U.S. Supreme Court Schlude v. Commissioner, 372
U.S. 128 (1963) Schlude v. Commissioner of Internal
Revenue No. 80 Argued December 10,
1962 Decided February 18,
1963 372
U.S. 128 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE EIGHTH
CIRCUIT Syllabus Petitioners, who operated dance studios, kept their books and
made their income tax returns on a fiscal year accrual basis. They
obtained from students contracts for dancing lessons over periods
of years, to be paid for partly in cash and partly in installments,
sometimes represented by negotiable notes which were discounted at
banks. For the years 1952, 1953 and 1954, they reported as gross
income only that portion of the advance payments received in cash
and the amounts of notes and contracts executed during the
respective years which corresponded with the number of hours
taught. The balance was reserved for accrual in future years when
additional lessons were taught, waived or forfeited. Held: it was proper for the Commissioner, in the
exercise of his discretion under § 41 of the Internal Revenue Code
of 1939 and § 446(b) of the Internal Revenue Code of 1954, to
reject petitioners' accounting system as not clearly reflecting
income, and to include as income in a particular year advance
payments by way of cash, negotiable notes and contract installments
falling due but remaining unpaid during that year. America
Automobile Association v. United States, 367 U.
S. 687 . Pp. 372 U. S.
129 -137.

															296 F.2d 721 affirmed in part, reversed in part, and
remanded. Page 372 U. S. 129 MR. JUSTICE WHITE delivered the opinion of the Court.

															This is still another chapter in the protracted problem of the
time certain items are to be recognized as income for the purposes
of the federal income tax. The Commissioner of Internal Revenue
increased the 1952, 1953, and 1954 ordinary income of the taxpayers
[ Footnote 1 ] by including in
gross income for those years amounts received or receivable under
contracts executed during those years despite the fact that the
contracts obligated taxpayers to render performance in subsequent
periods. These increases produced tax deficiencies which the
taxpayers unsuccessfully challenged in the Tax Court on the ground
that the amounts could be deferred under their accounting method.
On appeal, the Court of Appeals for the Eighth Circuit agreed with
the taxpayers and reversed the Tax Court, 283 F.2d 234, the
decision having been rendered prior to ours in American
Automobile Ass'n v. United States, 367 U.
S. 687 . Following the American Automobile
Association case, certiorari in this case was granted, the
judgment of the lower court vacated, 367 U.
S. 911 , and the cause remanded for further consideration
in light of American Automobile Association. 368 U.S. 873.
In a per curiam opinion, the Court of Appeals held that, in view of American Automobile Association, the taxpayers' accounting
method "does not, for income tax purposes, clearly reflect income,"
and affirmed the judgment for the Page 372 U. S. 130 Commissioner, 296 F.2d 721. We brought the case back once again
to consider whether the lower court misapprehended the scope of American Automobile Association, 370 U.S. 902.

															Taxpayers, husband and wife, formed a partnership to operate
ballroom dancing studios (collectively referred to as "studio")
pursuant to Arthur Murray, Inc., franchise agreements. Dancing
lessons were offered under either of two basic contracts. The cash
plan contract required the student to pay the entire downpayment in
cash at the time the contract was executed with the balance due in
installments thereafter. The deferred payment contract required
only a portion of the downpayment to be paid in cash. The remainder
of the downpayment was due in stated installments, and the balance
of the contract price was to be paid as designated in a negotiable
note signed at the time the contract was executed.

															Both types of contracts provided that (1) the student should pay
tuition for lessons in a certain amount, (2) the student should not
be relieved of his obligation to pay the tuition, (3) no refunds
would be made, and (4) the contract was noncancelable. [ Footnote 2 ] The contracts prescribed a
specific number of lesson hours ranging from five to 1,200 hours,
and some contracts provided lifetime courses entitling the student
additionally to two hours of lessons per month plus two parties a
year for life. Although the contracts designated the period during
which the lessons had to be taken, there was no schedule of
specific dates, which were arranged from time to time as lessons
were given. Page 372 U. S. 131 Cash payments received directly from students and amounts
received when the negotiable notes were discounted at the bank or
fully paid [ Footnote 3 ] were
deposited in the studio's general bank account without segregation
from its other funds. The franchise agreements required the studio
to pay to Arthur Murray, Inc., on a weekly basis, 10% of these cash
receipts as royalty and 5% of the receipts in escrow, the latter to
continue until a $20,000 indemnity fund was accumulated. Similarly,
sales commissions for lessons sold were paid at the time the sales
receipts were deposited in the studio's general bank account.

															The studio, since its inception in 1946, has kept its books and
reported income for tax purposes [ Footnote 4 ] on an accrual system of accounting. In
addition to the books, individual student record cards were
maintained showing the number of hours taught and the number still
remaining under the contract. The system, in substance, operated as
follows. When a contract was entered into, a "deferred income"
account was credited for the total contract price. At the close of
each fiscal period, the student record cards were analyzed and the
total number of taught hours was multiplied by the designated rate
per hour of each contract. The resulting sum was deducted from the
deferred income account and reported as earned income Page 372 U. S. 132 on the financial statements and the income tax return. In
addition, if there had been no activity in a contract for over a
year, or if a course were reduced in amount, an entry would be made
canceling the untaught portion of the contract, removing that
amount from the deferred income account, and recognizing gain to
the extent that the deferred income exceeded the balance due on the
contract, i.e., the amounts received in advance. The
amounts representing lessons taught and the gains from
cancellations constituted the chief sources of the partnership's
gross income. [ Footnote 5 ] The
balance of the deferred income account would be carried forward
into the next fiscal year, to be increased or decreased in
accordance with the number of new contracts, lessons taught and
cancellations recognized.

