Opinion
No. 46235.
October 1, 1945.
Maxwell M. Mahany, of Tulsa, Okla., for plaintiff.
John A. Rees, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
The plaintiff, a Delaware corporation, reported and paid its federal income tax on the accrual basis. In the year 1940 it paid to the State of Oklahoma $5,575.19, with interest thereon, for state income taxes for the years 1936, 1937, and 1938, on the income of certain intangible personal property. The reason the plaintiff had not paid those taxes to the state in the years 1936, 1937, and 1938 was that it thought, because of a decision of the Supreme Court of Oklahoma, that the intangible personal property referred to did not have a taxable situs in Oklahoma and that therefore neither it nor its income could be taxed by that state.
In 1940, however, the state proposed to assess the tax for the years 1936, 1937, and 1938. The plaintiff protested, a hearing was had before the State Tax Commission which held that the tax was owed, and the plaintiff paid the tax, with interest, giving statutory notice of its intention to sue to get it back. Under the Oklahoma law the state held taxes so paid in a separate fund until the litigation was decided. The plaintiff sued in the United States District Court and lost, in the year 1940. The Circuit Court of Appeals affirmed and the Supreme Court of the United States denied certiorari in 1942.
In 1941 when the plaintiff filed its federal income tax return for the year 1940, it took deductions for taxes paid and interest paid to the State of Oklahoma in 1940 as recited above. The Commissioner of Internal Revenue disallowed the deductions and required the plaintiff to pay its taxes without the benefit of the deductions, which the plaintiff did, and filed a timely claim for refund. It sues here to recover $1,013.33, the amount which the disallowance of the deductions added to its income tax for 1940.
The Government concedes that under Section 23 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, § 23, the plaintiff would have been entitled to the deductions claimed, if it had been making its returns on a cash basis. But the Government urges, since the plaintiff's accounts were kept and its tax returns made on the accrual basis, it could not take its deduction for the taxes and interest paid to the State of Oklahoma until the year 1942, when its suit for their return was finally decided adversely to it.
We think the Government is wrong. One is not entitled to accrue a debt or other liability which is asserted against him but which he disputes and litigates, until the litigation is concluded. But if a liability is asserted against him and he pays it, though under protest, and though he promptly begins litigation to get the money back, the status of the liability is that it has been discharged by payment. It is hardly conceivable that a liability asserted against him, which he has discharged by payment, has not yet "accrued" within the meaning of the tax laws and the terminology of accounting. Accrual, from the debtor's standpoint, precedes payment, and does not survive it.
The Government cites Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 64 S.Ct. 596, 598, 88 L.Ed. 725. In that case the taxpayer in 1935 obtained an injunction against the collection of the tax, the court requiring as a condition of the granting of the injunction that the taxpayer pay the amount of the tax into a depository designated by the court. The taxpayer, on its income tax return for 1935 took deductions of the amounts paid into the depository, as taxes accrued in that year. The Supreme Court held that they had not accrued, within the meaning of the tax statutes. The court said "Since it denied liability for, and failed to pay, the tax during the taxable year 1935, it was not in a position in its tax accounting to treat the Government's claim as an accrued liability." In the instant case the taxpayer denied liability, but paid. We think it thereby "accrued" the taxes and interest, if accrual is requisite at all, in the case of the debtor, when actual payment has occurred.
The plaintiff is entitled to recover $1,013.33 with interest as provided by law.
It is so ordered.
JONES, Judge, took no part in the decision of this case.