Sohio Corp. v. Commissioner

Harron, /., dissenting: I agree with the dissent of Judge Disney, but wish to add as further reasons for my dissent, perhaps at the risk of some repetition, the following:

(1) Petitioner reported income on the accrual method.

(2) In the taxable years petitioner contracted for purchases of oil from oil producers, which created a definite liability in petitioner to pay its vendors the full amount of the contract prices. Therefore, petitioner had to accrue as its costs of oil, in 1941 and 1942, 100 per cent of the contract prices.

Separate and apart from the above was the procedure of collecting a tax for the State of Illinois.

The tax was on the oil producers, not petitioner. They, like petitioner, had to report in income the full amount of the contract prices in 1941 and 1942, and they could deduct as a tax the 3 per cent Illinois tax at some time. Under the holding of Security Flour Mills Co. v. Commissioner, 321 U. S. 281 , if I understand the full import of that decision, the oil producers could not deduct the Illinois tax, for which they denied liability, until the year in which the validity of the tax was established, if the tax was held to be valid. The oil producers denied liability for the tax, as in Security Flour Mills. The oil producers had no choice in the matter of paying or not paying the tax.

(3) The Illinois statute had severe compulsory features, (a) It deprived the oil producers of any say in paying or not paying the tax, for it required vendees of oil producers to collect the tax out of purchase contract moneys, (b) It compelled purchasers of oil, such as petitioner was, to collect the tax, and (c) to pay to themselves the tax collecting costs out of the tax. It made purchasers of oil agents of the state, i. e., tax collectors.

Petitioner was caught between the state and those from whom it bought oil. In theory it paid oil producers all of the contract prices, and then collected a tax from them.

Petitioner held back from oil producers 3 per cent of contract prices as an agent of the state, under a claim of right of the state to a tax. Two per cent of that tax, which petitioner had to hold for its expenses, was also held subject to a claim of right of the state, for petitioner could be paid its tax collecting expenses only out of the tax. Theoretically, all of the tax had to be paid to the state first, before the state could pay costs to the tax collector. The statute short-cut this by requiring the tax collector, petitioner here, to keep part of the tax collected for expenses of tax collecting.

(4) Petitioner incurred expenses in collecting the tax and was out of pocket those expenses. Having incurred such expenses in 1941 and 1942, petitioner had claims against the state for those expenses. This must be recognized, even though the Illinois statute operated in such way that the expenses were supposed to be paid out of the tax moneys. One reason for this is that, whether or not petitioner was ever paid by the state for its expenses, petitioner incurred expenses in fact, and, for income tax purposes, the expenses had to be deducted in the year in which incurred. Deduction could not be postponed until it should become certain whether the state could make payment to reimburse the expense.

The question here is whether petitioner had to report in 1941 and 1942, as income, the amounts for which it had claims against the state, to wit, $15,000 and $23,000, to use round figures. It is an established rule that a taxpayer reporting income under the accrual method must report income in the year in which his right to income and the obligor’s obligation to make payment have become final and definite in amount. Security Flour Mills Co. v. Commissioner, supra.

It has been held that a taxpayer is not required to report as income an amount which it may never receive. North American Oil Consolidated v. Burnet, 286 U. S. 417 . It has been held that, if conditions in a tax year make it uncertain that a taxpayer will ever receive anything at all on its claim, the taxpayer does not have to make any accrual of the income represented by such uncertain claim. Jamaica Water Supply Co. v. Commissioner, 125 Fed. (2d) 512, 513; certiorari denied, 316 U. S. 698 .

(5) The above question can not be fairly decided unless this Court, at the outset, makes a construction of the fact situation which petitioner occupied in 1941 and 1942. This involves a subsidiary question: In what capacity did petitioner hold part of the disputed tax, $15,000 in 1941 and $23,000 in 1942?

The 3 per cent tax was being contested in the taxable years by those on whom the tax was imposed, the oil producers. Petitioner, being put in the position of a tax collector by force of a statute, joined the oil producers in litigation which questioned the validity of the tax. This litigation put in issue title to all the funds — the 3 per cent of contract prices — which petitioner had been required to collect. Title to the part of the tax which petitioner was required to keep to cover its tax collecting costs was just as much in question as was title to the part of the tax which petitioner had been required to turn over to the state. There was no provision for putting any of these moneys in the hands of a receiver. But that one fact should not weigh against petitioner. Petitioner could be paid for its tax collecting expense by the state only out of the tax itself (the state could not make payment to petitioner out of its general funds), and, since title to all of the tax moneys was the subject of litigation in 1941 and 1942, it seems clear, and I think should be held, that petitioner held the $15,000 and the $23,000 in 1941 and 1942 as a trustee for such entity as had title to the tax moneys, of which the above sums were a part, or that it was holding these sums as an agent for the state until decision would be made of whether the state was entitled to the entire fund representing the tax.