															Deductions were also reported on the accrual basis, except that
the royalty payments and the sales commissions were deducted when
paid, irrespective of the period in which the related receipts were
taken into income. Three certified public accountants testified
that, in their opinion, the accounting system employed truly
reflected net income in accordance with commercial accrual
accounting standards.

															The Commissioner included in gross income for the years in
question not only advance payments received in Page 372 U. S. 133 cash, but the full face amounts of notes and contracts executed
during the respective years. The Tax Court and the Court of Appeals
upheld the Commissioner, but the United States in this Court has
retreated somewhat, and does not now claim the includability in
gross income of future payments which were not evidenced by a note
and which were neither due by the terms of the contract nor matured
by performance of the related services. [ Footnote 6 ] The question remaining for decision, then,
is this: was it proper for the Commissioner, exercising his
discretion under § 41, [ Footnote
7 ] 1939 Code, and § 446(b), [ Footnote 8 ] 1954 Code, Page 372 U. S. 134 to reject the studio's accounting system as not clearly
reflecting income, and to include as income in a particular year
advance payments by way of cash, negotiable notes, and contract
installments falling due but remaining unpaid during that year? We
hold that it was, since we believe the problem is squarely
controlled by American Automobile Association, 367 U. S. 687 .

															The court there had occasion to consider the entire legislative
background of the treatment of prepaid income. The retroactive
repeal of § 452 of the 1954 Code, "the only law incontestably
permitting the practice upon which [the taxpayer] depends," was
regarded as reinstating longstanding administrative and lower court
rulings that accounting systems deferring prepaid income could be
rejected by the Commissioner.

															"[T]he fact is that § 452, for the first time, specifically
declared petitioner's system of accounting to be acceptable for
income tax purposes, and overruled the longstanding position of the
Commissioner and courts to the contrary. And the repeal of the
section the following year, upon insistence by the Treasury that
the proposed endorsement of such tax accounting would have a
disastrous impact on the Government's revenue, was just as clearly
a mandate from the Congress that petitioner's system was not
acceptable for tax purposes."

															367 U.S. at 367 U. S.
695 . Page 372 U. S. 135 Confirming that view was the step-by-step approach of Congress
in granting the deferral privilege to only limited groups of
taxpayers while exploring more deeply the ramifications of the
entire problem.

															Plainly, the considerations expressed in American Automobile
Association are apposite here. We need only add here that,
since the American Automobile Association decision, a specific
provision extending the deferral practice to certain membership
corporations was enacted, § 456, 1954 Code, added by § 1, Act of
July 26, 1961, 75 Stat. 222, continuing at least so far the
congressional policy of treating this problem by precise provisions
of narrow applicability. Consequently, as in the American
Automobile Association case, we invoke the "long established
policy of the Court in deferring, where possible, to congressional
procedures in the tax field," and, as in that case, we cannot say
that the Commissioner's rejection of the studio's deferral system
was unsound.

															The American Automobile Association case rested upon an
additional ground which is also controlling here. Relying upon Automobile Club of Michigan v. Commissioner, 353 U.
S. 180 , the Court rejected the taxpayer's system as
artificial, since the advance payments related to services which
were to be performed only upon customers' demands, without relation
to fixed dates in the future. The system employed here suffers from
that very same vice, for the studio sought to defer its cash
receipts on the basis of contracts which did not provide for
lessons on fixed dates after the taxable year, but left such dates
to be arranged from time to time by the instructor and his student.
Under the contracts, the student could arrange for some or all of
the additional lessons or could simply allow their rights under the
contracts to lapse. But even though the student did not demand the
remaining lessons, the contracts permitted the studio to insist
upon payment in accordance with the obligations undertaken, and to
retain Page 372 U. S. 136 whatever prepayments were made without restriction as to use and
without obligation of refund. At the end of each period, while the
number of lessons taught had been meticulously reflected, the
studio was uncertain whether none, some, or all of the remaining
lessons would be rendered. Clearly, services were rendered solely
on demand in the fashion of the American Automobile
Association and Automobile Club of Michigan cases.
[ Footnote 9 ]

															Moreover, percentage royalties and sales commissions for lessons
sold, which were paid as cash was received from students or from
its note transactions with the bank, were deducted in the year
paid, even though the related items of income had been deferred, at
least in part, to later periods. In view of all these
circumstances, we hold the studio's accrual system vulnerable under
§ 41 and § 446(b) with respect to its deferral of prepaid income.
Consequently, the Commissioner was fully justified in including
payments in cash or by negotiable note [ Footnote 10 ] in gross income for the year in which
such payments were received. If these payments are includible in
the year of receipt because their allocation to a later year does
not clearly reflect income, the contract installments are likewise
includible in gross income, as the United States now Page 372 U. S. 137 claims, in the year they become due and payable. For an accrual
basis taxpayer "it is the right to receive, and not the actual
receipt, that determines the inclusion of the amount in gross
income," Spring City Foundry Co. v. Commissioner, 292 U. S. 182 , 292 U. S. 184 ; Commissioner v. Hansen, 360 U. S. 446 , and
here the right to receive these installments had become fixed at
least at the time they were due and payable.

