*1031 In 1937 the petitioner, making its tax return on the cash receipts and disbursements basis, deducted from its adjusted net income, in computing the amount of income upon which the personal holding company surtax is imposed, the full amount of the undistributed profits tax paid in that year for 1936. In 1939 the respondent determined that such tax for 1936 was overpaid in the amount of $4,477.74, credited the overpayment against deficiencies determined for 1937, and recomputed the personal holding company surtax for 1937 by disallowing the deduction from the adjusted net income of $4,477.74 of the undistributed profits tax paid in 1937 for 1936. Held, that the respondent did not err in disallowing the deduction of the $4,477.74 in question.
*1056 This is a proceeding for the redetermination of a deficiency in personal holding company surtax for 1937 in the amount of $3,358.30.
The amended petition filed in this proceeding alleges in part as follows:
4. The determination of tax set forth in the said notice of deficiency*1032 is based upon the following errors:
A. Commissioner erroneously disallowed as a deduction in determining the amount of Undistributed Adjusted Net Income the full amount, $10,387.42, of surtax on undivided profits for the year 1936 paid in 1937.
FINDINGS OF FACT.
1. The petitioner, a personal holding company, is a Delaware corporation with its principal place of business in Jersey City, New Jersey. Its return for 1937 was filed with the collector of internal revenue for the fifth district of New Jersey.
2. The petitioner's accounts have been consistently kept on the cash receipts and disbursements basis and its tax returns prepared and filed on that basis.
*1057 3. The advice of an accountant was sought by the petitioner in connection with its dividend policy in relation to its tax matters. Its dividend policy was to pay out all earnings to its stockholders, and the petitioner also wanted to make sure that its dividends paid would be sufficient to eliminate any personal holding company surtax.
4. The petitioner's adjusted net income, dividends paid, surplus, and taxes paid, as shown on the returns for the years 1936 and 1937 filed in evidence, were as*1033 follows:
| Taxable | Taxable year | |
| year 1936 | 1937 | |
| Adjusted net income on original personal-holding- | ||
| company returns | $79,504.13 | $143,867.89 |
| Dividends paid | 103,000.00 | 146,000.00 |
| Surplus at close of taxable years | 379,127.95 | 420,863.99 |
| Taxes shown on the returns and payable in the year | ||
| following the taxable year: | ||
| Normal tax | None | 1,226.91 |
| Undistributed-profits tax | 10,387.42 | None |
| Excess-profits tax | None | None |
| Surtax under section 351, personal-holding-company tax | None | None |
5. The petitioner in 1936 received $27,540 from the Atlantic Coast Lumber Corporation which it reported in good faith in its tax return as dividends based on notice from the paying corporation that the payments constituted dividends out of surplus.
6. Late in 1938 petitioner received a notice and its first information from the Atlantic Coast Lumber Corporation that it had been determined that the payments made as dividends in 1936 were paid out of capital and were not taxable as dividends.
7. The respondent recomputed the petitioner's taxes for 1936 and 1937 and determined the capital gain from amounts received from the Atlantic Coast Lumber Corporation in 1937 upon*1034 the redemption of that corporation's stock in 1937 and held that there was a deficiency in tax for 1937 of $5,453.83 and an overassessment and overpayment of tax for 1936 of $4,477.74, which amount was allowed as a credit against the deficiency of $5,453.83.
8. The petitioner in October 1939 paid the amount of the difference between the deficiency for 1937 and the overassessment in 1936.
9. The respondent then determined that an error had been made in the computation of petitioner's personal holding company surtax for 1937 and that the amount thereof was $4,813.84 in lieu of $1,455.54, which had been assessed on the July 1936 list #3 and paid by the petitioner in October 1939. The respondent determined that the adjusted net income for 1937 was $158,594.80, which determination is not contested by the petitioner. The respondent held, however, that the petitioner was not entitled to deduct therefrom the full amount of the tax which it had paid in 1937, namely, $10,387.42, but only $5,909.68, which was the petitioner's correct undistributed *1058 profits tax liability for 1936. By reason of this adjustment the respondent determined that there was a deficiency in the personal*1035 holding company surtax of $3,358.30, which is the amount in controversy in this proceeding.
OPINION.
SMITH: The question presented is whether the petitioner is entitled to deduct from its adjusted net income for 1937, admittedly $158,594.80, the undistributed profits tax paid by the petitioner in 1937 in the amount of $10,387.42, for the purpose of determining the amount of the income upon which the personal holding company surtax is imposed.
At the hearing of this proceeding counsel for the respondent stated:
The Commissioner takes the position, while the sum of $10,000. [$10,387.42] may have been turned over to the Collector of Internal Revenue, merely the sum of five thousand-odd dollars [$5,909.68] constituted the payment of tax. The excess was mere deposit which the taxpayer might as well have put in a bank account with six percent interest. He is only entitled to the net amount of this deduction under this section. * * *
The petitioner submits that since it made its tax return for 1937 on the cash receipts and disbursements basis it is entitled to deduct from its adjusted net income for 1937 the full amount of the undistributed profits tax for 1936 paid by*1036 it in 1937, viz., $10,387.42, and not merely the amount of its correct undistributed profits tax for 1936, viz., $5,909.68.
Section 41 of the Revenue Act of 1936 provides in material part as follows:
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. * * *
Section 356 of the Revenue Act of 1936, added by section 1 of the Revenue Act of 1937, provides in part as follows:
For the purposes of this title the term "adjusted net income" means the net income with the following adjustments:
(a) ADDITIONAL DEDUCTIONS. - There shall be allowed as deductions -
(1) Federal income, war-profits, and excess-profits taxes paid or accrued during the taxable year to the extent not allowed as a deduction under section 23; * * *
*1037 In *1059 , we said:
A taxpayer is not entitled to deduct the amount of tax paid in a given year if, prior to the final determination of his tax liability for such year, the amount paid is refunded or recovered. ; ; ; ; ; Philip C. Brown, supra [10 B.T.A. 1122]; and see . Similarly, a taxpayer is not entitled to deduct the amount of tax accrued in a given year, if, prior to the final determination of his tax liability for such year, the amount accrued is ascertained to be excessive, and then he is entitled to deduct only the correct amount of tax. See , in which the Board stated in part as follows (p. 751):
* * * In any event, however, we have consistently held that where in a given year a taxpayer takes*1038 a deduction which, prior to the final determination of his income tax liability for such year, is ascertained to be excessive only the correct amount will be allowed in the final determination of his income tax liability. ; affd., ; ; affd., ; ; ; ; .
Cf. ; .
Although in several of the cases above cited the taxpayers kept their books of account and made their income tax returns upon the accrual basis, that was not true in ; affd. (C.C.A., 1st Cir.), . The taxpayer in that case was on the cash receipts and disbursements basis. In 1922 the taxpayer paid a large estate tax. She claimed the deduction from her gross income of 1922 of the full amount of the estate tax paid. *1039 In 1928 she recovered a large part of the estate tax paid. The court held, affirming the Board, that the taxpayer was entitled to deduct from her gross income of 1922 only the unrefunded portion of the estate tax paid.
We think that the rule applied by the court in , has equal application to the proceeding at bar. The year 1937 is the year with which we are concerned. That is the year in which the petitioner paid the undistributed profits tax for 1936. To the extent that the payment of the tax was in excess and has been refunded, the petitioner is not entitled to the deduction thereof. This is in accordance with the respondent's determination.
Reviewed by the Board.
Decision will be entered for the respondent.
MURDOCK, dissenting: This case further demonstrates the error of the rule established in the Elliott case, 45 B.T.A. 82">45 B.T.A. 82.