactions of the taxpayer for 1942 and 1943, making a combined calculation of income and deductions for the two years. A careful study of the assessment will reveal that what the department has done, in effect, is to indulge in computations of the 1942 income, and the 1942 federal income tax deductions, in order to determine the amount realized as a result of the federal tax cancellation, and has treated this realization as income as of September 1, 1943, assessing additional income tax based thereon.

The appellants' position is premised on two contentions: First, that the cancellation did not result in taxable income to the taxpayers; and, second, if it did so result, it was income for the year 1942, which the assessment does not attempt to tax, and which is prevented from further assessment because of the statute of limitation provided by § 412, supra....