															We affirm the Court of Appeals insofar as that court held
includible the amounts representing cash receipts, notes received
and contract installments due and payable. Because of the
Commissioner's concession, we reverse that part of the judgment
which included amounts for which services had not yet been
performed and which were not due and payable during the respective
periods, and we remand the case with directions to return the case
to the Tax Court for a redetermination of the proper income tax
deficiencies now due in light of this opinion. It is so ordered. [ Footnote 1 ]

															The controversy turns upon the accounting method employed by a
partnership in which the taxpayers were equal partners. Since a
partnership is not a taxable entity, the partners being liable in
their individual capacities for their distributive share of
partnership income, § 181, Int.Rev.Code of 1939; § 701,
Int.Rev.Code of 1954, the proper statement of the partnership's
income affects only the tax liabilities of the partners
individually. However, as there is no other dispute in the case,
for convenience, the discussion will center upon the partnership's
accounting method without further mention of its effect upon the
respective tax liabilities of the partners.

															[ Footnote 2 ]

															Although the contracts stated they were noncancelable, the
studio frequently rewrote contracts reducing the number of lessons
for a smaller sum of money. Also, despite the fact that the
contracts provided that no refunds would be made, and despite the
fact that the studio discouraged refunds, occasionally a refund
would be made on a canceled contract.

															[ Footnote 3 ]

															Notes taken from the students were ordinarily transferred, with
full recourse, to a local bank which would deduct the interest
charges and credit the studio with approximately 50% of the face
amount. The remaining 50% was held in a reserve account,
unavailable to the studio, until the note was fully paid, at which
time the reserved amount was transferred to the studio's general
bank account.

															[ Footnote 4 ]

															Though the studio is not a taxable entity, it is still required
to prepare and file an information return showing, inter
alia, items of gross income and allowable deductions. § 187,
1939 Code; § 6031, 1954 Code.

															[ Footnote 5 ]

															The following schedule reflects ordinary net income on the
studio's books and returns:

															bwm:

															Gross income:

															Contract amounts trans- 1952 1953 1954

															ferred to earned income $143,949.63 $243,277.46 $325,266.97

															Gains from cancellation. . 26,861.40 19,483.36 28,488.61

															Other income . . . . . . . 4,041.21 11,426.23 16,987.31

															----------- ----------- -----------

															Total. . . . . . . . . . 174,852.24 274,187.05 370,702.89

															Deductions. . . . . . . . . . 137,267.91 223,390.69
301,609.76

															=========== =========== ===========

															Ordinary net income . . . . . 37,584.33 50,796.36 69,093.13

															ewm:

															[ Footnote 6 ]

															"Upon reconsideration, however, we concede the error of accruing
future payments which are neither due as a matter of contract nor
matured by performance of the related services. Indeed, the
Studio's right to collect the installment on its due date depends
on its continuing ability and willingness to perform. Until that
time, its right to receive payment has not fully ripened."

															Brief for the United States, p. 67.

															[ Footnote 7 ]

															" SEC. 41. GENERAL RULE." "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. If the taxpayer's
annual accounting period is other than a fiscal year as defined in
section 48 or if the taxpayer has no annual accounting period or
does not keep books, the net income shall be computed on the basis
of the calendar year."

															[ Footnote 8 ]

															" § 446. GENERAL RULE FOR METHODS OF ACCOUNTING" "(a) GENERAL RULE. -- Taxable income shall be computed under the
method of accounting on the basis of which the taxpayer regularly
computes his income in keeping his books."

															"(b) EXCEPTIONS. -- If no method of accounting has been
regularly used by the taxpayer, or if the method used does not
clearly reflect income, the computation of taxable income shall be
made under such method as, in the opinion of the Secretary or his
delegate, does clearly reflect income."

															"(c) PERMISSIBLE METHODS. -- Subject to the provisions of
subsections (a) and (b), a taxpayer may compute taxable income
under any of the following methods of accounting-"

															"(1) the cash receipts and disbursements method;"

															"(2) an accrual method;"

															"(3) any other method permitted by this chapter; or"

															"(4) any combination of the foregoing methods permitted under
regulations prescribed by the Secretary or his delegate."

															[ Footnote 9 ]

															The treatment of "gains from cancellations" underlines this
aspect of the case. These gains, representing amounts paid or
promised in advance of lessons given, were recognized in those
periods in which the taxpayers arbitrarily decided the contracts
were to be deemed canceled. The studio made no attempt to report
estimated cancellations in the year of receipt, choosing instead to
defer these gains to periods bearing no economic relationship to
the income recognized. Cf. Continental Tie & Lumber Co. v.
United States, 286 U. S. 290 .

															[ Footnote 10 ]

															Negotiable notes are regarded as the equivalent of cash
receipts, to the extent of their fair market value, for the
purposes of recognition of income. § 39.22(a)-4, Treas.Reg. 118,
1939 Code; § 1.61-2(d)(4), Treas.Reg., 1954 Code; Mertens, Federal
Income Taxation (1961), § 11.07. See Pinellas Ice & Cold
Storage Co. v. Commissioner, 287 U. S. 462 .

															MR. JUSTICE STEWART, with whom MR. JUSTICE DOUGLAS, MR. JUSTICE
HARLAN, and MR. JUSTICE GOLDBERG join, dissenting.

