State v. Edelman, 7 Div. 417
| Decision Date | 20 August 1959 |
| Docket Number | 7 Div. 417 |
| Citation | 114 So.2d 261,269 Ala. 475 |
| Parties | STATE of Alabama v. Samuel EDELMAN. |
| Court | Alabama Supreme Court |
John Patterson, Atty. Gen., Willard W. Livingston and Wm. H. Burton, Asst. Attys. Gen., for appellant.
Ralph D. Porch, Anniston and Bainbridge & Mims, Birmingham, for appellee.
This is an appeal by the State from a decree of the Circuit Court of Calhoun County, in Equity, vacating a deficiency income tax assessment made by the State Department of Revenue against Samuel Edelman, a resident of Calhoun County.
The question for decision is whether Edelman owes State income tax on a tax refund which he received from the federal government.
Edelman has reported his income to the State on a calendar year cash accounting basis.
In 1952 Edelman paid to the Director of Internal Revenue the sum of $32,041.85 as additional federal income tax for the years 1943, 1944, and 1945.
Edelman paid no income tax to the State of Alabama for the year 1952. His state income tax return for that year showed an income of $11,065.13 before deduction. He deducted the amount of $32,041.85 paid the federal government, hence his state return showed no taxable income.
In 1954 Edelman was refunded a part of the additional taxes which he had paid the federal government in 1952. The amount of the refund was $20,771.23.
Edelman did not list as income in his 1954 state income tax return any part of the amount so refunded.
The State Department of Revenue determined that the refund was subject to state income tax for the year 1954 and, in 1956, entered a deficiency assessment to that effect.
The Circuit Court of Calhoun County vacated that assessment. The State has appealed from that decree.
In a strict sense income has been considered gain derived either from capital or labor, or from both combined, or from the sale or exchange of property.
The recovery of a debt previously charged off as worthless, the refund or abatement of a tax, the recoupment of a loss, the rebate or cancellation of an expense, and similar adjustments affecting items deducted in prior years are not in this strict sense a part of income.
Nevertheless, such recoveries or cancellations are as a general rule said to be subject to income tax. See Plumb, The Tax Benefit Rule Today, 57 Harvard Law Review 129, 130.
In our recent case of State v. Yellow Pine Lumber Co., 263 Ala. 613, 83 So.2d 317, we observed that refunds of taxes constitute taxable income. It seems that in the Yellow Pine Lumber Co. case the taxpayer conceded that the refund was taxable. The dispute was as to the year in which it should be reported as income.
The authorities seem to differ on the theoretical basis for taxing such items as tax refunds and the recovery of debts previously charged off as worthless. One theory which seems to rest on estoppel or implied waiver is that by taking the deduction the taxpayer consents that any future recovery with respect to the item shall be taxed. Philadelphia Nat. Bank v. Rothensies, D.C., 43 F.Supp. 923. Another theory seems to be that the allowance of a deduction results in a portion of gross income not being taxed; when the deducted item is recouped, the recovery stands in the place of the gross income which had not been taxed before and is therefore taxable. National Bank of Commerce of Seattle v. Commissioner, 9 Cir., 115 F.2d 875.
We are not concerned here with the question...
To continue reading
Request your trial
-
Chapman v. Oklahoma Tax Commission
...cited no cases from other jurisdictions precisely in point on the facts, and our own research has disclosed none. State of Alabama v. Edelman, 269 Ala. 475, 114 So.2d 261, principally relied upon by the Commission, is not in point because Alabama is one of the jurisdictions which tax the en......