(6) The construction suggested above removes from this case the argument that petitioner received payment from the state in 1941 and 1942. But further reason for concluding that petitioner received nothing from the state in the taxable years in payment for its claim against the state for tax collecting expense, is that the state had no funds of its own in the taxable years out of which to pay petitioner. Litigation pending on the matter, all that the state had in 1941 and 1942 was an undetermined claim of right to all the tax funds, including the sums held by petitioner. Those sums were held by petitioner, as an agent of the state, subject to a contingency that the state had no title in them. This must be true because petitioner, as a corporation, was contesting the tax, and it had followed the course of collecting the tax and holding out part of the tax moneys under protest, and only under the compulsion of the statute. In other words, petitioner held the $15,000 and $23,000 under the state’s claim of right, not under its own claim of right. Petitioner contended that the funds belonged to the oil producers.

As has been pointed out before, the state could pay petitioner for its expenses only out of the tax moneys, and if the tax were held invalid, the state could and would pay petitioner nothing. Furthermore, if the tax was invalid, as it was held to be in 1944, it was invalid at all times, and title to the tax moneys, including the sums here in question, was in the oil producers in 1941 and 1942, that is, ah initio.

Under all of the facts and the circumstances, I think the conclusion should be that petitioner had only a claim against the State of Illinois in 1941 and 1942 for payment for services rendered to the state, and that in the taxable years the payment by the state of the claim was dependent upon the constitutionality of the tax statute, regarding which litigation was pending; that the existence of the court proceedings created sufficient doubt and uncertainty in the matter of the state’s making payment to petitioner for its tax-collecting services so as to require a holding in this case that income did not accrue to petitioner in 1941 and 1942 under its claim against the state. Petitioner might never collect from the state because of the peculiar situation which tied together inseparably the ability of the state to make payment of the costs of collection with the validity of the tax. Also, petitioner’s right to receive payment of its costs from the state was tied to the state’s right to the tax moneys, which right was not decided until 1944. I think it is correct to say that the obligation of the state to pay petitioner for its costs depended upon the state’s fight to the tax moneys. Both the right of the state to the tax and its obligation to make payment to petitioner were undetermined in the taxable years. In that situation petitioner should not be required to report as income in 1941 and 1942 sums which it might never receive. North American Oil Consolidated v. Burnet, supra; Jamaica Water Supply Co. v. Commissioner, supra.

The situation here is unusual. Petitioner was caught in a complex web which was not of its own making. The circumstances require recognizing the various roles which petitioner had to play, if a fair result is to be reached. I respectfully note this dissent for the purpose of giving that recognition of the taxpayer’s several capacities. I believe that the question presented here should not be decided any differently than it would undoubtedly be decided if all of the tax moneys, and particularly the $15,000 and $23,000, had been held by a trustee or impounded in some way during the time litigation over the validity of the tax was pending, which included the taxable years, because petitioner did not voluntarily get enmeshed; it followed a course under the mandate of a statute.

Another unusual feature is that the normal flow of the moneys was short-circuited in two ways. Money owing from petitioner to oil producers never reached the oil producers. Part of the tax money which the state claimed did not go to the state. Both of these shortcut courses were required by a statute, which was later held invalid. But the requirements of that state statute should not make us unable to see who the claimants to tax money were; why petitioner did not hold any of the tax money under a claim of right of its own; why petitioner was not holding part of the tax money free from restrictions ; and that, until the right of the state to the entire fund of tax moneys was determined, petitioner held part thereof as an agent of the state and not under its own claim of right. Petitioner held part of the tax money pending determination of who owned it, the state or the oil producers.

I do not find in the facts that petitioner held part of the tax money under a claim that it belonged to it, as money “paid” by the state on an account due, and that at the same time petitioner claimed that the money belonged to the oil producers. Petitioner was a party, with the oil producers, in suit against the state challenging the validity of the tax. Pending decision of the litigation, petitioner was an unwilling agent of the state.

Respondent has determined that petitioner had taxable income in 1941 and 1942 under an agreement of the State of Illinois to pay it for its services in collecting a tax for the state. The broad question has to do with the tax concept of income. Whether or not petitioner received income can not be answered by a superficial reference to a fimd of money, $15,000 and $23,000, over which petitioner had mere custody pending litigation over title to that fund. If the state statute was invalid those funds, which had become the income of the oil producers in 1941 and 1942 under oil purchase contracts made in those years, never were endowed with the character of state’s money derived from a tax. Until the funds first took on the nature of state’s money, they could not take on the character of income to petitioner. The question whether the funds were income to petitioner in 1941 and 1942 can not be answered and determined by the naive fact that petitioner had mere possession of the funds in 1941 and 1942. Mere possession of money does not make it income for tax purposes. That has been demonstrated frequently in cases where money held by a trustee, trust income, has "been taxed to another person, the grantor of the trust. Here the money in question originally was owned by petitioner; it became payable to others under contracts; but by operation of a state statute it became frozen in the custody of petitioner. The money was in such frozen state in 1941 and 1942. That being a fact, I am unable to perceive that the money had become income, from a tax standpoint, to petitioner in 1941 and 1942.