Helvering v. Cannon Valley Milling Co.

• Decision Date: 15 July 1942
• Docket Number: No. 12206.,12206.
• Citation: 129 F.2d 642
• Parties: HELVERING, Com'r of Internal Revenue, v. CANNON VALLEY MILLING CO.
• Court: U.S. Court of Appeals — Eighth Circuit

129 F.2d 642 (1942)

HELVERING, Com'r of Internal Revenue, v. CANNON VALLEY MILLING CO.

No. 12206.

Circuit Court of Appeals, Eighth Circuit.

July 15, 1942.

Benjamin M. Brodsky, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

Kenneth Taylor, of Minneapolis, Minn. (R. T. Angell and Kingman, Cross, Morley, Cant & Taylor, all of Minneapolis, Minn., on the brief), for respondent.

Before STONE, SANBORN, and THOMAS, Circuit Judges.

STONE, Circuit Judge.

Taxpayer is a milling company which was subject to processing taxes under the Agricultural Adjustment Act of 1933, 7 U.S.C.A. § 601 et seq. It kept its books on the accrual basis and its fiscal year ended June 30th. It brought suit to test the validity of such taxes. The court ordered deposited with it — to await the result of the suit — such taxes collected by taxpayer from vendees of products processed and sold by it during May and June, 1935, which amounted to $53,148. Taxpayer claimed this sum as a tax deduction in its return for its tax year ending June 30, 1935. Shortly after the Supreme Court, on January 6, 1936, declared the Act invalid (United States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R. 914), the District Court paid over to taxpayer the above sum (less the small registry fee). This payment does not appear upon any return by taxpayer. Both before and after the above decision by the Supreme Court, numerous claims for reimbursement were made against taxpayer by its vendees from whom it had collected the above taxes for May and June. Although denying any liability to reimburse but because of business reasons, taxpayer compromised these claims for a total amount of $29,423.45. These compromises and payments were in taxpayer's 1937 tax year. In September, 1938, the Commissioner gave notice of a deficiency determination for tax year 1935, which (inter alia) included disallowance of the above deduction of $53,148. In its petition on appeal to the Board, taxpayer challenged this disallowance as: "improper unless there be allowed as a deduction from gross income for the taxable year the amount of reimbursements made by the taxpayer to its customers on account of such unpaid processing taxes with respect to deliveries made during the taxable year in the sum of $30,238.92, or in some other amount which fairly represents the reimbursements attributable to the taxable year." The facts were stipulated and therein taxpayer waived "any claim to the deduction in the fiscal year 1935 of the amount of $23,724.55," being the difference between the amounts collected from and paid back to its vendees. In his brief to the Board, the Commissioner raised, for the first time, the question of non-compliance by taxpayer with Regulations 86, Art. 43-1(a) and the Board considered that contention. The only other issue before the Board was the propriety of the deduction for reimbursements. The Board determined this in favor of the taxpayer and the Commissioner brings this review. Since the parties agree that the disallowance of processing taxes claimed in the return for 1935 is proper in that year¹ but differ only as to the reduction of the amount of such disallowance by the reimbursements, we accept that situation and consider only the two issues presented to the Board and here. Those two issues are: (1) is respondent entitled to relate back these reimbursement payments to its tax year 1935 "in order to clearly reflect" its income under Section 43 of the Revenue Act of 1934, 48 Stat. 680, 694, Title 26 U.S.C.A. Int.Rev.Code, § 43; and (2) whether compliance with Treasury Regulations 86, Article 43-1(a), is a necessary prerequisite to invocation of above Section 43 by respondent.

I. Section 43.

The pertinent portion of Section 43 is: "The deductions and credits * * * provided for in this title chapter 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 the deductions or credits should be taken as of a different period." (Italics added.) The immediately important language, within which taxpayer claims to come, is "unless in order to clearly reflect the income the deductions * * * should be taken as of a different period."

