*100 Decision will be entered under Rule 50.
1. In 1935 petitioner included in the price of its products the amount of processing taxes for which it was liable under the Agricultural Adjustment Act but which were not paid by it because of its contention that that act was unconstitutional. In 1937 petitioner made reimbursement to its vendees of amounts thus included in its prices. Held, petitioner is not entitled to deduct from its 1935 gross income amounts thus paid in 1937. Security Flour Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281.
2. In 1940 petitioner and respondent entered into an agreement under section 506. Revenue Act of 1936, with regard to the amount of petitioner's unjust enrichment tax liability and the amount of refund of processing taxes to which petitioner was entitled. Of the amount of refund of processing taxes agreed upon, respondent allocated a certain part to the processing taxes paid in 1935. Petitioner, in 1940, paid the difference between the amount of unjust enrichment taxes agreed upon and the amount of refund of processing taxes agreed upon. Respondent thereupon reduced the deduction allowed to petitioner in its return*101 for 1935 on account of processing taxes paid in that year by a part of the amount of the refund of processing taxes agreed upon in 1940 and credited in that year against the petitioner's agreed liability for unjust enrichment taxes. Held, respondent acted in error in this respect. Security Flour Mills Co. v. Commissioner, supra.
3. Petitioner, which is on an accrual basis of accounting, seeks to deduct from its gross income for 1935 processing taxes on sales made during certain months of that year. Petitioner never paid these taxes and successfully contended before the courts that it was not liable for them. Held, petitioner is not entitled to this deduction. Security Flour Mills Co. v. Commissioner, supra; Dixie Pine Products Co. v. Commissioner, 320 U.S. 516">320 U.S. 516.
*1027 Respondent determined a deficiency against Stanard-Tilton Milling Co. in income tax liability for the year ended *102 June 30, 1935, in the amount of $ 4,483.79, and in excess profits tax liability for the same year in the amount of $ 793.75. Petitioner in this proceeding denies liability in any amount and asks for a refund of taxes paid for the taxable year in the sum of $ 17,517.61.
Three principal issues are involved: (1) Whether petitioner was entitled to a deduction during the taxable year of amounts paid by it to its vendees in 1937 representing reimbursements of processing taxes included in the sale prices of goods sold during the taxable year but not paid by petitioner; (2) whether petitioner was entitled to deduct in the taxable year processing taxes paid during that year but, in effect, refunded to it in 1940; and (3) whether petitioner, which was on an accrual basis of accounting, was entitled to deduct processing taxes on sales made during certain months of the taxable year which were never paid to respondent and which were successfully contested by it in legal proceedings.
The facts were stipulated by the parties and we find them to be as stipulated. In order to make clear the issues here presented, they may be summarized as follows.
FINDINGS OF FACT.
Petitioner, now dissolved, during*103 the taxable year ended June 30, 1935, and for many years prior thereto, was engaged in the milling of corn and wheat and selling flour and other products. It filed its tax return for the taxable year with the collector of internal revenue for the eighth district of Illinois. Petitioner's books were kept and its returns were filed on an accrual basis of accounting. It operated two mills, one at Alton, Illinois, and the other at Dallas, Texas. As a processor of wheat and corn it was subject to the provisions of the Agricultural Adjustment Act of 1933, as amended, and it paid to the Federal Government the processing taxes imposed by that act up to March 31, 1935, on wheat and corn processed at its Alton mill and up to April 30, 1935, at its Dallas mill.
On July 5, 1935, petitioner instituted an injunction suit in the Federal District Court of Texas and on July 6, 1935, it instituted a similar suit in the Federal District Court of Illinois, to enjoin the collectors of internal revenue in those states from collecting further processing taxes under the Agricultural Adjustment Act. In each court a temporary injunction was granted and petitioner, pursuant to the orders of the courts, *104 paid to the clerks of the respective courts or deposited in a bank designated by the court $ 62,577.14 representing the amount of the processing tax due on corn and wheat milled during the months of April, May, and June 1935 at its Alton mill, and $ 64,857.30 *1028 representing the amount of the processing taxes due on corn and wheat milled during the months of May and June 1935 at its Dallas mill. After the Agricultural Adjustment Act was declared unconstitutional by the United States Supreme Court on January 6, 1936, in the case of , the Federal court in Illinois on January 30, 1936, and the Federal court in Texas on January 15, 1936, ordered and decreed the injunctions be made permanent, and they returned to petitioner the above respective amounts of $ 62,577.14 and $ 64,857.30, aggregating $ 127,434.44.
