*925 In 1935 decedent taxpayer was engaged in the business of slaughtering hogs and was subject to the payment of processing taxes pursuant to the Agricultural Adjustment Act. During that year taxpayer accrued such taxes on his books, but contended that they were imposed unconstitutionally and never paid them to the collector. Early in 1936 the Agricultural Adjustment Act was declared unconstitutional by the Supreme Court and all of such taxes were abated. Held, taxpayer is not entitled to a deduction from gross income for 1935 of such taxes thus accrued.
*965 This proceeding involves a deficiency in the income tax liability of decedent for the year 1935 determined by the respondent in the sum of $74,824.14. The petition alleges error on the part of respondent in that he refused to allow processing taxes in the amount of $142,734.52 *966 accrued in the year 1935 but not paid as an allowable deduction in the taxable year.
There is no dispute as to the facts.
FINDINGS OF FACT.
The petitioners are respectively executrix and executors*926 of the estate of David Davies, deceased, with principal office at 616 West Mound Street, Columbus, Ohio.
David Davies during the year 1935 operated a packing plant and was engaged in the slaughtering of hogs. He filed an individual income tax return for the calendar year 1935 with the collector of internal revenue for the eleventh district of Ohio, reporting thereon a net profit from business of $57,528.71. The books of David Davies were kept upon an accrual basis and his income tax return for the taxable year was filed on the same basis.
In computing the profit of $57,528.71 from business as reported in his individual income tax return, there was claimed as a deduction for processing taxes the amount of $142,734.52, which was included in the item of purchases set forth in schedule 1 attached to said return.
In determining the deficiency herein respondent refused to allow the deduction claimed on the 1935 income tax return for processing taxes in the amount of $142,734.52 and increased the net profit from business reported by David Davies on the return by the said amount. The deficiency was determined under date of October 16, 1937.
On May 12, 1933, an act known as the*927 Agricultural Adjustment Act went into effect. Section 9-A of that act gave the Secretary of Agriculture the power to determine that benefit payments should be made with respect to any basic agricultural commodity and provided that a processing tax on said commodity would go into effect after the date of such determination.
Hogs were declared to be a basic agricultural commodity by section 11 of said act, and on August 17, 1933, the Secretary of Agriculture determined that benefit payments were to be made with respect to them. A processing tax on hogs went into effect on November 5, 1933.
Section 19-A of the Agricultural Adjustment Act provided that, after a processing tax had gone into effect upon any basic agricultural commodity, this tax should be collected by the Bureau of Internal Revenue under the direction of the Secretary of the Treasury. Section 626 of the Revenue Act of 1932, made applicable by section 19-B of the Agricultural Adjustment Act, provided that every person liable for the processing tax should make monthly returns under oath in duplicate and that the taxes should be paid to the collector of internal revenue of the district in which the taxpayer was located. *928 Section 626(b) of the Revenue Act of 1932, made applicable by *967 section 19-B of the Agricultural Adjustment Act, provided that the tax should be due and payable at the time of filing of each monthly process tax return without assessment by the Commissioner or notice from the collector.
This processing tax on hogs was in full force and effect during the calendar year 1935, and was fixed during the taxable year at $2.25 per hundred weight. The slaughter of hogs by the decedent, being the first processing thereof, was subject to this processing tax.
Pursuant to the regulations promulgated by the Commissioner of Internal Revenue, David Davies filed with the collector of internal revenue for the eleventh district of Ohio processing tax returns on the first domestic processing of hogs for the months of February to November 1935, inclusive.
The amount of processing taxes reported in each of the above stated processing tax returns, the month for which filed, the account number under which said taxes were assessed and the amount of said taxes abated by the collector, together with the date of abatement, are as follows:
| Return filed | Account No. | Tax filed | Amount abated | Schedule No. | Date |
| Feb. 1935 | Mar. 1935 P-3024 L-7 | $8,465.91 | $8,465.91 | PTA 8943 | 3-14-36 |
| Mar. 1935 | Apr. 1935 P-3027 L-0 | 12,280.34 | 12,280.34 | PTA 8943 | |
| Apr. 1935 | May 1935 P-3019 L-3 | 11,386.16 | 11,386.16 | PTA 8943 | |
| May 1935 | June 1935 P-3014 L-3 | 14,678.12 | 14,678.12 | PTA 8943 | |
| June 1935 | July 1935 P-3012 L-8 | 12,238.91 | 12,238.91 | PTA 8943 | |
| July 1935 | Sept. 1935 P-3000 L-8 | 14,060.91 | 14,060.91 | PTA 8943 | |
| Aug. 1935 | Sept. 1935 P-3010 L-3 | 11,147.96 | 11,147.96 | PTA 8943 | |
| Sept. 1935 | Nov. 1935 P-3001 L-3 | 9,408.00 | 9,408.00 | PTA 8998 | 3-22-36 |
| Oct. 1935 | Nov. 1935 P-3012 L-4 | 14,217.45 | 14,217.45 | PTA 8998 | |
| Nov. 1935 | Dec. 1935 P-3012 L-9 | 17,026.93 | 17,026.93 | PTA 8998 | |
| Dec. 1935 | (No return filed) |
*929 The amount of $9,085.49 appearing opposite Account February 1935, P-3028 L-3, as contained in petitioners' Exhibit 7 has been adjusted by agreement between petitioners and respondent and is not in controversy in this proceeding.
