Opinion
No. 13981.
1948-06-23
CHILLICOTHE PAPER CO. v. GLANDER.
Wilson & Rector, of Columbus, for appellant. Hugh S. Jenkins, Atty., Gen., of Ohio, and Daronne R. Tate, Asst. Atty. Gen., for appellee.
Proceedings by C. Emory Glander, Tax Commissioner of Ohio, against the Chillicothe Paper Company. From orders of Tax Commissioner redetermining intangible tax deficiencies for the years 1944 and 1945, and derecting the issue of corrected tax assessment certificates, the Chillicothe Paper Company appeals.
Order in accordance with opinion.Wilson & Rector, of Columbus, for appellant. Hugh S. Jenkins, Atty., Gen., of Ohio, and Daronne R. Tate, Asst. Atty. Gen., for appellee.
BY THE BOARD.
This cause and matter came on to be heard and considered by the Board of Tax Appeals upon an appeal filed herein under date of January 19, 1948, by the appellant above named, a corporation under the laws of Ohio, from certain final orders of the tax commissioner (Nos. 1720 and 2456) which modified in some respects increased intangible property tax assessments against the appellant for the tax years 1944 and 1945 and directed the issue of corrected tax assessment certificates against the appellant for said tax years. The case was submitted to the Board upon said appeal, upon transcripts of the proceedings of the tax commissioner relating to the several tax assessments complained of and upon evidence offered and introduced by and on behalf of the appellant at a hearing of the case before one of the Board's examiners.
The questions presented in this case had their inception in audits made by the Department of Taxation of intangible and personal property tax returns filed by the appellant for the tax years 1944 and 1945, respectively. The first question here presented is with respect to certain moneys, aggregating in amount the sum of $6,252, which the appellant had withheld from the wages of its employes under the provisions of sections 1621 and 1622 of the Internal Revenue Code, Tit. 26 U.S.C.A. §§ 1621, 1622, Sub-chapter D, Chapter 9 which moneys the appellant had on hand on January 1, 1944, and which it was required to pay to the collector of internal revenue on or before January 10, 1944. As to this it appears that the appellant in filing its tax return for the tax year 1944 listed this item as a current account payable in computing its net taxable credits for said tax year. Upon audit of this tax return the Department of Taxation disallowed this item as a current account payable with a result that an increased tax assessment was made upon the appellant's net taxable credits for said year. The tax commissioner upon consideration of the appellant's application for review and redetermination with respect to this increased tax assessment, confirmed the same.
In the consideration of the question presented by the action of the tax commissioner in disallowing as a current account payable this item of $6,252 which the appellant was required to pay to the collector of internal revenue, we are of the view that although this obligation of the appellant was a liability, it was not an ‘account payable’ within the definitive terms of section 5327, General Code, which provides that ‘The term ‘credits' as so used, means the excess of the sum of the current accounts receivable and prepaid items (used) in business when added together estimating every such account and item at its true value in money, over and above the sum of current accounts payable of the business, other than taxes and assessments.’ In this connection it is noted that section 1623 of the Internal Revenue Code, 26 U.S.C.A. § 1623, referring to the moneys which an employer is required to withhold from the wages of his employes under the above noted sections of the Federal Income Tax Law, provides: ‘The employer shall be liable for the payment of the tax required to be deducted and withheld under this subchapter, and shall not be liable to any person for the amount of any such payment.’
This provision should be read in connection with the provisions of section 3661 of the Internal Revenue Code, 26 U.S.C.A. § 3661, which reads as follows: ‘Whenever any person is required to collect or withhold any internal-revenue tax from any other person and to pay such tax over to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.’
