*1 rights injured per- stroy designed solely rangement to relieve (Citing indemnity. cas- premiums vehi- sons in the es.)” Ryan additional from ascertained, it was lease when cles under expired, policy terms after the fully the trial We convinced that are in- in fact leased that such vehicles properly numerous and court resolved the inju- bodily against by the lessee sured litigated, complex issues that were Ryan, damage, property so ries judgment respects is in all accident, ex- not be of an in case Affirmed. meth- This posed payment of claim. entirely procedure was od policy Trav- provisions under which audit permitted examine elers was any at books and records the insured’s during period and within policy time years final termination after three determining purpose policy for the premium that was due. the earned COMMISSIONEROF INTERNAL REV- ENUE, Petitioner, policy did not insure
claim that contrary clear to its vehicles is v. leased language the dec- and flies in the teeth of LIQUIDATING O. CORPORATION. “ * * * policy em- laration No. 13420. existing agreements between all bodies Appeals Court of United States [Ryan] himself Third Circuit. agents relating insurance.” to this 23, Argued Feb. Although Travelers was advised 14, Decided June December, 1957, equip early as covering policy had leased been ment Supplies further advised in to Lead 1958, May, Car tractor had that the Auto tractor, it for the Mack substituted time modi action at that to take failed fy coverage policy, provisions of the effectively accom which it have could through expedient plished simple embodying the
a written endorsement agreement contended now
terms procedure not resorted to for. This long 1958, the date until after June rights parties of other
the accident when attempt in No
came into existence. The modify vember, retroactively coverage by suspending contract legal effect. tractor was without involved Spann Ins. v. Commercial Standard See Tex., Dallas, Cir., 82 F.2d
Co. of Bernstein, and Goldstein N.E.2d where this Mass.
pertinent pronouncement was made: ac “After cause of action against persons injured to the crued insured, parties then the by any insurance cannot contract of agreement release, or collusion de- *2 refusing grant his
for a ? material item of presented question That is the critical by the Reve- Commissioner of Internal petition nue’s for Tax Court review the decision which answered it the affirm- ative.1 Regulations 118, 39.41-2, Treasury § relating to Sections 41 and 42 of the 2 provide Internal Revenue Code of 1939 part in relevant as follows: “(c) changes A who accounting employed keeping shall, his books before com- puting upon his income such new taxation, purposes method for se- cure the consent of the Commission- * -x- * er. Permission to the method of will not granted unless the and and terms conditions under which the ” * ** will be effected. facts, stipulated The relevant as by Court, found the Tax are not in dis- pute be summarized as follows: Liquidating (“tax- Corporation O. The payer”), kept at has all times its books reported and year its income on a calendar Washington, Douglas Kahn, D. C. A. and accrual basis. In 1918 Atty. Gen., Rice, (Charles Asst. Lee K. established, and since broadened and Harry Attorneys, Jackson, Baum, continuously maintained, group insur- C., Justice, Washington, Dept, D. plan employees. premi- ance for its petitioner. brief), for policies pursuant ums on the obtained City, Jr., Chapman, York New John S. plan by paid respondent. monthly poli- installments. All of the cies here involved were written one KALODNER, STALEY Before company mutual insurance all Judges. FORMAN, Circuit policy coterminous calen- Judge. year. exception, KALODNER, dar one With Circuit each of policies provi- contained an identical of Internal Rev- Did the margin,3 sion, statutory is set out in the discretion in enue abuse Society Findings and distributed certained of Fact Memorandum 1. The annually policy anniversary of each as Opinion of Tax Court are policy provided (1960). shall this have been con- Ct.Mem. 154 Tax at CCH payment pre- in force all tinued ed., Sections 42. U.S.C.A. policy to such miums hereunder anni- Society versary; any, surplus, otherwise shall not if distributed “The upon surplus policy. policy this distribute dividend shall be as- Pur- duction in its federal tax return dividends.4 payment annual year. During de- provision, the actuarial calendar suant partment received insurance divi- compute year, $37,713.05. dends in the January amount of would, of each *3 year prior and surplus in the earned the through 1949, years During 1941 the the formula dividend recommend a taxpayer accrued the as of the end of regular meet- itsAt directors. year, board of the amount of that exact dividends con- February, would the board ing in by were to be it in the received subse- report and determine actuarial sider the quent year. 1950, taxpayer In under- any, dividend, be if of the amount accrued the it amount of the dividend distributed. subsequently 1951, in in received and 1951, taxpayer this item. overacerued pur- policies involved here taxpayer again In 1952 the estimated beginning with varying dates chased on exact amount. consistently follow- Taxpayer 1941. recording Taxpayer, its books in order correct on the practice of the ed pre- overaccrual, monthly underaccrual and the 1951 insurance the amount year its expense in the calendar in 1951 and an miums as returns, years years During tax the in which the divi- paid. the in which actually dend inclusive, taxpayer con- was through received. The 1952, Com- missioner, upon auditing practice however, of record- tax- sistently the followed payer’s 1950, repre- ing year amount returns for an the end as of necessary adjustments to made the senting