Sohio Corp. v. Commissioner

Disney, J., dissenting: The petitioner, in the taxable years, purchased oil. It did not, until later, fully pay therefor, because of an Illinois statute forbidding. Out of this situation the majority opinion spells income to the petitioner.

Beginning disposition of the question, the opinion says:

* * * We think respondent must be sustained. In the first place, the Illinois statutes did not require petitioner to retain 2 per cent of the amount which it collected to compensate it for the expenses incurred in collecting and remitting to the state the production taxes. The statute permitted the petitioner to deduct for such purposes not more than 2 per cent. * * *

Neither party suggested such an argument, and no point whatever is made by either as to the difference between the actual deductions and the 2 per cent. Apparently the actual expense was either 2 per cent, or it was so nearly so that the parties thought the difference was so negligible as to be unworthy of attention. All facts were stipulated. If there had been any appreciable difference, it would doubtless have been noted and relied on. I do not think decision should be based on something the parties altogether disregarded.

Next, after noting that the actual expense was deducted and allowed by the respondent, the majority view is expressed as follows:

This being so, it seems to us petitioner was required to return as gross income the $15,701.95 and $23,151.02 which it retained to reimburse it for these expenses. Otherwise, petitioner would have been receiving deductions for expenses for which in the same year it was being reimbursed by another, and that is not permissible under our income tax laws. * * *

Such conclusion, however, seems at war with the facts. The petitioner was not being “reimbursed by another” for expenses, but, under the coercion of a highly dangerous state law, was retaining its own money out of the price it had agreed to pay for oil, to the extent of expenses approved by the state, forced upon it, at the same time protesting such coercion, proceeding in court to eliminate it, if possible, and assuring the oil producers that their interests were being protected, and that in petitioner’s opinion the tax would be refunded. Shall we judge such a situation by any ordinary standard of reimbursed expenses? The majority view, moreover, fails to take into consideration the fact that petitioner was in business, and as a part of that business actually incurred the expenses and, therefore, had the usual right to deduct them. Deduction was, or should have been, allowed for that simple reason, and without regard to any retention or reimbursement. Without such, the petitioner would surely not have been denied deduction. Incurring these expenses helped to keep petitioner in business, by complying with a law which might have destroyed its business in Illinois, just as did the expenses approved in Commissioner v. Heininger, 320 U. S. 467 . Conclusion here, in my view, can not logically be based on the fact of expense deduction. In addition, the majority opinion considers the petitioner as if it retained or collected from the oil producers because it had the expense, therefore taxes the amount; whereas, conversely, the petitioner actually incurred the expense because, and only because, it had, through fear of consequences, obeyed the Illinois law, collected the tax, and made the deduction from purchase, price. If, therefore, it has and makes no claim of right, and is not without restriction as to disposition of the amount, there is not income.

In A. P. Giannini, 42 B. T. A. 546, we, and the Circuit Court affirming, 129 Fed. (2d) 638, held that income may be forced on no man. It has, moreover, long been the law that one who receives income under the claim of right thereto and without restriction as to its disposition, is to be taxed thereon, even though it be later decided that he must repay. North American Oil Consolidated v. Burnet, 286 U. S. 417 ; National City Bank of New York, Executor, 35 B. T. A. 975, and cases there collected; Commissioner v. Los Alamitos Land Co., 112 Fed. (2d) 648. On this subject, Commissioner v. Security Flour Mills Co., 135 Fed. (2d) 165, says:

* * * Revenue received under claim of right without restriction in respect of its use or disposition constitutes taxable income, even though the one receiving it may thereafter be adjudged liable to restore it or its equivalent. North American Oil Consolidated v. Burnet, 283 U. S. 417 , * * *

* * * But it became entitled to the money and actually received it in 1935 under claim of right without legal restriction as to its use and disposition, and it therefore constituted taxable income in that year. * * *

With most obvious reference to the same idea and to what the Circuit Court had said, the Supreme Court, in Security Flour Mills Co. v. Commissioner, 321 U. S. 281 , specifically pointed out that therein the processor of flour (who was seeking deduction of processing taxes), “in figuring its costs and its sales price to consumers, added the amount of the processing tax, but it collected its purchase price as such and designated no part of it as representing the tax. The petitioner received the purchase price as such.” The Court, in my opinion, plainly limited its whole conclusion so as to except and not affect the principle that one not claiming right to income should not be charged therewith. The language is pointless and unnecessary otherwise. And Brown v. Helvering, 291 U. S. 193 , also relied on by the majority opinion here, likewise emphasizes its distinction from such a case as this, when referring to insurance agent’s commissions:

* * * When received, the general agent’s right to it was absolute. It was under no restriction, contractual or otherwise, as to its disposition, use, or enjoyment. Compare North American Oil Consolidated v. Burnet, 286 U. S. 417 . * * *