Pursuant to a bill of complaint and petition for declaratory judgment filed by David Davies against the collector of internal revenue for the eleventh district of Ohio, the District Court of the United States for the Southern District of Ohio, Eastern Division, issued an order on August 29, 1935, granting a temporary injunction against the said collector of internal revenue, restraining him from collecting from David Davies the processing taxes assessed and appearing on the collector's assessment list and ordered that Davis Davies deposit in escrow an amount equal to the amount of processing taxes claimed by the collector from David Davies. This order was modified on September 3, 1935, to change the escrow agent and the temporary injunction was extended by entries of the court until December 29, 1935. On January 18, 1936, the said court dismissed the bill of *968 complaint and ordered the return to David Davies of all amounts of processing taxes*930 paid to the escrow agent pursuant to its prior orders of August 29 and September 3, 1935.
The amounts of processing taxes reported on the processing tax returns filed by David Davies with the collector of internal revenue for the months of February, March, April, May, and June 1935, totaling $59,049.44, were paid to the escrow agent, and said amounts were never paid to the collector of internal revenue for the eleventh district of Ohio or to any other collector of internal revenue. On January 18, 1936, the amount of $59,049.44 was returned to David Davies by the escrow agent, pursuant to the above stated order of the District Court of the United States for the Southern District of Ohio, Eastern Division, entered on January 18, 1936.
The processing taxes reported on the returns filed by David Davies with the collector of internal revenue for the eleventh district of Ohio for the months of February to November 1935, inclusive, were entered at the end of each respective month on his books of account and record as a debit to "merchandise purchases, pork" or "merchandise purchases, hog tax" and a credit to accounts payable. The processing taxes reported on the returns filed by David*931 Davies with the collector of internal revenue for the months of February to June 1935, inclusive, totaling $59,049.44, which were paid to the escrow agent, were entered on the books of account and record of David Davies as a debit to the cash account in the general ledger when paid to the escrow agent.
David Davies prepared a processing tax return for the month of December 1935, but did not file the return with the collector of internal revenue for the eleventh district of Ohio. The amount of tax determined by David Davies on that return was $17,823.83, which amount was entered on his books of account and record in journal entry 830.
The amounts of processing taxes reported on the returns filed by David Davies with the collector of internal revenue for the eleventh district of Ohio for the months of July to November 1935, inclusive, totaling $65,861.25, together with the above stated amount of processing taxes of $17,823.83 entered on his books of account and record for the month of December 1935, were neither paid to the escrow agent nor to the collector of internal revenue for the eleventh district of Ohio or to any other collector of internal revenue.
*932 On January 6, 1936, the Supreme Court of the United States, in the case of , decided that the Agricultural Adjustment Act approved May 12, 1933, was unconstitutional.
On January 13, 1936, the Supreme Court of the United States, in the case of , decided that the constitutional infirmities of the original Agricultural *969 Adjustment Act were not cured by the amendment thereto by Act of August 24, 1935.
OPINION.
KERN: We have held that where taxes imposed by a statute later declared unconstitutional are paid by a taxpayer using the cash method of accounting or are accrued and then paid by a taxpayer using the accrual method of accounting, and such taxes have not been refunded prior to the final determination of the tax liability for the year in which such payments were made, then under such circumstances the taxpayer is entitled to a deduction from gross income in the amount of such payment as ctaxes paid", either in the year of payment or the year of accrual, depending on the method of accounting used. See *933 , and cases therein cited.
However, in , we refused to allow a deduction "for accrued taxes which were resisted, were never paid, and were declared unconstitutional prior to the filing of the petition" in that case.
There is a very real and practical distinction between the two cited cases, which has impelled us to a difference in their resolution. In the first there was an actual payment of money demanded as taxes by the sovereign, which might or might not be refunded, and, if refund were made, might be refunded either in whole or in part. Under the rule applied in that case the taxpayer can deduct amounts thus paid as taxes, eitherin the year of payment or of accrual, depending on the taxpayer's method of accounting, and if the law imposing these taxes is declared unconstitutional and any part thereof is refunded to the taxpayer in a year subsequent to the filing of the petition or the final determination of the tax liability for the year in which such taxes were paid, then the amount so refunded is includable in the taxpayer's gross income for the year in which such*934 refund is made. In the second case no sums were paid as taxes, the taxpayer consistently contended that it was not liable for the payment of such taxes, and prior to the filing of the petition the law imposing these taxes was declared unconstitutional and it was apparent that no amounts would ever be paid pursuant thereto. Under such circumstances it is obviously more just and infinitely more practical to make the proper adjustment in the taxpayer's income for the year in which the deduction was claimed, since all the facts necessary to such adjustment are known and it is not rendered impossible by reason of any period of limitation.
The facts of the instant case bring it squarely within the rule of , and, under the authority of that case,
Decision will be entered for the respondent.