the in the of dividends an accrual years company accrued, by the which was paid insurance dividend be subsequent respectively. by and 1951 in the received year, was recorded amount which significant In made a expense off-set as an account insurance departure prior from its consistent meth- gross therein premiums recorded od of for the divi- insurance year. income and In its federal for taxpayer, year, In dends. that without years for all profits returns tax excess requesting the of the Commis- 1953, petitioner claimed as a prior to sioner, accrued no dividends and deducted group expense insurance for deduction group the full amount its of insurance remaining re- after the amount the net premiums from its federal income and gross premiums of the amount of duction profits tax return. In excess tax- by year calendar paid within the totalling payer $114,- received dividends recorded as an ac- dividends amount of 117.44, reported which amount year end. crual as year.5 return for that The obvious effect group of was a this deduction year taxpayer re- Thus, year expense for the insurance sisting 1953 con- expense account insurance in its corded gross premiums only with no $170,- amount premiums corresponding off-set for insurance divi- in the amount of an accrual 641.05 dends. representing to be $37,713.05, dividends by taxpay- and to be In paid insurance examination of profits tax by excess income and er’s federal received leaving year 1953, expense $132,928.00 return for the the Commis- net decreasing adjustment as a de- made an claimed and allowed sioner which policy Taxpayer $72,531.- surplus apportioned Any a dividend this received However, provision this shall be 79 in 1953. that item accordance Employer, or, upon reported pur- paid it in to the accrued in cash Society accounting practice. the Em- notice to suant written applied by Employer ployer, adhered to its Had any premium payment of hereon.” item, accounting for this have reported in 1953 the accrued dividend not disclose the dividend does 4. The record policies. provision it received contained in one group expense be deleted and net insurance year deduction for claimed e., by $114,117.44, i. expense deduction increased to dividend received extent. that the he determined have been taxpayer in 1954 should appeal, does On the Commissioner 1953. As a accrued and contest the Tax Court’s determina- adjustment, taxpayer’s net sult of this tion that annual dividends accrued expenses was for insurance deduction receipt so $151,209.56. $265,327 to reduced from reporting insur- former single adjustment is the It is this under the ance dividends was incorrect dispute here.
item in accounting. con- accrual method of He *4 tends, however, applicable under that the that, the since The Tax Court held may Regulations, taxpayer statutes and change a in taxpayer the no to receive had accounting the em- method of prior the determina dividends surance only ployed reporting in his if he in board of directors of the tion of the obtains first the consent of the Commis- aside a certain to set surance sioner; that for is the reason this rule surplus distribution, which amount of change accounting that a will of method always was determination normally the tax- involve a distortion of paid, year the the was dividend in which change payer’s year income for the of accruing re taxpayer’s method of and and, protect in order to the Government year prior to porting item in the this against revenues, a loss of Commis- the payment (receipt) The erroneous. was sioner conditions his consent to the change in the held that the court further change taxpayer’s acceptance on the of by taxpayer its in of this item treatment adjustments prevent which the would not tax return did constitute 1953 federal liability. avoidance of tax Commis- The accounting change of in its method a urges ap- sioner further that rule require prior approval the which would only change plies not in an over-all Accordingly, the of the Commissioner. accounting change of but also method to a the dividend received Tax held that Court in method of materi- the for a by taxpayer in in that 1954 accrued item; change al that the which the tax- in 1953 that the and dividend rather than payer made in the instant consti- case year. properly in the later was “change” requiring tutes the accepted However, court the the Commis approval of the Commissioner notwith- argument that, alternative sioner’s standing taxpayer’s prior that method of holdings, taxpayer the view of above the erroneous, for this item was failing report in 1953 the erred in therefore, and, proper- the Commissioner in 1953 but it received dividend making ly, the here reported in and 1952. The had accrued taxpayer issue, refused to allow to uni- according adjusted the return court laterally change method of deficiency ly $50,- of and determined for this item. year.6 In a dic for that taxable 772.28 tum, however, Taxpayer, hand, the court stated that since on the other contends already that, in 1953 in view received the uncontested deter- the dividend appears “it mination of the Tax Court the in- been accounted that petitioner [taxpayer] properly report- will ade surance have that quate dividends receipt from double inclusion of an able in relief accounting, virtue accrual of those method other item no “clearly seq.] et of the 1954 method reflect income” sections [1311 “may The net Tax and that Commissioner result not in- Code.” (if holding, sist and of dictum adherence to method which Court’s ” year’s ‘clearly that will fails to reflect applied), is one dividend income.’ It 7. deficiency Tax determined the Com- CCH Ct.Mem. at The missioner, using dividend $78,851.43. than rather Regulations, Treasury argues ear- of an error Pertinent “that correction long-standing forth, provide lier method accounting that a set conform to a ac- who method not a desires to is counting employed reporting in- not and perpetuate an come must first “secure the consent change, Taxpayer further asserts Commissioner” to the error.” permission equitable not be are relevant it will if considerations to make granted possible determination, not in this “unless is terms here to where as between determine equi- conditions under will Government and the which the years that for effected.” ties rest view of fact prepaying the tax has been argument proceeds as taxpayer paid this item taxes follows: which it would not have otherwise taxpayer may employ a “The not subject expiration at the of the excess which does profits tax of II in 1946 World War clearly reflect income. If the whenever tax rates were reduced. clearly fails *5 urges modify Finally, taxpayer that we income, reflect then under Section brought decision, the Tax Court’s which 41 of the Internal of Revenue Code already into 1953 the dividend which 1939, the insist Commissioner can (relief been in 1952 from which employed that a method which be by the Court indicated could be secured ” * * * clearly does reflect income. way of a claim for under 1311 refund § “However,. the Commissioner has seq. Code, et 1954 26 U.S.C.A. power taxpayer, not to by directing seq.), 1311 et the deletion § any reason, accounting employ to an of this item from the 1953 return' —exe- clearly method which fails to reflect cute the dictum of the Tax Court as income. His to determine were. employ what shall Section 42 of the Internal Revenue important has limitations. One lim- provides Code of 1939 that “items of itation —the limitation which here gross income shall included in the authority controls —is that no is year income for the taxable vested the Commissioner to dis- unless, which taxpayer, received the regard the actual transaction and to permitted accounting methods of readjust the income on a which basis any under section such amounts are clearly would not reflect income.” properly to be accounted for as a dif- of argument premised is on Caldwell This period.” ferent Section 41 of the 1939 Commissioner, Cir., 202 F.2d v. provides Code 112; of Internal Revenue 166; Cir., 1952, Frame, “The net 195 F.2d shall be com- puted upon taxpay- the of of Internal Revenue v. basis the accounting period (fiscal Estate, Cir., 1950, er’s annual 184 F.2d Mnookin’s year year or subsequent calendar similar the case cases. Those be) changes involuntary in accordance with the method involved cases regularly employed re- the keeping taxpayer; quired books of the Commissioner because the clearly but if no such method of did not old method employed, has been so or if income and in them the Commis- the meth- reflect employed necessary clearly attempted od does not to make the reflect sioner income, computation so that would be nei- shall be items duplicated. nor The courts ther omitted accordance with such meth- opinion od as in could not the Commis- held adjustments. clearly quired
sioner does to make such reflect As income.” counting purposes Commis- Truck Co. v. method for of his stated in Advance sioner, Cir., * * taxability 391- current 262 F.2d and return. 392: open “It is not either the Com- missioner or a fair state- unilateral- that it is “We believe ly shift, say to make a rationale of income whether ment to outgo, year or of than that the Commissioner another such cases is year status, that for empowered in tax ‘in is deficiency change-over accordance method of ac- to assess with the change-over counting regularly employed keep- year tax for ing taxpayer’,
premised income which books of such on items of properly Security have, failed but created. should Commissioner, include, return Flour income tax Mills Co. v. in his years prior 281, 286-287, 321 599, U.S. for the tax or S.Ct. change, (Emphasis sup- em- the method L.Ed. 725.” based keeping plied.) ployed taxpayer in for such books of account Regulation The rationale of the here years.” virtually involved is that material applicable here The rule stated is not reporting in the method of simple the Commis- reason that or deduction will result in a dis- items attempt tax- sioner did not income, tortion of taxable it is the impose payer’s responsibility Commissioner’s to insure contrary, but, he adjustments, on the that the distortion will not be the detri- sought only prevent ment Government. The Commis- *6 taxpayer’s for this withholding accomplishes sioner given not his item to which he had first agrees his consent until the to adjustments consent and to adherence to prevent, alia, that will inter many years prior to duplication method used for of deduction items or omis- recognized 1953. This distinction sion of income items as a result of the Cir., Commissioner, 8 change. in Goodrich v. Commissioner, Brookshire 4 v. 688-689, 686, pages 1957, F.2d at 1960, 243 Cir., 638, 273 F.2d certiorari denied where was said: 827, 1597, 363 80 4 U.S. L.Ed.2d S.Ct. Regulation] him allows “It [the impose ad- to Commissioner] [the agree On review of the record we justments taxpayer’s a in relation to with the Commissioner’s contention that only years, as income status other change while did not its over on which he or condition will a term change all method it did its change to a consent significant treatment of a item—the in purposes method of surance dividends which amounted to current tax return. of the latter’s |114,000 that its action constituted —and impose not allow him But does change in the method of adjustments in relation to the such taxpayer’s meaning Treasury Reg within of the other income status of Court, opinion, ulations. The Tax in our agree- years, except a matter of as finding contrary. erred in acceptance on the
ment or
part.