On September 16, 1935, petitioner filed its income and excess profits tax return for the fiscal year ended June 30, 1935, with the collector of internal revenue at Springfield, Illinois, showing a net income of $ 63,374.76 and a tax liability of $ 8,187.86, which was paid.
On this return petitioner claimed*105 a deduction from gross income in the amount of $ 653,146.41 representing processing taxes accrued on wheat and corn processed during the taxable year, as reflected on its books of account and in processing tax returns filed with the respective collectors of internal revenue. This sum of $ 653,146.41 included the $ 127,400.83 1 which petitioner paid to the clerks of the Federal courts in connection with the aforesaid injunction proceedings and which was refunded to petitioner after the Agricultural Adjustment Act had been declared unconstitutional by the Supreme Court.
In December 1936 petitioner filed an amended income and excess profits tax return for the fiscal year ended June 30, 1935, showing a net income of $ 171,017.33 and an additional tax liability of $ 14,800.85 in excess*106 of the $ 8,187.86 tax shown on the original return. This additional amount of $ 14,800.85 was paid by petitioner on December 21, 1936. On this amended return petitioner deducted from gross income as processing taxes the sum of $ 525,745.58, this being the amount of processing taxes actually paid to the collector during the taxable year.
On February 10, 1938, the petitioner filed a second amended income and excess profits tax return for the taxable year ended June 30, 1935, showing a net income of $ 133,081.07 and an income tax liability of $ 17,772.48. On this return petitioner deducted on account of processing taxes actually paid during the taxable year an amount of $ 525,745.58, which was the same amount shown as a deduction on account of processing taxes on the first amended return. On this second amended return, however, petitioner claimed a deduction, not claimed on the prior returns, of $ 37,936.26 representing amounts paid during the months of September and October 1937 to its vendees in the compromise of claims made against petitioner for reimbursements of the *1029 amount of processing taxes upon the commodities purchased by them during the part of the year for which*107 the petitioner did not pay the processing taxes assessed against it.
The difference in tax liability shown on this second amended return and the prior returns amounted to $ 5,216.23 and on February 17, 1938, petitioner filed a claim for refund of this amount. The only grounds stated in the claim for refund as the basis for the refund related to petitioner's claim for a deduction of the amount of the reimbursements of $ 37,936.26 which petitioner had paid to its vendees.
Petitioner was liable for unjust enrichment taxes under Title III of the Revenue Act of 1936, and after the Agricultural Adjustment Act had been declared unconstitutional on January 6, 1936, petitioner also filed claims for refunds of processing taxes under Title VII of the Revenue Act of 1936 amounting to, in the aggregate, $ 458,027.10.
On December 20, 1940, respondent and petitioner entered into an agreement pursuant to section 506 of the Revenue Act of 1936, wherein the parties agreed to petitioner's unjust enrichment tax liability and the amount of refund of processing taxes which petitioner was entitled to. In this agreement the parties agreed that petitioner was entitled to a refund of a certain amount of *108 processing taxes actually paid, of which the sum of $ 32,609.35 was allocated by respondent to the taxable year ended June 30, 1935. The refund so agreed upon was credited against the unjust enrichment taxes agreed upon, and the balance of unjust enrichment taxes in excess of refunds agreed to be due under Title VII was paid by petitioner. The amount of this payment was $ 23,444.06. Respondent has increased petitioner's income for the taxable year by the amount of $ 32,609.35.
By amended petition, petitioner seeks to be allowed as an additional deduction the amount of $ 127,400.83 representing the processing taxes accrued for the taxable year but not paid, and, accordingly, it has increased the amount of refund claimed from $ 5,216.23 to $ 17,517.61.
OPINION.