The majority opinion here specifically states that “The petitioner was required by law to retain the compensation out of a tax which it was required to deduct from the purchase price of oil,” and elsewhere repeats that idea. Nevertheless, it is based squarely upon Security Flour Mills Co., supra. To me this is a remarkable situation. Taking a case of admittedly forced retention of expense forced upon the petitioner, nevertheless the opinion holds the petitioner to have income, despite the clear exception of just such a situation from the very case primarily and almost entirely relied on, and despite the fact that in the Security Flour Mills case the petitioner denied liability to its customers, while here the petitioner at all times contended in court that the money belonged to the producers. In the Security Flour Mills case the customers intervened and sought the money, and the petitioner resisted. The situation is in substance the reverse of the one here involved.

The gist of the majority opinion is, that since the Security Flour Mills case holds that exceptions may not be made to the general rule of accounting because of injustice in not isolating particular transactions and treating them on a long term result, since the petitioner therein was not entitled to a ded/uction for processing tax not paid, though “included in the sales price of flour,” and since the petitioner here could not accrue a liability to the oil producers because of contingency, the petitioner here had income in the amounts involved.

Such treatment gives no consideration whatever to the fact of coercive receipt of the income, and the petitioner’s constant and consistent protest against its receipt, the negation of claim of right, as if there was no such element in the case, despite the exception of just such a case by Security Flow Mills. That case is no basis for the conclusion here; on the contrary, it recognizes the doctrine upon which the petitioner relies. In Knight Newspapers v. Commissioner, 143 Fed. (2d) 1007, the court says, in this connection: “No claim of right resulting from the directors’ action was ever asserted by any one.” In Walter I. Bones, 4 T. C. 415 , the respondent relied upon the North American Oil Consolidated case, but we upheld the petitioner in his contention that he had no income, saying that he had a legal right to refuse a check for commissions where the amount due him was in dispute until later and he was contending for a larger amount. Here, the petitioner had not only a legal ground for contending that the whole matter was unconstitutional, but it never received the money involved from anyone. It already had the money — its own money— and wished to pay it out for oil purchased, but the “legal right” of the statute forbade. The Court of Claims, in Greenwald v. United States, 57 Fed. Supp. 569, 570, considered a case where the petitioner had received bonuses because of falsification of corporate records by an accountant and, when such falsification was discovered, returned the bonuses. Again the Government relied on North American Oil Consolidated, but the court, though recognizing physical receipt of the money, held that because of the mistake of fact, the “claim of right” doctrine did not apply, and the petitioner was not taxable. Here, the mistake was one of law, the whole matter being unconstitutional, and the petitioner, so contending, never made any claim of right. In Clinton Hotel Realty Corporation v. Commissioner, 128 Fed. (2d) 968, it was held that money received under a lease, but as security for future rent and with no present right or claim of full ownership, “was not income.”

Moreover, to affirm, as does the majority opinion, that there is no certainty of offsetting liability to the producers is to admit that the right to income was at least doubtful, for the right to income obviously could not be more certain than the right to offset liability — to say nothing of the disclaimer of right by the petitioner and the enforced receipt — if merely to decline, unwillingly and for fear of a statute, to pay in full for oil purchased, is receipt. I do not think it is. In fact the moneys represent past income of the petitioner, upon which we may assume it paid taxes, and the tax now proposed is merely because petitioner has not paid the money out pursuant to its contract of purchase, because of the legal danger in so doing. This is not income in my view. It might have been breach of contract, since the law was unconstitutional, but it was not the receipt of additional income, but only failure to dispose of income already earned. In the Security Flour Mills case, the petitioner sold and actually received money. Here it purchased, yet is said to be in the same position because it did not fully pay until a later year. This appears to me a curious inversion of the principle of the Security Flour Mills case. In addition let it be noted that a deduction for taxes not paid but contested was sought in Security Flour Mills, while here the petitioner primarily seeks to prevent addition of income.

The fact that the petitioner merely, because of the command of the statute, failed to pay fully for the oil received disposes also of the idea that it “commingled with its own funds the other 2 per cent,” which seems to be relied upon as showing freedom of disposition of the money. The 2 per cent was already a commingled part of petitioner’s own funds, which it would have paid out under its purchase contract had the law not prevented; and such simple involuntary failure to pay can be no logical proof of such unrestricted dominion over funds received under claim of right as in other cases has caused taxation.

Though the majority opinion finds that the law required retention of the expense money, nevertheless, I think analysis of the reasons for such conclusion will assist in a clear view of the situation here.

