Hygienic Products Co. v. Commissioner of Int. Rev., 8048.

• Citation: 111 F.2d 330
• Decision Date: 12 April 1940
• Docket Number: No. 8048.,8048.
• Parties: HYGIENIC PRODUCTS CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

111 F.2d 330 (1940)

HYGIENIC PRODUCTS CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 8048.

Circuit Court of Appeals, Sixth Circuit.

April 12, 1940.

Meyer A. Cook, of Cleveland, Ohio (Meyer A. Cook, of Cleveland, Ohio, on the brief), for petitioner.

A. A. Armstrong, of Washington, D. C. (James W. Morris, J. Louis Monarch, and W. Croft Jennings, all of Washington, D. C., on the brief), for respondent.

Before HICKS, HAMILTON, and ARANT, Circuit Judges.

ARANT, Circuit Judge.

The only question presented by this petition is whether income taxes due the Dominion of Canada for the taxable years 1930, 1931, 1932 and 1933, and paid in 1934, are deductible from income taxes due the United States for the taxable year 1934. The Commissioner disallowed the deduction and determined a deficiency; and the Board of Tax Appeals has approved that determination. Practically all the facts are stipulated.

Section 31 of the Revenue Act of 1934, 26 U.S.C.A.Int.Rev.Code, § 31, provides for credit upon income tax due the United States of income taxes imposed by foreign countries, and Section 43, 26 U.S.C.A.Int. Rev.Acts, page 679, provides that such credit "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." Section 41, 26 U.S.C.A.Int.Rev. Code, § 41, provides: "The net income shall be computed upon the basis of the taxpayer's annual accounting period * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income."

Petitioner contends that its accounting system was on the cash basis as to expenses, and, in consequence, it was entitled to deduct the taxes in the year in which they were paid.

Among the facts stipulated are the following:

"The income tax returns of the petitioner filed with the Collector of Internal Revenue at Cleveland, Ohio, have contained the following information:

"`Basis of Return

"`6. Is this return made on the basis of cash receipts and disbursements? No.

"`If not, describe fully what other basis or method was used in computing net income. Accrual.'

"The petitioner has consistently throughout its corporate existence treated the sales of its product and other property as income when such sales were made whether or not the cash was collected at the time of making the sale. Inventories of goods on hand are used at the beginning and end of each year in determining the cost of goods sold, even though in the cost of goods sold there are or may be items of inventory that are not paid for nor charged to `Purchases' in the year in which the inventory is effective. The expenses of the petitioner have consistently been recorded only as the cash was disbursed, even though there appears at times an item on the balance sheet called `Accounts Payable,' which is in each instance a customer's credit balance and not unpaid purchases or expenses. The petitioner has never accrued on its books or its returns any Federal, State, County, Municipal or other taxes owing at the end of the taxable year. The Commissioner in adjusting the petitioner's returns has accrued these taxes."

Petitioner characterizes its system of accounting as "hybrid." No such system, however, is recognized by the Act; unless...