															As the Court notes, this case is but the most recent episode in
a protracted dispute concerning the proper income tax treatment of
amounts received as advances for services to be performed in a
subsequent year by a taxpayer who is on an accrual, rather than a
cash, basis. The Government has consistently argued that such
amounts are taxable in the year of receipt, relying upon two
alternative arguments: it has claimed that deferral of such
payments would violate the "annual accounting" principle which
requires that income not be postponed from one year to the next to
reflect the long-term economic result of a transaction.
Alternatively, the Government Page 372 U. S. 138 has argued that advance payments must be reported as income in
the year of receipt under the "claim of right doctrine," which
requires otherwise reportable income, held under a claim of right
without restriction as to use, to be reported when received despite
the fact that the taxpayer's claim to the funds may be disputed.
[ Footnote 2/1 ]

															As I have elsewhere pointed out, neither of these doctrines has
any relevance to the question whether any reportable income at all
has been derived when payments are received in advance of
performance by an accrual-basis taxpayer. [ Footnote 2/2 ] The most elementary principles of accrual
accounting require that advances be considered reportable income
only in the year they are earned by the taxpayer's rendition of the
services for which the payments were made. The Government's
theories would Page 372 U. S. 139 force upon an accrual basis taxpayer a cash basis for advance
payments in disregard of the federal statute, which explicitly
authorizes income tax returns to be based upon sound accrual
accounting methods. [ Footnote
2/3 ]

															Apparently the Court agrees that neither the annual accounting
requirement nor the claim of right doctrine has any relevance or
applicability to the question involved in this case. For the Court
does not base its decision on either theory, but rather, as in two
previous cases, [ Footnote 2/4 ] upon
the ground that the system of accrual accounting used by these
particular taxpayers does not "clearly reflect income" in accord
with the statutory command. [ Footnote
2/5 ] This result is said to be compelled both by a
consideration of legislative history and by an analysis of the
particular accounting system which these taxpayers employed.

															For the reasons I have elsewhere stated at some length,
[ Footnote 2/6 ] to rely on the
repeal of §§ 452 and 462 as indicating congressional Page 372 U. S. 140 disapproval of accrual accounting principles is conspicuously to
disregard clear evidence of legislative intent. The Secretary of
the Treasury, who proposed the repeal of these sections, made
explicitly clear that no inference of disapproval of accrual
accounting principles was to be drawn from the repeal of the
sections. [ Footnote 2/7 ] So did the
Senate Report. [ Footnote 2/8 ] The
repeal of these sections was occasioned solely by the fear of
temporary revenue losses which would result from the taking of
"double deductions" during the year of transition by taxpayers who
had not previously maintained their books on an accrual basis.
[ Footnote 2/9 ]

															The Court's decision can be justified, then, only upon the basis
that the system of accrual accounting used by the taxpayers in this
case did not "clearly reflect income" in accordance with the
command of § 41. In the Automobile Club of Michigan case,
[ Footnote 2/10 ] the taxpayer
allocated yearly dues ratably over 12 months, so that only a
portion of the dues received during any fiscal year was reported as
income for that year. In the absence of any proof that services
demanded by the Automobile Club members were distributed in the
same proportion over the year, the Court held that the system used
by the taxpayer did not clearly reflect income. In the American
Automobile Association case, [ Footnote 2/11 ] the taxpayer offered statistical proof
to show that its proration of dues reasonably matched the
proportion of its yearly costs incurred each month in rendering
services attributable to those dues. The Court discounted the
validity of this statistical evidence because Page 372 U. S. 141 the amount and timing of the services demanded were wholly
within the control of the individual members of the Association,
and the Court thought that the Association could not, therefore,
estimate with accuracy the costs attributable to each individual
member's demands.

															In the present case, the difficulties which the Court perceived
in Automobile Club of Michigan and American Automobile
Association have been entirely eliminated in the accounting
system which these taxpayers have consistently employed. The
records kept on individual students accurately measured the amount
of services rendered -- and therefore the costs incurred by the
taxpayer -- under each individual contract during each taxable
year. But, we are told, there is a fatal flaw in the taxpayers'
accounts in this case too: the individual contracts did not provide
"for lessons on fixed dates . . . , but left such dates to be
arranged from time to time by the instructor and his student." Yet
this "fixed date of performance" standard, it turns out, actually
has nothing whatever to do with those aspects of the taxpayers'
accounting system which the Court ultimately finds
objectionable.

															There is nothing in the Court's opinion to indicate disapproval
of the basic method by which income earned by the rendition of
services was recorded. On the contrary, the taxpayers' system was
admittedly wholly accurate in recording lessons given under each
individual contract. It was only in connection with lessons which
had not yet been taught that the taxpayers were "uncertain whether
none, some, or all" of the contractual services would be rendered,
and the condemned "arbitrariness" therefore is limited solely to
the method by which cancellations were recognized. [ Footnote 2/12 ] It is, of course, true of
all businesses in Page 372 U. S. 142 which services are not rendered simultaneously with payment that
the number and amount of cancellations are necessarily unknown at
the time advances are received. But surely it cannot be contended
that a contract which specified the times at which lessons were to
be given would make any more certain how many of the remaining
lessons students would in fact demand. Indeed, the Court does not
suggest that a schedule fixing the dates of all future lessons
would, if embodied in each contract, suffice to make petitioners'
accounting system "clearly reflect income."

															Instead, the cure suggested by the Court for the defect which it
finds in the accounting system used by these taxpayers is that
estimated cancellations should be reported as income in the year
advance payments are received. I agree that such estimates might
more "clearly reflect income" than the system actually used by the
taxpayers. But any such estimates would necessarily have to be
based on precisely the type of statistical evaluations which the
Court struck down in the American Automobile Association case. Whatever other artificialities the exigencies of revenue
collection may require in the field of tax accounting, it has never
before today been suggested that a consistent method of accrual
accounting, valid for purposes of recognizing income, is not
equally valid for purposes of deferring income. Yet, in this case,
the Court says that the taxpayers, in recognizing income, should
have used the very system of statistical estimates which, Page 372 U. S. 143 for income deferral purposes, the American Automobile decision held impermissible.

