In re Fleishman

Shaep, J. The question presented by this appeal is: May a taxpayer who has in prior years erroneously included in his taxable income the amount of loans made to him offset these amounts against his taxable income for the year in which he repays the loans, or must he seek an adjustment of his income-tax liability for each year in which an erroneous overstatement of income occurred and within the time specified by G.S. 105-266 and G.S. 105-266.1? Loans to a taxpayer do not constitute taxable income and should not, therefore, be included as gross income on his income-tax return. G.S. 105-141; 1 Mertens, Federal Income Taxation § 5.24 (1942 Ed.) Likewise, amounts expended to repay the principal of a loan are not allowed as deductions from taxable income. G.S. 105-147. The Commissioner concedes that taxpayer erroneously overstated his income on his tax return for the years 1950-1955 and therefore overpaid the correct amount.of. his taxes during these years. He found that the overstate [207] ments were the result of taxpayér’s accountant’s error. (The Commissioner contends that it appears from tables in taxpayer’s brief that he underpaid his 1956 taxes, but no deficiency was ever assessed for that year. Neither party seeks in this action an adjustment for any year but 1957.) Had taxpayer applied for a refund of any overpayment of tax for a given year “at any time within three years after the date set by the statute for the filing of the return ... or within six months from the date of payment of such tax or additional tax, whichever is later . . . ,” G.S. 105-266.1 and G.S. 105-266, clearly he would have been entitled to it. G.S. 105-266 prohibits the refund of any overpayment unless discovery is made by the Commissioner or written demand is made by the taxpayer within the time set out above. Taxpayer contends (1) that, having included loans as income in his returns for the years 1950-1955, six years, he had established a “method of accounting”; (2) that, having repaid the loans to his employer in 1957 in an amount in excess of his compensation, under his method of accounting, he had no net income that year; and (3) that, since “federal agents” had allowed the loan repayment of $42,065.03 as a deduction from 1957 income under Int. Rev. Code of 1954, § 1341, the State should do likewise because G.S. 105-142 (a) requires a taxpayer to compute his income according to a method of accounting which clearly reflects his income and also to “follow as nearly as practicable the federal practice, unless contrary to the context and intent of this article.” Gen Stats, ch. 105, art. 4. Taxpayer is without a leg to. stand on. The classification of a loan as income for the year in which the money was borrowed and as a deduction for the year in which the money was repaid not only is not an approved and generally accepted method of accounting but also is a procedure directly contrary to “the context and intent” of Gen. Stats, ch. 105, art. 4. Neither G.S. 105-141, which defines income, nor G.S. 105-147, which specifies deductions, includes loans. G.S. 105-142 (a) authorizes no deductions not included in G.S. 105-147. Net income for income-tax purposes is the gross income of a taxpayer less the deductions allowed by Gen. Stats, ch. 105, art. 4. Notwithstanding that taxpayer’s unorthodox method of accounting is “contrary to the context and intent” of Gen. Stats, ch. 105, art. 4, G.S. 105442(a), we see no way, despite the agreement of “federal agents,” in which taxpayer could bring himself within the provisions of Int. Rev. Code of 1954, § 134Í. See Good’s Estate v. United States, 208 F. Supp. 521 (E. D. Mich.), wherein this section was held applicable —• no loan involved. This section allows a deduction for repayment of amounts exceeding $3,000.00 “for the taxable year” when the amount repaid “was included in gross income for a prior taxable year (or years) [208] because it appeared that the taxpayer had an unrestricted, right to such item.” (Italics ours.) North Carolina has no similar provision. Although a borrower may have the right to use the proceeds of a loan as he sees fit, he has a correlative obligation to repay, and this obligation to repay prevents the right to the money from being an unrestricted right. The proceeds of a loan belong to a taxpayer only temporarily. The withdrawals which taxpayer made from his father’s business were not made under any claim of right. His contract of employment fixed his compensation, and his withdrawals in excess of his agreed compensation were entered on the books of the business as loans. The fact that taxpayer may never have intended to repay these sums does not alter the true nature of the transaction. To allow as deductions for the tax year 1957 items which could have been the basis of claims for refunds in prior years would render every return inconclusive far beyond the time intended by the legislature. As regrettable as may be the accounting error which produced this situation for taxpayer, we cannot disregard the provisions of G.S. 105-266 and G.S. 105-266.1 in order to give him relief. The Tax Review Board, having found “that the taxes with respect to which the claim for refund was filed were not paid within the period specified under the provisions of G.S. 105-266 and G.S. 105-266.1,” correctly sustained the assessment. The judgment of the Superior Court, upholding the decision of the Tax Review Board, is Affirmed.