Smith Packing Co. v. Commissioner

SMITH PACKING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Smith Packing Co. v. Commissioner Docket No. 101249. United States Board of Tax Appeals 42 B.T.A. 1054; 1940 BTA LEXIS 910; October 23, 1940, Promulgated *910 Shortly after the processing tax under the Agricultural Adjustment Act was held invalid on January 6, 1936, petitioner received from a bank an amount of money which had been deposited in escrow for petitioner's account in 1935 pending the outcome of litigation concerning the validity of the processing tax. Petitioner did not deduct the amount in question on its corporation income and excess profits tax return for 1935. Held, that respondent erred in including the amount in question in petitioner's taxable income for 1936. James W. Allen, C.P.A., and Seymour Samuels, Jr., Esq., for the petitioner. John R. Stivers, Esq., for the respondent. HARRON *1054 Respondent determined deficiences of $738.80 in income tax and $1,306.24 in unjust enrichment tax for 1936. The basic question is whether respondent correctly included in petitioner's taxable income *1055 for 1936 the amount of $2,101.29 which was deposited with a bank in escrow for petitioner's account pending the outcome of certain litigation involving the validity of the Federal processing tax under the Agricultural Adjustment Act and was released from escrow and returned*911 to petitioner in 1936 after the processing tax was held invalid. United States v. Butler,297 U.S. 1. Other adjustments made by respondent are not contested. FINDINGS OF FACT. Petitioner is a Tennessee corporation and has its principal place of business at Nashville, Tennessee. Petitioner filed an original and an amended corporation income and excess profits tax return for 1935 with the collector of internal revenue for the district of Tennessee. Petitioner is engaged in the business of meat packing, which business includes the slaughtering of hogs for market. Petitioner keeps its books and files its income tax returns on the accrual basis. During the first seven months of 1935 petitioner did not have its own facilities for the slaughtering of hogs, and had its hogs slaughtered by the Jacobs Packing Co. of Nashville. The Jacobs Packing Co. charged petitioner the amount of the regular slaughtering fees, which was billed to petitioner monthly, and an amount equivalent to the Federal processing tax on the slaughtering of hogs for market under the Agricultural Adjustment Act, which was billed to petitioner weekly and separately from the regular charges*912 for custom slaughtering. In June 1935 the Jacobs Packing Co. brought an action against the collector of internal revenue for the district of Tennessee in the United States District Court for the middle district of Tennessee and obtained an order of that court temporarily restraining the collector from collecting processing tax from the Jacobs Packing Co. At or about the same time, petitioner and the Jacobs Packing Co. entered into an agreement under which it was agreed (1) that petitioner was to pay the Jacobs Packing Co. a proportionate share of the expenses incurred in the action brought by the Jacobs Packing Co. against the collector of internal revenue and (2) that an amount equivalent to the amount of the processing tax on the hogs thereafter slaughtered for petitioner by the Jacobs Packing Co. was to be deposited in escrow with the Commerce Union Bank of Nashville for the account of petitioner, on the condition that the amount thus deposited was to be released to the Jacobs Packing Co. if the processing tax were held valid, and to petitioner if the processing tax were held invalid. During the months of June, July, August, and September 1935 a total amount of $2,223.59*913 was deposited in escrow with the Commerce *1056 Union Bank for the account of petitioner in accordance with the above agreement between petitioner and the Jacobs Packing Co. On January 6, 1936, the proessing tax under the Agricultural Adjustment Act was held invalid. United States v. Butler, supra. Shortly thereafter, in January 1936, the amount of $2,223.59 deposited with the Commerce Union Bank was released from escrow, and that amount less $122.30, as petitioner's proportionate share of the expenses incurred in the action brought by the Jacobs Packing Co. against the collector of internal revenue, or $2,101.29, was returned to petitioner. OPINION. HARRON: The basic question is whether the amount of $2,101.29 which was deposited with the Commerce Union Bank for petitioner's account in escrow pending the outcome of certain litigation involving the validity of the Federal processing tax under the Agricultural Adjustment Act and was released from escrow and returned to petitioner shortly after the processing tax was held invalid on January 6, 1936, should be included in petitioner's taxable income for 1936. *914 In our opinion, respondent erred in including the $2,101.29 in petitioner's taxable income for 1936. The amount in question was supplied by petitioner and was deposited with the Commerce Union Bank in escrow for petitioner's account and was never actually paid to the Jacobs Packing Co. During the period when this amount was held by the Commerce Union Bank in escrow, title thereto remained in petitioner. 21 Corpus Juris, pp. 882, 883. Obviously petitioner realized no income when the $2,101.29 was released from escrow and returned to it. Any liability which petitioner had to pay that amount to the Jacobs Packing Co. was purely contingent on the outcome of the litigation involving the validity of the processing tax, and petitioner could not properly accrue such a contingent liability, Lucas v. American Code Co.,280 U.S. 445; Reuben H. Donnelley Corporation,22 B.T.A. 175: and it follows that the extinguishment of such a contingent liability could not result in the accrual of income. It is true that in 1935 petitioner entered on its books the amounts deposited with the Commerce Union Bank in escrow as debits to processing tax. However, the*915 actual facts, and not the entries made by petitioner on its banks, are controlling, especially where, as here, the bookkeeping methods employed are faulty. Paul & Mertens, Law of Federal Income Taxation, vol. I, sec. 5.07. Moreover, even if it were assumed that such book entries at the time they were made correctly reflected the accrual of the amount in question as outgo, the accrual was in doubt and could be adjusted when the doubt was removed shortly after the end of 1935 and before the closing of petitioner's books for 1935. Sanford Cotton Mills, Inc.,42 B.T.A. 190. Petitioner did just that. After the amount in question *1057 was released from escrow and before petitioner closed itss books for 1935, petitioner by appropriate entries on its books canceled the entries debiting processing tax with that amount, and, although petitioner had deducted the amount in question on its original corporation income and excess profits tax return for 1935, it subsequently filed an amended return on which it eliminated that deduction. Therefore, it is held that respondent erred in including the amount in question in petitioner's taxable income for 1936. Although*916 respondent's determination of a deficiency in income tax for 1936 resulted from several adjustments, his determination of a deficiency in unjust enrichment tax under section 501 of the Revenue Act of 1936 resulted solely from his inclusion of the amount in question in petitioner's taxable income for 1936. In the deficiency notice respondent based his determination of a deficiency in unjust enrichment tax on the ground that the amount in question represented a reimbursement received by petitioner from the Jacobs Packing Co. of amounts representing Federal processing tax burdens included in the prices which had been paid by petitioner to the Jacobs Packing Co., within the meaning of subdivision (2) of section 501(a). 1 *917 The conclusion that respondent erred in including the amount in question in petitioner's taxable income for 1936, entirely eliminates the deficiency in unjust enrichment tax, as is conceded by respondent. Decision will be entered under Rule 50. Footnotes 1. SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES. (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below: * * * (2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees. ↩