Henry H. Cross Co. v. Cook, Comm. of Rev.

This is an action brought by appellant to recover from appellee as Commissioner of Revenues for the State of Arkansas the sum of $819.51 paid to the latter by the former as balance of or additional income tax due for 1942, under protest, as provided by Art. 7, 32 of Act 118 of 1929, 14054 of Pope's Digest.

Appellant filed its State of Arkansas income tax return for 1942 and therein deducted from its gross income the sum of $397,548.82 Federal income and excess profits taxes paid by it to the government for said year. In auditing the return so filed appellee refused to allow *Page 959 the total deduction claimed in said return, but did allow the sum of $364,779.73, the difference being the sum of $32,769.09 which latter is the so-called "Federal Credit" or "Post-War Refund" allowed by 780(a), Internal Revenue Code. Appellant's excess profit taxes paid to the government for 1942 was the sum of $327,696.95, and under the provisions of said 780(a), (b), (c), (d) and (e), the Secretary of the Treasury by (a) is authorized and directed to establish a credit to the account of the taxpayer, under conditions therein set out, "of an amount equal to 10 per centum" of the excess profits tax imposed under the act for such taxable year. Under sub-section (b), it is provided that "Within three months after the payment of the excess profits tax — there shall be issued to and in the name of the taxpayer bonds of the United States" in the amount of 10 per cent. of the excess profits tax paid, "and the credit established under sub-section (a) for such taxable year is hereby made available for the purchase of such bonds." Under (c) such bonds shall be issued under the authority of the Second Liberty Bond Act, as amended, shall bear no interest, be non-negotiable, non-transferable, "on or before the date of the cessation of hostilities in the present war," but otherwise thereafter. The bonds shall mature "on the last day of that calendar year, beginning after the date of cessation of hostilities in the present war," which is reflected in an appended table. Sub-section (d) provides: "The proceeds of any such bond upon redemption shall not be included in gross income." Sub-section (e) defines the term "cessation of hostilities."

The question for determination is whether said sum of $32,769.09, the post-War refund, paid by appellant to the government under the provisions of 780, I. R. C., for the year 1942, shall be allowed as a deductible item of taxes. If so, appellant should prevail and the decree of the chancery court be reversed. If not, it should lose and the decree be affirmed, since the court dismissed appellant's complaint for want of equity.

We think the Commissioner properly assessed and collected the additional tax and that the chancery court *Page 960 properly so held. We are cited to no case directly in point and our own investigation has found no such case.

By the express terms of the cited federal statute, the Secretary of the Treasury is authorized and directed to establish a credit to appellant's account of the sum of $32,769.09, which we assume he did, and within three months after paying its excess profits tax, bonds of the United States shall be issued to it for said credit. While it is true that such bonds shall bear no interest, and are not negotiable or transferable while the war continues, they are nevertheless valuable assets, and appellant so regards them, since, in its balance sheet as of December 31, 1942, it carries them as an asset at par, listed as "Post-War Refund, $32,769.09," with other assets in the total sum of $1,277, 368.33, and which augments to this extent its surplus account in the total sum of $318,081.48. Also, in its income tax return to this state for 1942, in "Schedule A, Reconciliation of Net Income and Analysis of Surplus," it lists the same item under the head of "additions."

While it is true that our State Income Tax Act, 14036, Pope's Digest, provides that "There shall be allowed as deductions . . . taxes paid or accrued within the income year imposed by authority of the United States . . ," the question is what was the net amount of tax paid to the United States? It paid to the collector the full amount now claimed by it, but it immediately became entitled to the credit and received the credit by operation of law, and within three months it was entitled to have issued to it government bonds, in the amount of the credit, pledging the full faith and credit of the United States to their payment, in the manner provided in the Act of Congress above mentioned. We think the effect of the transaction was to reduce its tax payment or was a refund to appellant of the amount of the credit in the sum stated, which reduced the amount of its taxes paid to this extent. We do not think that the credit exists as an act of grace from the United States through said act and that it is a provision for a gift to the taxpayer, as appellant argues. It is more in the nature of a forced loan to the government to the extent of the credit. If *Page 961 appellant has not received bonds, to which it is plainly entitled, it is not the fault of appellee. If appellant had overpaid the amount of its tax and had been refunded the amount of the overpayment in the taxable year, it certainly could not have claimed as deductible the amount of the refund. It is true that it has not received the controverted item in cash, but it has received it either in the form of a credit or in bonds and entered it on its books as an asset and carried it into its surplus account available for company purposes.

We, therefore, conclude that the trial court correctly dismissed the complaint to recover the sum assessed against and paid by it.

Affirmed.