That the provisions of the Internal Revenue Code above noted, import an absolute liability of the appellant with respect to the payment of the moneys here in question, is not doubted; but it does not follow that this liability is an ‘account payable’ such as may be deducted from its accounts receivable in determining its net taxable credits for said tax year. In this connection it is noted that the term ‘credits' as defined by section 5327, General Code, means the excess of the sum of all current accounts receivable used in business over the sum of a current accounts payable of the business. It follows from this that the only accounts receivable and accounts payable which may be taken into account in determining the taxable credits are such as accrue or are incurred in the business of the taxpayer as that term is defined or indicated by the provisions of section 5325-1, General Code. And as to this it may be assumed that the legislature, in the enactment of the present provisions of section 5327, General Code, intended to give to the terms ‘accounts receivable’ and ‘accounts payable’ the generally accepted legal sense and meaning of these terms. In this view it is noted that ‘an account’ is a general term which covers contracts, express or implied. Twin Tree Lumber Co. v. Ensign, 193 Ala. 113, 118, 69 So. 525;Harris Cortner & Co. v. Oneonta Trust & Banking Co., 186 Ala. 484, 65 So. 68;Barkers Creek Coal Co. v. Alpha-Pocahontas Coal Co., 96 W.Va. 700, 706, 123 S.E. 803;J. F. Rapple Co. v. Manitowoc, 182 Wis. 141, 145, 195 N.W. 399. As to the question here presented it is further noted that in the case of West Virginia Pulp & Paper Co. v. Karnes, 137 Va. 714, 120 S.E. 321-which case was cited with apparent approval on this question by the Supreme Court of this state in the case of Tax Commission of Ohio v. National Malleable Castings Co., 111 Ohio St. 117, 134-137, 144 N.E. 604, 35 A.L.R. 1448,-the Supreme Court of Appeals of the state of Virginia in the consideration of a tax statute of that state providing that ‘the excess of bills and accounts receivable over bills and accounts payable’ should be taxed as capital of a corporation said: ‘Now, as to the meaning of the terms ‘bills and accounts receivable’ and ‘bills and accounts payable’; these terms have a well understood technical meaning. According to that meaning they embrace only contract obligations, express or implied.' See also on this point Hickok Oil Corp. v. Evatt, 141 Ohio St. 644, 649, 49 N.E.2d 937;National Cash Register Co. v. Evatt, 145 Ohio St. 597, 606, 62 N.E.2d 327. In the case of Hickok Oil Corp. v. Evatt, supra, the corporation, as a dealer, at the end of its fiscal years there in question owed to the states of Ohio and Michigan and to the province of Ontario various amounts of money imposed upon or collected by it as excise taxes in the sale of gasoline and other motor vehicle and liquid fuels; which obligations it sought to deduct as accounts payable from its accounts receivable in determining its net taxable credits for the tax years in question. In the consideration of the question thus presented the Supreme Court in its opinion in this case said [141 Ohio St. 644, 49 N.E.2d 940]:
‘Appellant takes the position that it handles these taxes ‘only as a collection agency’ as ‘collected by appellant and remitted to the state of Ohio’; ‘that an account payable may arise from * * * ‘fiduciary relation”; that as to the state of Michigan appellant ‘stands in a fiduciary relation with reference to the money collected’; and with reference to the Ohio taxes, ‘The relationship is that of a fiduciary relation of a public nature created by law.’
‘As will be shown later, we think appellant's contention is correct in respect of its relationship to the state of Michigan. Assuming that appellant is correct also as to Ohio, we are at once met with the query in respect of all such taxes, by what right does appellant attempt to set off the funds belonging to its principals against claims owing to appellant in its own right? Of course, the agent or fiduciary may be compelled to account in equity to his principal, but this does not convert appellant's liability to his principal into an account payable. An account payable results from the relationship of debtor and creditor. In the event of the debtor's failure, the creditor has to participate in the debtor's assets pro rata. In case an agent or fiduciary fails to account to his principal the relationship is not that of debtor and creditor for the reason that the ownership of the fund is in the principal and the principal may follow and recover the entire fund without sharing with creditors to whom accounts payable are owing.’
Upon the considerations above noted we are of the view that the liability of the appellant for the payment of the Federal income tax moneys withheld from the wages of its employes, was not an account payable; and the tax commissioner did not err in disallowing this item as a deduction from the appellant's accounts receivable in determining its net taxable credits for said tax year.
The other question here presented is one common to both of the tax years 1944 and 1945, and arises with respect to post-war refund credits which stood to the credit of the appellant on tax listing day in each of said years under the provisions of section 780 of the Internal Revenue Code, 26 U.S.C.A. § 780. As to this it appears that for the year 1942 there accrued against the appellant excess profits taxes in the amount of $432,000 under the corporations excess profits tax law which was carried into the Internal Revenue Code as sections 710 to 783, inclusive, Tit. 26 U.S.C.A. §§ 710-783, Subchapter E-Excess Profits Tax.
The excess profits tax which accrued against appellant for the year 1942 was in the amount of $432,000 which was paid to the United States Government in quarterly installments during the year 1943; and the excess profits tax which accrued against the appellant for the year 1943 amounted to the sum of $483,290, which was paid to the government in quarterly installments during the year 1944. And as to this it appears that as to such taxes so paid during each of said years 1943 and 1944 the last installment thereof was paid in the month of December. By reason of the payment by the appellant of excess profits taxes in the amounts above stated there accrued to it post-war refund credits in the amounts of $43,200 and $48,329, which several amounts stood to its account on and as of tax listing day in the years 1944 and 1945, respectively. Government bonds covering such post-way refund credits were issued and delivered to the appellant in August 1944 in the amount of $43,200 and in July 1945 in the amount of $48,329.
As above indicated these post-war credits in the several amounts above stated accrued to the appellant under section 780 of the Internal Revenue Code. This section provides in part as follows:
‘The Secretary of the Treasury is authorized and directed to establish a credit to the account of each taxpayer subject to the tax imposed under this subchapter (secs. 710 to 783 of this title), for each taxable year ending after December 31, 1941 (except in the case of a taxable year beginning in 1941 and ending before July 1, 1942), and not beginning after December 31, 1943, of an amount equal to 10 per centum of the tax imposed under this subchapter for each such taxable year. For the purposes of this part (secs. 780 to 783 of this title), in the case of a taxpayer whose tax is determined under section 710(a)(3), the term ‘tax imposed under this subchapter’ means the portion of the tentative tax determined under section 710(a)(3)(B).