The statute not only provided “shall collect” the tax, but also “shall * * * deduct such cost.” The petitioner was forced, by dire penalties, both civil and criminal, to collect, or rather here to retain, the 3 per cent tax — the entire 3 per cent. It was thus required to retain that portion going to cover expenses, and once retained, if it was income it would be so even though passed on to the state, or returned to the producer. Though the statute permitted petitioner “with the consent of the Department” to “enter into any other contract, for the payment of the tax” it is to be noted that such contract must provide for the “payment of the tax” — 3 per cent, so petitioner had no chance, without violation of law, to escape retention of the “expense” portion of the 3 per cent. Note, too, that contracting was possible only by consent of the Department, and though all facts are here stipulated, no such consent appears, and we properly therefore eliminate such consent, and find the petitioner unable to contract. Moreover the statute says nothing of contracting as to the expenses; and in addition their deduction was “subject to the approval of the Department,” so not subject to contract. Without such approval, even the amount could not be known; therefore, it would be impossible to contract for collection of the tax, without inclusion therein of the “expense.” Thus we see the petitioner absolutely bound to act as it did. In the face of the statutory mandate of “collect the tax” the taxpayer, however it might wish to let the oil producer keep the amount of expense money, and so escape the present income question, would indeed have been, to say the least, the “incorrigible optimist” had it collected less, and would not have known how to collect less, not knowing what actual expense the Department might approve. The majority opinion could not fail to hold that the retention of the expense money was required.

In this matter I am not at all suggesting that we “make exception to the general rule of accounting by annual periods” as the words of the majority opinion run, but I am suggesting that established law has already made an exception of involuntary receipt of what would otherwise be income, and says it is not income — and that attention solely to the general and sound principles of Security Flour Mills Co. v. Commissioner, and none to the exception there made and here at hand, disregards such established law, and bypasses the question presented here. The majority relies on no case involving involuntary receipt of income, or income received under claim of right. It merely seeks to extend the generalities of Security Flour Mills altogether beyond the extent there intended, and to a case involving different facts and principles.

The petitioner here, from beginning to end, did all that it could to indicate its opposition to the law, including returning the “expense” deduction to the producer. If anything could negative claim of right, it appears to have been done here. In the absence of voluntary collection or retention of the 2 per cent of the tax, the petitioner is shown free from that frame of mind, claim to the money, which in Commissioner v. Wilcox, 327 U. S. 404 , is shown to be controlling, and without which it was held the petitioner there was not taxable. There is no essential difference between the absence of any legal right to money in the embezzler there considered and the absence of any legal right in the petitioner here, under an unconstitutional statute which, ah initio, could be no basis of right or imposition of duty. If a petitioner’s right to money received is only voidable and not void, he may have income; Griffin v. Smith, 101 Fed. (2d) 348, where it was held that the petitioner was taxable on compensation since his right to it was voidable only, as distinguished from absolutely void. The case serves to accentuate the fact of no income here, where the whole procedure was unconstitutional. “No rights are conferred, no protection is afforded, and no duties can be imposed, by such a statute,” i. e., an unconstitutional statute. 16 Corpus Juris Secundum 289; Peters v. Gilcrest, 227 U. S. 483 ; India Oolithic Stone Co. v. Ridge, 91 U. S. 994 . This is a complete answer to any thought that the petitioner had no obligation, in the taxable years, to complete payment for the oil it had purchased, and not retain any portion thereof. The Wilcox case particularly points out that the embezzler had the relation of debtor to the employer. The same is clearly true here, for petitioner had obtained the producer’s oil. When we add the fact of petitioner’s protest and opposition throughout to the unconstitutional statute and reiterated contention that it was so, I discern, not claim of right, but its antithesis.

In H. Lewis Brown, 1 T. C. 760 , we distinguished between a claim of right in the North American Oil Consolidated case, and a “qualified claim of right” in that though an attorney received money, he recognized that another might not agree with his claim thereto; and we took the later agreement on the amount into consideration, refusing to sustain the respondent’s contention of receipt of the entire amount under the North American Consolidated case. In Baird v. United States, 65 Fed. (2d) 911, the court held that, though money received for sale of realty is ordinarily taxable in the year of receipt, yet where in that year the right to retain it was in doubt “because of certain provisions in the agreement,” it was not returnable as income. Here we have not even a “qualified claim of right,” but a contention that there was no such right.

In no case containing these elements has income been found. Failure to pay out its own funds for such strong reasons later so fully sustained as to unconstitutionality is no logical basis for taxation of income. I do not believe the taxpayer should be ground between the upper millstone of Federal taxes and the lower millstone of a punitive state statute. This case should not be decided without regard to the claim of right doctrine merely because of generalities not considering but excepting it. I therefore respectfully dissent.

ARnold and Harron, JJ., agree with this dissent.