The first issue, as we have already indicated, is whether petitioner is entitled to deduct from its gross income for the year ended June 30, 1935, amounts paid in 1937 to the vendees by way of reimbursement to them of processing taxes which were included in the prices charged to its vendees but which were not paid by it. The parties have stipulated that the decision of the Supreme Court in ,*109 is dispositive of this issue. Therefore, on the authority of that decision we decide this issue in favor of respondent.
The second issue is whether petitioner is entitled to deduct from its gross income for the year ended June 30, 1935, the amount of certain processing taxes which were paid by it in that year, but which, *1030 as respondent contends, were, in effect, refunded to it in 1940 by reason of their being credited in that year against unjust enrichment taxes agreed to be owing by petitioner. Petitioner contends that the settlement made in 1940 under section 506 of the Revenue Act of 1936 was indivisible and that the respondent can not go behind the settlement to restore any item to income for 1935 which was taken into consideration in reaching the settlement, citing ; affirmed on other issues by the Supreme Court in Respondent, on the other hand, contends that the 1940 agreement under section 506 was divisible and that it can be clearly demonstrated that, in effect, a refund had then and thereby*110 been given to petitioner of $ 32,609.35 out of processing taxes of $ 525,745.58 paid and deducted in 1935. Respondent urges that under the facts shown the deduction taken by petitioner in 1935 in the amount of $ 525,745.58 should be reduced by the amount of $ 32,609.35, since, although the petitioner paid processing taxes in the greater amount, some part of this was, in effect, refunded in 1940 to petitioner, and, therefore, the amount of the deduction properly taken in 1935 should be adjusted by the amount of the refund granted in the later years, citing .
Even though we should agree with respondent's contention with regard to the divisible nature of the settlement made by the parties in 1940 under section 506, we are not able to come to the conclusion urged by him and toward which the Elliott case points, for we consider that the application of the principle of the Elliott case to the situation here presented is precluded by the recent pronouncement of the Supreme Court in
The third issue is whether petitioner is entitled to*111 deduct from its gross income for the taxable year the amount of processing taxes accrued by it but which were not paid, which were contended by it to be not payable and which were held by the Supreme Court to have been imposed by an unconstitutional statute. Under the authority of , and , we decide this issue in favor of respondent.
Decision will be entered under Rule 50.
Turner, J., dissenting: I am unable to agree with the majority that the decision of the Supreme Court in Security Flour Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281, requires the allowance of the deduction claimed by the petitioner under the second issue. In Security Flour Mills, when decided by us, there was an issue in all material respects similar to that appearing in the second issue here, but that issue did *1031 not go to the Supreme Court, was not discussed there, and was not decided. What the Supreme Court did was to reaffirm what it had previously held in Dixie Pine Products Co. v. Commissioner, 320 U.S. 516">320 U.S. 516,*112 to the effect that a taxpayer "who accounts on the accrual basis" may not accrue and deduct "a tax, liability for which the taxpayer denies, and payment whereof he is contesting." The Court further said that the refunding in a subsequent year by petitioner to its vendees of an amount equal to that included in the selling price for processing tax supplied no basis for applying section 43 of the Revenue Act of 1934 so as to allow as a deduction for the year of the sale the amounts refunded in the subsequent year, the full amounts received from customers having been received as the selling price of the processed commodities and no part thereof having been designated "as representing the tax."
The deduction dealt with in the second issue is claimed as "taxes paid," yet we know that the amount in question, even though paid, was not a tax but an unconstitutional exaction of an amount as a tax, that the payor was at all times entitled to recover, was strenuously engaged in proceedings for recovery, and did in fact recover, the amount collected. Just as in Security Flour Mills, where the amounts which were impounded were later held not to constitute a tax and were returned to petitioner, *113 so were the amounts here involved. To say that we are required to hold that amounts illegally and unconstitutionally collected as a tax are "taxes paid" and therefore deductible because the Supreme Court has said that where there was denial of liability and contest of payment of an asserted tax there was no accrual and therefore no allowable deduction, is, to me, very strange reasoning. Such however, it seems to me, is the effect of holding that Security Flour Mills is decisive of the second issue here. I accordingly note my dissent.
Footnotes
1. There is a difference of $ 33.61 between the amount actually paid to the clerks of the Federal courts and the amount sought to be deducted in this proceeding. Petitioner, however, seeks to deduct the smaller amount, to wit, $ 127,400.83.↩