116 F.2d 202 | 1st Cir. | 1940
Lead Opinion
This action was brought for the recovery of alleged overpayments of income and excess profits taxes for the calendar year .1920. A written agreement of the parties
The facts were stipulated below. The appellant is a Massachusetts corporation which kept its books of account and records and prepared its returns of net income on the accrual basis of accounting for calendar years. In 1921 it paid the Massachusetts domestic corporation tax assessed as of April 1, 1921. At that time this tax was ascertained by adding together an amount equal to .5% of the “corporate excess,” determined as of April 1, 1921, and an amount equal to 2%% of the corporation’s net income as reported to the federal government on its last income tax return prior to April 1, 1921.
We do not think this language is determinative of the issue in the case at bár. Certainly the characterization of the excise as “single”, apparently directed to the question of constitutionality, is not conclusive upon us' in determining how the Massachusetts tax is to be treated for federal income tax purposes. However, as an interpretation of the Massachusetts statute involved, and as an indication of the liabilities of corporate taxpayers under that act, the Springdale decision is of course binding upon us. The case involved a corporation which sold out its business in July, 1920. During 1920 it had paid the domestic corporation tax based upon its “corporate excess” as of April 1, 1920, and its net income during the calendar year 1919. The Commonwealth of Massachusetts, contending that this payment did not free the corporation from liability for a further payment of a corporate excise tax based upon the net income earned during 1920, accelerated the due date of the tax under General Laws, c. 63, § 76,
What the court meant by describing the fax as a “single excise” was that the tax, though made up of two components, was levied on a single commodity, that is, the exercise of the corporate franchise during the calendar year preceding the April first as of which the corporate excess was calculated. That these two components in truth were separable was demonstrated by what happened in the Springdale case itself; the tax there sustained was based solely on the net income of the corporation earned during the early months of 1920 before it went out of business.
It becomes apparent that that portion of the tax claimed as a deduction by the taxpayer in the present case, although paid during 1921, was exacted for the privilege of doing business during 1920 and that it became an inescapable liability during that year. The corporation could, of course, have escaped payment of that part of the tax calculated on its “corporate excess” had it dissolved prior to April 1, 1921; and at any rate the amount of this factor could not be determined until that date. No such choice was open in regard to that part of the tax determined by the taxpayer’s net income; as of December 31, 1920, the amount of excise to be paid under this factor became mathematically ascertainable and its ultimate payment inevitable. Springdale Finishing Co. v. Commonwealth, 1922, 242 Mass. 37, 136 N.E. 250; Commonwealth of Massachusetts v. Meehan, 1 Cir., 1933, 67 F.2d 638.
The Supreme Court has had occasion to define the requirements of “accrual” of taxes. In United States v. Anderson, 1926, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347, the taxpayer had attempted to deduct the munitions tax
“Only a word need be said with reference to the contention that the tax upon munitions manufactured and sold in 1916 did not accrue until 1917. In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect * * * the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee’s books.”
To the same effect, see American National Co. v. United States, 274 U.S. 99, 47 S.Ct. 520, 71 L.Ed. 946; Niles Bement Pond Co. v. United States, 281 U.S. 357, 50 S.Ct. 251, 74 L.Ed. 901; Aluminum Castings Co. v. Routzahn, 282 U.S. 92, 51 S.Ct. 11, 75 L.Ed. 234. Cf. Fawcus Machine Co. v. United States, 282 U.S. 375, 51 S.Ct. 144, 75 L.Ed. 397.
We think that the deduction sought by the present appellant, representing taxes exacted for the privilege of doing business in 1920 and ascertainable in that year, was a proper deduction from 1920 gross income and should have been allowed. In the case of the taxpayer whose books are kept on an accrual basis, “while the taxes for any year are not payable until the following year, good accounting practice requires an accrual of them as a liability of the current year’s business * * *. A corporation cannot claim to have accumulated any net income in any year until provision is made for taxes accrued, based on net income for the same year.” Fawcus Machine Co. v. United States, 282 U.S. 375, 378, 51 S.Ct. 144, 145, 75 L.Ed. 397. Had the Massachusetts law provided for two formally separate taxes, each calculated on a basis of one of the factors, there could be no doubt in view of the Anderson case that that tax based on 1920 net income “accrued” in 1920. We can see no reason why the formally composite nature of the excise should necessitate a contrary result. The fact that a further indefinite impost may be levied is scarcely a valid reason for refusing to permit the accrual of that which is already certain.
