*2036 A bank on cash receipts and disbursements basis may not deduct amount of bank-stock taxes which became a lien on the bank property in the taxable year but were not actually paid until a succeeding year.
*1050 This is a proceeding for the redetermination of deficiencies in income taxes asserted by the respondent for the calendar years 1924, 1925, and 1926, as follows:
| 1924 | $706.40 |
| 1925 | 574.49 |
| 1926 | 814.72 |
The only error alleged is the respondent's action in disallowing deductions claimed for bank-stock taxes for the years in question.
*1051 FINDINGS OF FACT.
The petitioner is a national banking corporation organized in 1899 under the laws of the United States, with its principal office at Stoughton, Wis. The petitioner for the years 1924, 1925 and 1926 made its returns on a cash receipts and disbursements basis and on the basis of a calendar year.
The Wisconsin Statutes of 1925 provide:
SEC. 7031. * * * (3) The shares of stock in any bank shall be liable to assessment and taxation as personal property and shall*2037 be entered upon the assessment roll in the names of the several owners, separately from the assessment of other personal property assessable to such owners. * * *
* * *
SEC. 70.39. Bank may pay tax on stock. Any bank is authorized to pay such taxes on the shares of stock in such bank and shall have a lien from the preceding first day of May upon the shares of stock for the amount of the taxes so paid with interest and for any costs or expenses incurred therewith or any such bank may at its option pay such taxes for all the stockholders in such bank out of its earnings or other available resources as the expenses of such bank.
It had been the practice of the petitioner over a period of at least ten years to determine on the last day of each year the amount of its bank-stock taxes owing to the city treasurer, but which were not payable until the succeeding year and to make out a certificate of deposit payable to the city treasurer for that amount. It would then charge that amount up to expense and deduct it on its books for that calendar year. When the time for collecting the tax came, sometime between the first of January and the first of March of the succeeding year, *2038 a draft or a new certificate would be made out for the amount and delivered to the city treasurer. The certificate of deposit bore interest on its face, but as a matter of fact was not held long enough to draw any interest.
For the years 1924, 1925, and 1926 the same procedure was followed as to determining the amount of tax due, issuing a certificate of deposit, and charging the amount thereof to expense. However, due to the fact that the constitutionality of the law imposing the taxes was in controversy, the amount was not paid when due. Approximately 35 per cent of this amount was paid later under a settlement agreement with the city of Stoughton after the Supreme Court of the United States had decided that the act imposing the tax was unconstitutional, in .
*1052 OPINION.
MCMAHON: The petitioner made its returns on the cash receipts and disbursements basis and it is conceded by the petitioner that it kept its books upon the same basis. The respondent disallowed as a deduction in each of the years in question an amount deducted by the petitioner on its books for bank-stock*2039 taxes which was not actually paid until a later year. The question to be decided is whether a bank, on the strictly cash receipts and disbursements basis, may deduct the amount due for taxes as an accrued liability simply because it has done so over a number of years. Section 212(b) of the Revenue Acts of 1924 and 1926 provides:
The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *
Article 23 of Regulations 69 provides:
Bases of computation. - Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 200*2040 for definition of "paid or accrued" and "paid or incurred." All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. * * *
The petitioner contends that a taxpayer does not have to use a strictly accrual or a strictly cash basis, but that a method which clearly reflects income and which has been followed consistently over a period of years should not be disturbed. We do not believe that the petitioner's contention is sound. We have repeatedly held that a taxpayer may not return part of its return on a basis of cash receipts and disbursements and a part on the accrual basis. Such a method does not clearly reflect income.
In , the petitioner was a banking corporation organized under the laws of Mississippi. In 1924 it became liable for state, county and municipal taxes, but did not pay them until 1925. We held that where the petitioner's books were kept on a basis of cash receipts and disbursements, no deduction*2041 was allowable in 1924. See also .
*1053 In , we said:
The petitioner states three propositions upon which it relies. It is urged that the method of accounting regularly employed by a taxpayer shall be used unless it fails to clearly reflect the income. Section 212(b), Revenue Act of 1921. With this statement there can be no disagreement, but it should be pointed out that the section refers to a method of accounting and not to the treatment accorded on the books to an isolated transaction. * * *
* * *
* * * While section 212 of the statute permits income to be returned in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, it limits this permission to cases where the method clearly reflects the income. * * *
Even if we assume that the taxpayer is entitled to accrue the amount due for taxes, it would not be entitled to a deduction therefor in the years in question. The evidence shows that the taxes were illegally assessed under a statute later declared unconstitutional by the Supreme Court of the United States. *2042 The petitioner was contesting its liability to pay and later events showed that there was no liability. In such a situation, no deduction is allowable. See ; ; and .
In our opinion the fact that in a later year the petitioner paid approximately 35 per cent of this amount does not work a different result in the case. In , due to the fact that the taxpayer was contesting the constitutionality of an act imposing taxes, it accrued taxes on its books for the years when due but did not pay them, and in the taxable year it paid an amount in compromise of the suit. The act imposing the taxes was later declared unconstitutional. We held that the amount paid was deductible in its entirety in the taxable year as a loss and did not constitute taxes deductible in the years in which they were accrued. While our case differs from the Bruce case in that the petitioner in the instant case paid the taxes after the act had been declared unconstitutional and the payment was, therefore, *2043 voluntary, since the year in which the amount was paid is not before us, we do not have to decide whether or not such a voluntary payment is deductible as a loss in that year. In any event the amount paid is not deductible as taxes in the years in question. See also .
We therefore hold that the petitioner is not entitled to the claimed deductions.
Judgment will be entered for the respondent.