US SUPREME COURT DECISIONS

Title III, § 12(a) of the Revenue Act of 1916 provides that net income and profits in the case of a domestic corporation shall be ascertained by deducting from gross income expenses, interest and taxes paid, and losses sustained, during the calendar year; § 13(b) provides that the return in every case shall state such data as are appropriate and in the opinion of the Commissioner necessary to determine the correctness of the net income chanrobles.com-red

Page 282 U. S. 93

returned and to carry out the provisions of the title, and § 13(d) that

"A corporation . . . keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned."

A Treasury ruling with respect to returns under §§ 12(a) and 13(d) contemplated that income and authorized deductions should be computed and accounted for on the same basis, and that the same practice should be consistently followed year after year. The returns of a taxpayer for 1916 and 1917 stated that they were made on the basis of actual receipts and disbursements. Each return, however, included bills and accounts receivable and payable and employed the inventory basis -- a practice which would have been authorized by Treasury regulations if the returns had been governed by earlier Acts which contained provisions like those of § 12(a), supra, but which lacked the new provisions of §§ 13(b) and 13(d). A munitions tax, which accrued in 1916, and was paid in 1917, was deducted by the taxpayer under § 12(a), in the 1917 return.

Held:

1. That the regulations mentioned, which required the use of inventories in proper cases and permitted the deduction of accounts payable when accounts receivable were brought into the income account, were supplementary to the provisions of the earlier Acts, and do not have the effect of classifying items receivable and payable as cash receipts and disbursements when the like provisions of § 12(a) are to be construed with the new provisions, §§ 13(d) and 13(b), of the 1916 Act. P. 282 U. S. 97.

2. Although, by § 12(a), taxes are required to be deducted only in the year when paid, § 13(d), in the light of its legislative history, plainly indicates that the returns contemplated by it are to be dealt with as a separate class, distinct from those based on actual receipts and disbursements alone described by § 12(a). Id.

3. The filing of a return under § 13(d), where the taxpayer is able to comply with its requirements, is optional if he is also able to prepare a return on the basis of actual receipts and disbursements; but if true income cannot be arrived at on the latter basis, the return must be filed on the accrual basis. P. 282 U. S. 98. chanrobles.com-red

Page 282 U. S. 94

4. A taxpayer's declaration in his income tax return as to whether it is made on the accrual basis or on that of actual receipts and disbursements is not conclusive. P. 282 U. S. 99.

5. The use of inventories, and the inclusion in the returns of accrual items of receipts and disbursements appearing on the taxpayer's books, indicate the general and controlling character of the account, and support the finding of the trial court in this case that books and returns were on the accrual basis. Id.

6. It was competent for the Commissioner -- the record not disclosing that the taxpayer offered to make a return for 1917 on the basis of actual receipts and disbursements, or could do so -- to correct the return for 1917 to conform it to the system of accounting in fact adopted by excluding from it the munitions tax which had accrued in 1916, whether appearing on the books for that year or not. Id.

31 F.2d 669 affirmed.

Certiorari, 280 U.S. 540, to review a judgment of the circuit court of appeals affirming a judgment of the district court, 24 F.2d 230, for the Collector in an action to recover income and excess profits taxes assessed and paid for 1917.