The Massachusetts Department of Corporations and Taxation has consistently ruled that the income portion of the Massachusetts domestic corporation tax becomes a liability of the taxpayer in the year in
We are aware of authority which would suggest a decision contrary to ours, but we do not consider it persuasive since it apparently results from a fundamental misconception of the Massachusetts corporation excise law. In H. H. Brown Co. v. Commissioner, 1927, 8 B.T.A. 112, the taxpayer sought to accrue its entire Massachusetts domestic corporation tax, assessable as of April 1, on the ensuing June 30, the close of its accounting year. The Board held that this was permissible. While the holding is not precisely in'point, it might follow as a corollary that an‘earlier accrual of a portion of the tax would have been regarded as improper. At any rate, the Board based its decision upon the assumption that “The corporation excise tax * * is assessed as of April 1 of the taxable year” — a statement which is erroneous in 'view of the Springdale decision which determined the “taxable year” to be the federal income tax year preceding the April 1 assessment date. Cf. National Casket Co., Inc., v. Commissioner, 1933, 29 B.T.A. 139, reversed in part, 3 Cir., 1935, 78 F.2d 940. That the Board might have reached a decision agreeing with ours had not its construction of the Massachusetts statute been erroneous, is indicated by its exposition of the applicable principles: “The basic idea under the accrual system of accounting is that the books shall immediately reflect obligations and expenses definitely incurred and income definitely earned without regard to whether payment has been made or whether payment is due. Expenses incurred in the' operations for a particular year q.re properly accrued in the accounts for that year, although payment may not be due until the following year. Under the accrual system, the word 'accrued’ does not signify that the item is due in the sense of being then payable. On the contrary, the accrual system wholly disregards due dates.” 8 B.T.A. at page 117. It seems clear to us that the deduction sought in the present case was an expense “incurred in the operations for” 1920 and was therefore “properly accrued in the accounts for that year.”
A second apparently contrary ruling is found in G.C.M. 6616, IX-2 Cum.Bull. 335 (1930). There a taxpayer sought to accrue the total Massachusetts domestic corporation taxes, payable in 1921 and 1922, during its fiscal year ending March 31, 1922. Naturally it was held that such an accrual, was improper. The memorandum decided, how
The Massachusetts domestic corporation law was amended in 1927 so that valuation of the “corporate excess” was to be made as of the close of the corporation’s taxable year. Massachusetts Acts and Resolves, 1927, c. 258, § 3, amending General Laws, c. 63, § 32. Since 1927, therefore, both factors of the excise tax have become calculable simultaneously. Under the law as amended it has been ruled that the entire tax may be accrued against the gross income of the year at the close of which the tax is calculated. G.C.M. 8553, IX-2 Cum. Bull. 109 (1930). We need have no fear, therefore, that our present decision, dealing as it does with income tax returns prior to 1927, will affect current Treasury practice.
The judgment of the District Courtds reversed, and the case is remanded to that court, with directions to enter judgment for the plaintiff in accordance with the stipulation.
Entered into in accordance with § 608 (b) (2) of the Revenue Act of 1028, 45 Stat. 874, as amended, 48 Stat. 756, 26 U. 8. G.A.Tnt.Rev. Code, § 3774.
Mass.General Acts of 1919, c. 355:
“Part I. Domestic Corporation Tax.
“Section 1. When used in Part I of this act: — * * *
“(2) Tiie term ‘taxable year’ shall mean the fiscal year of the corporation.
“(3) The term ‘corporate excess’ shall mean the fair cash value of all the shares 'constituting the capital stock of a corporation on the first day of April when the return called for by section four of this act is due. * * *
“Section 2. Except as is otherwise provided in this section, every domestic business corporation shall be subject to pay annually, with respect to the carrying on or doing of business by it, an excise tax equal to. the sum of the following:—
“(1) An amount equal to five dollars per thousand upon the value of its corporate excess.