The Commissioner admits, apparently, that these disbursements are proper deductions but contends they are allowable in 1937 (when the taxpayer compromised and paid the claims of its vendees) and cannot be related back to 1935 under the above "unless" clause. His reasoning is: (1) that the essence of this tax system is determination of tax liability on an annual basis; (2) that a disputed business liability does not become a deductible item until the contingency changes into a fixed and certain liability and these reimbursements did not become fixed and certain until 1937; (3) that neither the language, purpose nor proper application of the "unless" clause in section 43 justifies a departure from the above principles because (a) the clause must be taken as ex gratia, (b) must be strictly construed, and (c) the legislative history of the clause excludes its application here.

We understand that taxpayer opposes this reasoning of the Commissioner only as to the proper construction and application here of the "unless" clause of section 43. Thus the questions for us are: the construction of this clause and the application of the clause, so construed, to the fact situation here.

Construction of the "unless" clause. The construction urged by the Commissioner seems to be that it should be narrowly confined to instances of a "payment in one year of fixed determinable charges of a number of prior years" or of "accumulated deductions for a period of years" which may be distributed over prior years, to prevent distortion of income — such as "to allow a corporation which leases its business property to spread its rental payments, made in a lump sum for a group of prior years, over the period of those years." The supporting argument seems to be (1) the disruption of the basis of annual estimation of taxable income; and (2) the intent of Congress as revealed in the Committee Reports upon this provision in the Act of 1924 (where it first appears). The construction urged by taxpayer is that the clause covers all deductions which require relation to avoid distortion of income.

As to the Commissioner's argument as to disruption, it is clear that this clause does interfere with the conception of an inescapable, "straight jacket" annual basis wherein all deductions must appear as paid or finally accrued. Obviously, the clause is intended to do just that for that is what it says. The argument has value only in this: that the clause introduces an exception to the normal situation and that, because of the importance of maintaining the normal situation, the exception should be strictly construed.

As to the argument that the legislative history, as shown by the Committee Reports (to the Act of 1924), requires confinement to payment of accumulated expenses covering items extending over a period of years, we find no sufficient basis. The Committee Report (H.R. No. 179, 68th Cong., 1st Sess., pp. 10, 11) is as follows: "In subdivision (d) of this section authority is granted to the Commissioner to allow or require deductions and credits to be taken as of a year other than that in which `paid' or `accrued' when, in his opinion, it is necessary in order to clearly reflect the income. The Revenue Act of 1921 in sections 214(a) 6 and 234(a) 4 authorizes the Commissioner to allow the deduction of losses in a year other than that in which sustained when, in his opinion, it is necessary to clearly reflect the income. The proposed bill extends that theory to all deductions and credits. The necessity for such a provision arises in cases in which a taxpayer pays in one year interest or rental payments or other items for a period of years. If he is forced to deduct the amount in the year in which paid, it may result in a distortion of his income which will cause him to pay either more or less taxes than he properly should."²

The Report states the occasion of the provision in section 43 but the language of the section is more general than the reason stated in the Report. Had the Congress intended to limit this section to instances where "a taxpayer pays in one year interest or rental payments or other items for a period of years," it would have been easy to say so (compare section 107, Revenue Act 1939, 26 U.S.C.A. Int.Rev. Code, § 107). There is no suggestion of such a limitation in the section. We have no difficulty in saying that the section includes the situations stated in the Report. However, we cannot write into the section such a limitation on the ground that the expression in the Committee Report suggests such action. Helvering v. City Bank Farmers Trust Co., Trustee, 296 U.S. 85, 89, 56 S.Ct. 70, 80 L.Ed. 62.

The situations to which this clause is applicable are stated in the section to be those where a departure from the normal rule is necessary "in order to clearly reflect the income." It is neither possible nor prudent to undertake a definite definition of such situations — each must be dealt with on its own facts as it arises. However, there are some considerations helpful to bear in mind in applying the clause. It is obvious that the shift of any deduction from the year in which it is paid or is finally accrued must result in disturbance of the normal annual basis as to the two years necessarily involved. To construe this clause broadly to cover all instances where there is merely some relation between a deductible item and a business transaction in some year other than the one in which it was paid or finally accrued would introduce an uncertainty seriously interfering with the practical...