Security Flour Mills Co v. Commissioner of Internal Revenue

• Decision Date: 28 February 1944
• Docket Number: No. 276,276
• Citation: 64 S.Ct. 596,321 U.S. 281,88 L.Ed. 725
• Parties: SECURITY FLOUR MILLS CO. v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

321 U.S. 281

64 S.Ct. 596

88 L.Ed. 725

SECURITY FLOUR MILLS CO.

v COMMISSIONER OF INTERNAL REVENUE.

No. 276.

Argued Feb. 10, 1944.

Decided Feb. 28, 1944.

Messrs. Robert C. Foulston and John F. Eberhardt, both of Wichita, Kan., for petitioners.

Mr. J. Louis Monarch, of Washington, D.C., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The Circuit Court of Appeals has held¹ that the Board of Tax Appeals erred in deciding² that the petitioner was entitled, in reporting its income tax for the year 1935, to deduct payments made by it in 1936, 1937, and 1938. Because of a conflict of decision³ we granted certiorari. 320 U.S. 724, 64 S.Ct. 69.

The petitioner, which conducts a flour mill, reports its net income on the accrual basis. As a first domestic processor of wheat it was subject to the processing tax levied under the Agricultural Adjustment Act of 1933, 7 U.S.C.A. § 601 et seq. In the early months of 1935 it paid processing taxes, and claimed, and was allowed, the amount so paid as a deduction from gross income in its federal income tax return for 1935. The amount thus paid is not involved.

Petitioner instituted a suit to enjoin the collection of processing taxes, and obtained a temporary injunction enjoining further collection on the condition that pendente lite it file information returns and pay the amount of the tax into a depository. From May 1 to December 31, 1935 petitioner so paid $93,000 and accrued over $9,000 additional upon its books for processing tax for the last month. It also accrued about $1,000 as a reserve for possible increases in taxes earlier paid. On January 6, 1936, the taxing provisions of the Agricultural Adjustment Act were held unconstitutional by this court. Certain of the petitioner's vendees attempted to intervene in the injunction suit and to have impounded moneys returned to them. Petitioner resisted and the court denied the intervention and made an order directing the depository to pay to the petitioner the impounded money, which was done February 28, 1936.

The petitioner set up on its books a suspense account covering the items above mentioned under the title 'Reserve for Processing Tax, Claims, etc.' The petitioner refunded various sums to its customers, totaling over $45,000 in 1936, 1937, and 1938 to reimburse customers for processing tax included in the sales price of flour sold them in 1935 and not paid to the Collector of Internal Revenue as processing taxes. In its 1935 tax return petitioner deducted from gross income the total of the amounts impounded and accrued but not paid the Collector in the year 1935 as accrued tax liability. The Commissioner found a deficiency by disalllowing the petitioner's deduction for taxes accrued but not paid in 1935.

The propriety of the claimed deduction depends upon the construction of Sections 23(a), 41 and 43 of the Revenue Act of 1934.⁴ Section 23 permits the deduction of ordinary and necessary expenses 'paid or incurred during the taxable year in carrying on any trade or business'. Section 41 declares the general rule that the taxpayer's annual accounting period shall be the fiscal year or calendar year, depending upon the method of accounting regularly employed, provided such method clearly reflects income. Section 43, on which the petitioner relies, provides:

'The deductions and credits provided for in this title 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.'

It is settled by many decisions that a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent, and this principle is fully applicable to a tax, liability for which the taxpayer denies, and payment whereof he is contesting.⁵ Here the petitioner, in figuring its costs and its sales price to consumers, added the amount of the processing tax, but it collected its purchase price as such and designated no part of it as representing the tax. The petitioner received the purchase price as such. Its tax liability, if any, to the United States did not differ from other debts. Since it denied liability for, and failed to pay, the tax during the taxable year 1935, it was not in a position in its tax accounting to treat the Government's claim as an accrued liability. As it admittedly received the money in question in 1935 and could not deduct from gross income and accrued liability to offset it, the receipt, it would seem, must constitute income for that year.

Petitioner nevertheless insists that Section 43 of the Revenue Act, which requires that deductions be taken for the taxable year in which the amount was paid or accrued, creates an exception applicable to this case by its concluding clause, 'unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.' In short, the petitioner's position is that the Commissioner and the Board of Tax Appeals are authorized and required to make exceptions to the general rule of accounting by annual periods wherever, upon analysis of any transaction, it is found that it would be unjust or unfair not to isolate the transaction and treat it on the basis of the long term result. We think the position is not maintainable.

The Revenue Act of 1921, in Sections 214(a)(6) and 234(a)(4)⁶ authorized the Commissioner to allow the deduction of losses in a year other than that in which sustained when, in his opinion, that was necessary clearly to reflect income. The qualifying clause of Section 43 was first added as Section 200(d) of the Revenue Act of 1924.⁷ The reports of both House and Senate Committees concerning this change said:

'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.'⁸

From these reports it is clear that the purpose of inserting the qualifying clause was to take care of fixed liabilities payable in fixed installments over a series of years. For example, a tenant would not be compelled to accrue, in the first year of a lease, the rental liability covering the entire term nor would he be permitted, if he saw fit to pay all the rent in advance, to deduct the whole payment as an expense of the current year. But we think it was not intended to upset the well understood and consistently applied doctrine that cash receipts or matured accounts due on the one hand, and cash payments or accrued definite obligations on the other, should not be taken out of the annual accounting system and, for the benefit of the Government or the taxpayer, treated on a basis which is neither a cash basis nor an accrual basis, because so to do would, in a given...