															It seems to me that this decision, the third of a trilogy of
cases purportedly decided on their own peculiar facts, in truth
completes the mutilation of a basic element of the accrual method
of reporting income -- a method which has been explicitly approved
by Congress for almost half a century. [ Footnote 2/13 ]

															I respectfully dissent.

															[ Footnote 2/1 ]

															The Commissioner has sometimes been successful in urging the
"claim of right doctrine" as a bar to the deferral of advances by
accrual basis taxpayers. See e.g., Andrews v.
Commissioner, 23 T.C. 1026, 1032-1033; South Dade Farms v.
Commissioner, 138 F.2d 818 (C.A.5th Cir.); Clay Sewer Pipe
Ass'n v. Commissioner, 139 F.2d 130 (C.A.3d Cir.); Automobile Club of Michigan v. Commissioner, 230 F.2d 585,
591 (C.A.6th Cir.), aff'd on other grounds, 353 U. S. 353 U.S.
180.

															In more recent cases, on the other hand, the Courts of Appeals
have held the claim of right doctrine irrelevant to this problem. Bressner Radio, Inc. v. Commissioner, 267 F.2d 520, 524,
525-528 (C.A.2d Cir.); Schuessler v. Commissioner, 230
F.2d 722, 725 (C.A.5th Cir.); Beacon Publishing Co. v.
Commissioner, 218 F.2d 697, 699-701 (C.A.10th Cir.).

															In the present case, the Commissioner urged that the "claim of
right doctrine" was applicable even to advance fees which were due
under the contract but not yet paid, a position from which he
receded only when the case reached this Court. The Tax Court, at
least in one case, has accepted the argument. Your Health Club,
Inc. v. Commissioner, 4 T.C. 385.

															[ Footnote 2/2 ] See American Automobile Ass'n v. United States, 367 U. S. 687 at 367 U. S.
699 -702 (dissenting opinion).

															[ Footnote 2/3 ]

															" § 446. GENERAL RULE FOR METHODS OF ACCOUNTING" "(a) GENERAL RULE. -- Taxable income shall be computed under the
method of accounting on the basis of which the taxpayer regularly
computes his income in keeping his books."

															"(b) EXCEPTIONS. -- If no method of accounting has been
regularly used by the taxpayer, or if the method used does not
clearly reflect income, the computation of taxable income shall be
made under such method as, in the opinion of the Secretary or his
delegate, does clearly reflect income."

															"(c) PERMISSIBLE METHODS. -- Subject to the provisions of
subsections (a) and (b), a taxpayer may compute taxable income
under any of the following methods of accounting --"

															" * * * *" "(2) an accrual method; . . . ."

															[ Footnote 2/4 ] Automobile Club of Michigan v. Commissioner, 353 U. S. 180 , and American Automobile Ass'n v. United States, 367 U.
S. 687 .

															[ Footnote 2/5 ] See 372
U.S. 128 fn2/3|>note 3, supra. See also §
41, 1939 Code.

															[ Footnote 2/6 ] See American Automobile Ass'n v. United States, 367
U.S. at 367 U. S.
703 -711 (dissenting opinion).

															[ Footnote 2/7 ]

															H.R.Rep.No.293, 84th Cong., 1st Sess. 5.

															[ Footnote 2/8 ]

															S.Rep.No.372, 84th Cong., 1st Sess. 5-6. See also H.R.Rep.No.293, 84th Cong., 1st Sess. 4-5.

															[ Footnote 2/9 ]

															Since the taxpayers in the present case have consistently
maintained their books on an accrual basis, they could not have
taken advantage of a "double deduction" even under the repealed
sections.

															[ Footnote 2/10 ] 353 U. S. 353 U.S.
180.

															[ Footnote 2/11 ] 367 U. S. 367 U.S.
687.

															[ Footnote 2/12 ]

															The Court also urges that the taxpayers' treatment of the
commissions paid to sales personnel and royalties paid to Arthur
Murray, Inc., were inconsistent with an accrual accounting system.
It should be noted that § 1.461-1(a)(3), Treas.Reg., 1954 Code,
specifically provides:

															". . . However, in a going business, there are certain
overlapping deductions. If these overlapping items do not
materially distort income, they may be included in the years in
which the taxpayer consistently takes them into account."

															If, however, the Court is holding that these items do
"materially distort income," then the case should be remanded for
recomputation as to these items.

															[ Footnote 2/13 ] See § 13(d) of the Revenue Act of 1916, 39 Stat.
771.


U.S. Supreme Court United States v. Correll, 389
U.S. 299 (1967) United States v.
Correll No. 113 Argued November 14,
1967 Decided December 11,
1967 389
U.S. 299 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SIXTH
CIRCUIT Syllabus The Commissioner of Internal Revenue's longstanding ruling that
"traveling expenses" incurred in the pursuit of business "while
away from home," which are deductible under § 162(a)(2) of the
Internal Revenue Code of 1954, include the cost of meals only if
the trip requires sleep or rest, held to achieve not only
ease and certainty of application, but also substantial fairness
and to be within the Commissioner's authority to implement the
statute in any reasonable manner. Pp. 389 U. S.
301 -307.

															369 F.2d 87, reversed.

															MR. JUSTICE STEWART delivered the opinion of the Court.