‘(b) Within three months after the payment of the amount of the excess profits tax shown on the return for a taxable year to which subsection (a) applies (or, if such taxable year begins or ends in 1942, within one year after payment of the excessprofits tax shown on the return for such year), if the payment is made before July 1, 1945, there shall be issued to and in the name of the taxpayer bonds of the United States in an aggregate amount equal to 10 per centum of the tax paid in respect of which a credit is provided under subsection (a), and the credit established under subsection (a) for such taxable year is hereby made available for the purchase of such bonds.’
The appellant in filing his intangible and personal property tax return as a corporation for the tax years 1944 and 1945 did not include such post-war refund credits as taxable items therein; but in each instance and as to each tax return it noted such post-war credit in the proper amount thereof in the balance sheet which was included with the tax return. The tax commissioner on audit of such tax returns, and as to each of the same included these several post-war refund credits in the respective amounts above noted as an account receivable and as a ‘credit’ for each of said years; and a preliminary tax certificate including a tax on these several items was issued by the tax commissioner for each of said years. Thereafter the tax commissioner on consideration of the appellant's applications for review and redetermination filed by it for and with respect to said several tax years, found and determined that these items were not properly taxable as accounts receivable or as credits but that the same were properly taxable as ‘other taxable intangibles' as this term is defined by section 5327-1, General Code, which provides: ‘The terms ‘other taxable intangibles' and ‘other intangible property’ as so used, include every valuable right, title or interest not comprised within or expressly excluded from any of the other definitions set forth in this chapter.'
From the final order of the tax commissioner making this finding and determination and directing the issue of corrected assessment certificates in accordance therewith, the appellant filed this appeal with the Board of Tax Appeals.
In the consideration of the questions presented on this appeal it is noted that section 5328-1 provides, generally, that all moneys, credits, investments, deposits and ‘other intangible property’ of persons residing in this state shall be subject to taxation, except as provided in this section or as otherwise provided or exempted in the title of which this section is a part; such taxes being at the several and respective rates provided for by section 5638, General Code. In the case of C. H. Gosiger Machine Co. v. Glander, 75 N.E.2d 728, decided by the Board of Tax Appeals under date of October 20, 1947, the Board reversed a final order of the tax commissioner which confirmed an assessment against said corporation for the tax year 1944. Inasmuch, however, as the post-war refund credits of the corporation in the case above cited were assessed by the tax commissioner as an account receivable and as a credit under section 5327 and related sections of the General Code, the decision of the Board in reversing this order of the tax commissioner is conceded to be correct wholly aside from any consideration of the question of the power and authority of the tax commissioner to make an assessment of any kind upon property of the kind here in question. However, the decision of the Board in the C. H. Gosiger Machine Company case went beyond the particular question just noted, for it was therein held, in effect, that the tax commissioner had no more power or authority to make an assessment of any kind on the post-war refund credits of the company there in question than he would have had to make an assessment upon the government bonds thereafter issued and delivered to the company for and with respect to such credits.
We are of the opinion that the conclusion reached by the Board in said case is correct. As to this we are required to assume that the post-war refund credits provided for by section 780 of the Federal Revenue Code were so provided for for some well considered purpose in connection with the comprehensive legislation enacted by the Congress in and by which, for a limited period, excess profits taxes were imposed on corporations. Moreover, the tax here in question is a property tax and was assessed against the appellant corporation on the view that the corporation as a legal resident of this state and as the owner of this species of intangible property, was liable for such taxes under the provisions of section 5328-1 and related sections of the General Code. In this connection it is to be noted, however, that if the sections of the General Code above referred to are so construed as to impose a tax upon post-war refund credits of the kind here in question provided for by section 780 of the Internal Revenue Code, the amount of the taxes assessable under the state law will in every case be directly proportionate to the amount of the excess profits taxes paid by the corporation; and the greater the amount of the excess profits taxes paid by the corporation under the Federal law, the greater is the amount of the taxes assessable under the state law against the corporation paying such excess profits taxes. So construed, sections 5328-1, 5327-1 and related sections of the General Code of this state, in our opinion, have the effect of laying a direct and unconstitutional burden on the taxing power of the Federal government. State of North Dakota ex rel. Flaherty v. Hanson, 215 U.S. 515, 30 S.Ct. 179, 54 L.Ed. 307. Upon the consideration above noted the Board finds that the tax commissioner erred in assessing the post-war refund credits here in question for the tax years 1944 and 1945; and the final order of the tax commissioner herein complained of is in this respect reversed.