59-285,
In Rev.Rul.
1959-2 Cum.Bull.
Service,
the Internal Revenue
in con-
taxpayer refuses to
“If the
firming
interpretation
practice
imposed
so
the terms or conditions
respect to
41 of
with
Section
the Internal
accept re-
part
of 1939
Revenue Code
stated in
quired
the Commissioner to be
pp. 459-460)
(1959-2 Cum.Bull.
n
:
general
made,
to leave
the result is
simply
Code,
as one in which
the situation
“Under
legal
is without
Commissioner is re-
change
ac-
use of
his
quired
to make
in order for governmental
expense
change
at
his method
Pri-
item.
revenue. Kahuku Plantation Co.
respect
material
to a
Cir.],
132 F.2d
from
[9
secured
must be
or consent
or not
whether
regards
from
the method
noted,
“As heretofore
the effect
he desires to
which
proper.
respondent’s
determination is to
* *
*
quire the continued use of the ac-
counting
consistently
“Accordingly,
1939 Code
em-
Code,
ployed
petitioner
tax-
number
under the
for a
as well
years.
meth-
employing
accrual
the broad
payers,
To do so is within
accounting,
have consist-
administrative
who
discretion accorded
od of
ently
respondent
item
material
is
under the
deducted
statute
paid rather than
not
abuse
disturbed unless an
the
accrued,
” *
* *
prior con-
must obtain
discretion is evident.
supplied.)
(Emphasis
before
of the Commissioner
sent
changing
account-
Mertens,
the same effect
Fed-
To
see
taxpayer re-
ing,
not the
whether
Taxation,
(rev.
eral Income
12.08-.09
§§
gards
he de-
from
the method
1955).
ed.
(Em-
proper.”
to be
sires to
The “broad discretion” of
Com
supplied.)
phasis
determining
missioner in
whether to con
sent to a
was settled in Brown v.
administra
It well-settled
is
Helvering, 1934,
54 S.Ct.
U.S.
Reve
interpretation
Internal
tive
356,
regularly employed
keeping did not reflect It its books.” anticipated divi-
its 1953 return it had no claim dends which correctly ap- doing In so was in 1953. plying the accrual adopted and the which it the consent effected did not Publishing Cf. Beacon Commissioner. Revenue, of Internal Co.v. Commissioner Cir., 1955, F.2d 697. the Tax
I affirm the decision of
Court. COMPA FIRE INSURANCE NIAGARA Compa NY, American Insurance Great ny Com Fireman’s Fund Insurance Birming- Mead, Cox, J. S. Emmett R. Appellants, pany, ham, Ala., appellant. Caffey, Ala., Caffey, Mobile, al., William G. CO., Inc., et FURNITURE DYESS Caffey, Ala., Appellees. & Gallalee Mobile of counsel appellees. No. 18746. BROWN, RIVES, Before JONES and Appeals Court of States
United Judges. Circuit Fifth Circuit. June Judge. RIVES, Circuit argued question
The sole *8 or in district court this Court concerns aggregation ju claims to make the Diversity amount. risdictional of citi questioned. zenship has not been plaintiffs in the district court were two companies incorporated under York, princi New with their the laws of City places pal business in the of New York, and a third insurance in corporated under the laws of California principal place of with its business Francisco, California. The defend San corporations, organ five three ants were Alabama, under the laws of ized one un Mississippi and one der laws of way By precau- laws of Florida.