															The Commissioner of Internal Revenue has long maintained that a
taxpayer traveling on business may deduct the cost of his meals
only if his trip requires him to stop for sleep or rest. The
question presented here is the validity of that rule. Page 389 U. S. 300 The respondent in this case was a traveling salesman for a
wholesale grocery company in Tennessee. [ Footnote 1 ] He customarily left home early in the
morning, ate breakfast and lunch on the road, and returned home in
time for dinner. In his income tax returns for 1960 and 1961, he
deducted the cost of his morning and noon meals as "traveling
expenses" incurred in the pursuit of his business "while away from
home" under § 162(a)(2) of the Internal Revenue Code of 1954.
[ Footnote 2 ] Because the
respondent's daily trips required neither sleep nor rest, the
Commissioner disallowed the deductions, ruling that the cost of the
respondent's meals was a "personal, living" expense under § 262,
[ Footnote 3 ] rather than a
travel expense under § 162(a)(2). The respondent paid the tax, sued
for a refund in the District Court, and there received a favorable
jury verdict. [ Footnote 4 ] The
Court of Appeals for the Sixth Page 389 U. S. 301 Circuit affirmed, holding that the Commissioner's sleep or rest
rule is not "a valid regulation under the present statute." 369
F.2d 87, 90. In order to resolve a conflict among the circuits on
this recurring question of federal income tax administration,
[ Footnote 5 ] we granted
certiorari. 388 U.S. 905.

															Under § 162(a)(2), taxpayers "traveling . . . away from home in
the pursuit of trade or business" may deduct the total amount
"expended for meals and lodging" [ Footnote 6 ] As a result, even the taxpayer who incurs
substantial Page 389 U. S. 302 hotel and restaurant expenses because of the special demands of
business travel receives something of a windfall, for at least part
of what he spends on meals represents a personal living expense
that other taxpayers must bear without receiving any deduction at
all. [ Footnote 7 ] Not
surprisingly, therefore, Congress did not extend the special
benefits of § 162(a)(2) to every conceivable situation involving
business travel. It made the total cost of meals and lodging
deductible only if incurred in the course of travel that takes the
taxpayer "away from home." The problem before us involves the
meaning of that limiting phrase.

															In resolving that problem, the Commissioner has avoided the
wasteful litigation and continuing uncertainty that would
inevitably accompany any purely case-by-case approach to the
question of whether a particular taxpayer was "away from home" on a
particular day. [ Footnote 8 ]
Rather than requiring "every meal-purchasing taxpayer to take pot
luck in the courts," [ Footnote
9 ] the Commissioner has consistently construed travel "away
from home" to exclude all trips requiring neither sleep nor rest,
[ Footnote 10 ] regardless Page 389 U. S. 303 of how many cities a given trip may have touched, [ Footnote 11 ] how many miles it may
have covered, [ Footnote 12 ]
or how many hours it may have consumed. [ Footnote 13 ] By so interpreting the statutory phrase,
the Commissioner has achieved not only ease and certainty of
application, but also substantial fairness, for the sleep or rest
rule places all one-day travelers on a similar tax footing, rather
than discriminating against intracity travelers and commuters, who,
of course, cannot deduct the cost of the meals they eat on the
road. See Commissioner v. Flowers, 326 U.
S. 465 .

															Any rule in this area must make some rather arbitrary
distinctions, [ Footnote 14 ]
but at least the sleep or rest rule avoids the obvious inequity of
permitting the New Yorker who makes a quick trip to Washington and
back, missing neither his breakfast nor his dinner at home, to
deduct the cost of his lunch merely because he covers more
miles Page 389 U. S. 304 than the salesman who travels locally and must finance all his
meals without the help of the Federal Treasury. [ Footnote 15 ] And the Commissioner's rule
surely makes more sense than one which would allow the respondent
in this case to deduct the cost of his breakfast and lunch simply
because he spends a greater percentage of his time at the wheel
than the commuter who eats breakfast on his way to work and lunch a
block from his office.

															The Court of Appeals nonetheless found in the "plain language of
the statute" an insuperable obstacle to the Commissioner's
construction. 369 F.2d 87, 89. We disagree. The language of the
statute -- "meals and lodging . . . away from home" -- is obviously
not self-defining. [ Footnote
16 ] And to the extent that the words chosen by Congress cut in
either direction, they tend to support, rather than defeat, the
Commissioner's position, for the statute speaks of "meals and
lodging" as a unit, suggesting -- at least arguably -- that
Congress contemplated a deduction for the cost of meals only where
the travel in question involves lodging as well. [ Footnote 17 ] Ordinarily, at least, only the
taxpayer who finds it necessary to stop for sleep or rest incurs
significantly higher living expenses as a direct Page 389 U. S. 305 result of his business travel, [ Footnote 18 ] and Congress might well have thought that
only taxpayers in that category should be permitted to deduct their
living expenses while on the road. [ Footnote 19 ] In any event, Congress certainly recognized,
when it promulgated § 162(a)(2), that the Commissioner had so
understood its statutory predecessor. [ Footnote 20 ] This case thus comes within the settled
principle that

															"Treasury regulations and interpretations long continued without
substantial change, applying to unamended or substantially
reenacted statutes, are deemed to have Page 389 U. S. 306 received congressional approval and have the effect of law." Helvering v. Winmill, 305 U. S. 79 , 305 U. S. 83 ; Fribourg Nav. Co. v. Commissioner, 383 U.
S. 272 , 383 U. S.
283 .