“(2) An amount equal to two and one half per cent of that part of its net income as hereinafter defined, which is derived from business carried on within this commonwealth. * * *
“Section 3. Except as provided in the last paragraph of section two, the term ‘net income’, shall mean the net income for the taxable year as required to be reported by the corporation in its last prior return to the federal government as defined in the federal revenue act of nineteen hundred and eighteen * * *.
“Section 4. Every such corporation shall, within the first ten days of April, make a return as of April first, sworn to by the treasurer or assistant treasurer, or in their absence or incapacity by any other principal officer, in such form as the tax commissioner may prescribe * # * ”
“Sec. 234. (a) That in computing the net income of a corporation * * * there shall be allowed as deductions: * * *
“(3) Taxes paid or accrued within the taxable year * * 40 Stat. 1077.
The District Court reached the same result, for the 'same reason, in Consolidated Dry Goods Co. v. United States, 35 F.Supp. 523. That case involved the ¡same issues and, by stipulation of the parties, it will be governed on appeal by our decision in this ease. • '
“The sale or transfer, otherwise than in the ordinary course of trade and in the regular and usual prosecution of the corporation’s business, of any part or the whole of the assets of a domestic business corporation shall be fraudulent and void as against the commonwealth, unless such corporation shall, at least five days before the sale or transfer, notify the [tax] commissioner of the proposed sale or transfer * * ■*. Whenever such a corporation shall make such a. sale or transfer, the tax * * * shall become d'üé ' and payable at the time when the commissioner is so notified, or, if he is riot ’ so notified, at the time when he should have been notified.”
Revenue Act of 3916, § 300 et seq., 39 Stat. 780.
42 U.S.C.A. § 1101, et seq., 49 Stat. 639, § 901 et seq.
Provisions for credit against the tax are as follows:
“Sec. 902 [§ 1102]. [Credit against tax.] The taxpayer may credit against the tax imposed by section 901 [1101 of this chapter] the amount of contributions, with respect to employment during the taxable year, paid by him (before the date of filing his return for the taxable year) into an unemployment fund under a State law. The total credit allowed to a taxpayer under this section for all contributions paid into unemployment funds with respect to employment during such 'taxable year shall not exceed 90 per centum of the tax against which it is credited, and credit shall be allowed only for contributions made under the laws of States, certified for the taxable year as provided in section 903 [1103 of this chapter].”
“See. 90S [§ 1103]. [Approval and certification- of state laws.] (a) The Social Security Board shall approve any State law submitted to it, within thirty days of such submission, which it finds provides that [certain specified criteria are complied with],
“(b) On December 31 in each taxable year the Board shall certify to the Secretary of the Treasury each State whose law it has previously approved, except that it shall not certify any State which, after reasonable notice and opportunity for hearing to the State agency, the Board finds has changed its law so that it no longer , contains the provisions specified in subsection (a) or has with respect to such taxable year failed to comply substantially with any such provision.”
The persuasive force of the memorandum is somewhat lessened by its misquotation of the Springdale case, which resulted in a misapprehension of the Massachusetts court’s definition of “taxable year.” In the paragraph of the Spring-dale decision set forth above, the memorandum misquotes the original text (referring to “the next excise tax”) by speaking of “the net excise tax.” The result is to confuse the discussion of the tax litigated in the suit with the discussion of that tax already paid, the propriety of which was unquestioned.
Dissenting Opinion
(dissenting).
I think that the decision of the District Court should be affirmed. Springdale Finishing Co. v. Commonwealth, 242 Mass. 37, 40, 136 N.E. 250, holds that this tax is a single excise tax. Whether the use of the word “single” was directed to the question of constitutionality or not, the tax itself appeals to me as a single tax made up of the sum of two factors, one applied to income and the other to excess profits. Treating the tax as a single tax, I do not think that the tax on income accrued during 1920, even though it was ascertainable at the close of that year, because under the rule of United States v. Anderson, 269 U.S. 422, 441, 46 S.Ct. 131, 70 L.Ed. 347, all the events, which fixed the amount of the tax and determined the liability of the taxpayer to pay it, could not occur until April 1st when the corporate excess was known.