															Alternatives to the Commissioner's sleep or rest rule are, of
course, available. [ Footnote
21 ] Improvements might be imagined. [ Footnote 22 ] But we do not sit as a committee of
revision to Page 389 U. S. 307 perfect the administration of the tax laws. Congress has
delegated to the Commissioner, not to the courts, the task of
prescribing "all needful rules and regulations for the enforcement"
of the Internal Revenue Code. 26 U.S.C. § 7805(a). In this area of
limitless factual variations, "it is the province of Congress and
the Commissioner, not the courts, to make the appropriate
adjustments." Commissioner v. Stidger, 386 U.
S. 287 , 386 U. S. 296 .
The role of the judiciary in cases of this sort begins and ends
with assuring that the Commissioner's regulations fall within his
authority to implement the congressional mandate in some reasonable
manner. Because the rule challenged here has not been shown
deficient on that score, the Court of Appeals should have sustained
its validity. The judgment is therefore Reversed. MR. JUSTICE MARSHALL took no part in the consideration or
decision of this case.

															[ Footnote 1 ]

															Since Mr. and Mrs. Correll filed a joint income tax return, both
are respondents here. Throughout this opinion, however, the term
"respondent" refers only to Mr. Correll.

															[ Footnote 2 ]

															"(a) In General. -- There shall be allowed as a deduction all
the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including --
"

															" * * * *" "(2) traveling expenses (including the entire amount expended
for meals and lodging) while away from home in the pursuit of a
trade or business. . . ."

															§ 162(a)(2) of the Internal Revenue Code of 1954, 26 U.S.C. §
162(a)(2) (1958 ed.).

															[ Footnote 3 ]

															"Except as otherwise expressly provided in this chapter, no
deduction shall be allowed for personal, living, or family
expenses."

															§ 262 of the Internal Revenue Code of 1954, 26 U.S.C. § 262.

															[ Footnote 4 ]

															After denying the Government's motion for a directed verdict,
the District Judge charged the jury that it would have to
"determine under all the facts of this case whether or not" the
Commissioner's rule was "an arbitrary regulation as applied to
these plaintiffs under the facts in this case." He told the jury to
consider whether the meal expenses were "necessary for the employee
to properly perform the duties of his work."

															"Should he have eaten them at his home, rather than . . . away
from home, in order to properly carry on this business or to
perform adequately his duties as an employee of this produce
company[?]"

															"You are instructed that the cost of meals while on one-day
business trips away from home need not be incurred while on an
overnight trip to be deductible, so long as the expense of such
meals . . . proximately results from the carrying on the particular
business involved and has some reasonable relation to that
business."

															Under these instructions, the jury found for the respondent. The
District Court denied the Government's motion for judgment
notwithstanding the verdict.

															[ Footnote 5 ]

															The decision below conflicts with that of the First Circuit in Commissioner v. Bagley, 374 F.2d 204, but is in accord
with that of the Eighth Circuit in Hanson v. Commissioner, 298 F.2d 391, reaffirmed in United States v. Morelan, 356
F.2d 199, 208-210.

															[ Footnote 6 ]

															Prior to the enactment in 1921 of what is now § 162(a)(2), the
Commissioner had promulgated a regulation allowing a deduction for
the cost of meals and lodging away from home, but only to the
extent that this cost exceeded "any expenditures ordinarily
required for such purposes when at home." Treas.Reg. 45 (1920 ed.),
Art. 292, 4 Cum.Bull. 209 (1921). Despite it s logical appeal, the
regulation proved so difficult to administer that the Treasury
Department asked Congress to grant a deduction for the "entire
amount" of such meal and lodging expenditures. See Statement of Dr. T. S. Adams, Tax Adviser, Treasury Department, in
Hearings on H.R. 8245 before the Senate Committee on Finance, 67th
Cong., 1st Sess., at 50, 234-235 (1921). Accordingly § 214(a)(1) of
the Revenue Act of 1921, c. 136, 42 Stat. 239, for the first time
included that language that later became § 162(a)(2). See n 2, supra. The
section was amended in a respect not here relevant by the Revenue
Act of 1962, § 4(b), 76 Stat. 976.

															[ Footnote 7 ]

															Because § 262 makes "personal, living, or family expenses"
nondeductible, see n 3, supra, the taxpayer whose business requires no travel
cannot ordinarily deduct the cost of the lunch he eats away from
home. But the taxpayer who can bring himself within the reach of §
162(a)(2) may deduct what he spends on his noontime meal although
it costs him no more, and relates no more closely to his business,
than does the lunch consumed by his less mobile counterpart.

															[ Footnote 8 ]

															Such was the approach of the Tax Court in Bagley v.
Commissioner, 46 T.C. 176, 183, vacated, 374 F.2d
204; of the Eighth Circuit in Hanson v. Commissioner, 298
F.2d 391, 397, and evidently of the Sixth Circuit in this case, see 369 F.2d 87, 90.

															[ Footnote 9 ] Commissioner v. Bagley, 374 F.2d 204, 207.

															[ Footnote 10 ]

															The Commissioner's interpretation, first expressed in a 1940
ruling, I.T. 3395, 1910-2 Cum.Bull. 64, was originally known as the
overnight rule. See Commissioner v. Bagley, supra, at
205.

															[ Footnote 11 ]

															The respondent lived in Fountain City, Tennessee, some 45 miles
from his employer's place of business in Morristown. His territory
included restaurants in the cities of Madisonville, Engelwood,
Etowah, Athens, Sweetwater, Lake City, Caryville, Jacksboro, La
Follette, and Jellico, all in eastern Tennessee.

															[ Footnote 12 ]

															The respondent seldom traveled farther than 55 miles from his
home, but he ordinarily drove a total of 150 to 175 miles
daily.

															[ Footnote 13 ]

															The respondent's employer required him to be in his sales
territory at the start of the business day. To do so, he had to
leave Fountain City at about 5 a.m. He usually finished his daily
schedule by 4 p.m., transmitted his orders to Morristown, and
returned home by 5:30 p.m.

															[ Footnote 14 ]

															The rules proposed by the respondent and by the two amici
curiae filing briefs on his behalf are not exceptional in this
regard. Thus, for example, the respondent suggests that § 162(a)(2)
be construed to cover those taxpayers who travel outside their "own
home town," or outside "the greater . . . metropolitan area" where
they reside. One amicus stresses the number of "hours
spent and miles traveled away from the taxpayer's principal post of
duty," suggesting that some emphasis should also be placed upon the
number of meals consumed by the taxpayer "outside the general area
of his home."

															[ Footnote 15 ] See Amoroso v. Commissioner, 193 F.2d 583.

															[ Footnote 16 ]

															The statute applies to the meal and lodging expenses of
taxpayers "traveling . . . away from home." The very concept of
"traveling" obviously requires a physical separation from one's
house. To read the phrase "away from home" as broadly as a
completely literal approach might permit would thus render the
phrase completely redundant. But, of course, the words of the
statute have never been so woodenly construed. The commuter, for
example, has never been regarded as "away from home" within the
meaning of § 162(a)(2) simply because he has traveled from his
residence to his place of business. See Commissioner v.
Flowers, 326 U. S. 465 , 326 U. S. 473 .
More than a dictionary is thus required to understand the provision
here involved, and no appeal to the "plain language" of the section
can obviate the need for further statutory construction.

															[ Footnote 17 ] See Commissioner v. Bagley, 374 F.2d 204, 207, n.
10.

															[ Footnote 18 ]

															The taxpayer must ordinarily "maintain a home for his family at
his own expense even when he is absent on business," Barnhill
v. Commissioner, 148 F.2d 913, 917, and if he is required to
stop for sleep or rest, "continuing costs incurred at a permanent
place of abode are duplicated." James v. United States, 308 F.2d 204, 206. The same taxpayer, however, is unlikely to incur
substantially increased living expenses as a result of business
travel, however far he may go, so long as he does not find it
necessary to stop for lodging. One amicus curiae brief
filed in this case asserts that "those who travel considerable
distances such as [on] a one-day jet trip between New York and
Chicago" spend more for "comparable meals [than] those who remain
at their home base" and urges that all who travel "substantial
distances" should therefore be permitted to deduct the entire cost
of their meals. It may be that eating at a restaurant costs more
than eating at home, but it cannot seriously be suggested that a
taxpayer's bill at a restaurant mysteriously reflects the distance
he has traveled to get there.

															[ Footnote 19 ]

															The court below thought that,

															"[i]n an era of supersonic travel, the time factor is hardly
relevant to the question of whether or not . . . meal expenses are
related to the taxpayer's business. . . ."

															369 F.2d 87, 89-90. But that completely misses the point. The
benefits of § 162(a)(2) are limited to business travel "away from
home," and all meal expenses incurred in the course of such travel
are deductible, however unrelated they may be to the taxpayer's
income-producing activity. To ask that the definition of "away from
home" be responsive to the business necessity of the taxpayer's
meals is to demand the impossible.

															[ Footnote 20 ]

															In considering the proposed 1954 Code, Congress heard a taxpayer
plea for a change in the rule disallowing deductions for meal
expenses on one-day trips. Hearings on General Revision of the
Internal Revenue Code before the House Committee on Ways and Means,
83d Cong., 1st Sess., pt. 1, at 216-219 (1953); Hearings on H.R.
8300 before the Senate Committee on Finance, 83d Cong., 2d Sess.,
pt. 4, at 2396 (1954). No such change resulted.

															In recommending § 62(2)(C) of the 1954 Code, permitting
employees to deduct certain transportation expenses in computing
adjusted gross income, the Senate Finance Committee stated:

															"At present, business transportation expenses can be deducted by
an employee in arriving at adjusted gross income only if they are
reimbursed by the employer or if they are incurred while he was away from home overnight. . . ."

															"Because these expenses, when incurred, usually are substantial,
it appears desirable to treat employees in this respect like
self-employed persons. For this reason both the House and your
committee's bill permit employees to deduct business transportation
expenses in arriving at adjusted gross income even though the
expenses are not incurred in travel away from home or not
reimbursed by the employer. . . ."

															S.Rep. No. 1622, 83d Cong., 2d Sess., 9 (1954) (emphasis added). See also H.R.Rep. No. 1337, 83d Cong., 2d Sess., 9
(1954).

															And in discussing § 120 of the 1954 Code (repealed by 72 Stat.
1607 (1958)), which allowed policemen to exclude from taxable
income up to $5 per day in meal allowances, both the House and
Senate Reports noted that, under the prevailing rule, police
officers could deduct expenses over the $5 limit of § 120
"for meals while away from home overnight. " H.R.Rep. No.
1337, 83d Cong., 2d Sess., A40 (1954) (emphasis added); S.Rep. No.
1622, 83d Cong., 2d Sess., 191 (1954) (emphasis added). Thus,
Congress was well aware of the Commissioner's rule when it retained
in § 162(a)(2) the precise terminology it had used in 1921.

															[ Footnote 21 ] See n 14, supra. [ Footnote 22 ] See, e.g., the 1963 proposal of the Treasury
Department, in Hearings on the President's 1963 Tax Message before
the House Committee on Ways and Means, 88th Cong., 1st Sess., pt.
1, at 98 (1963).

															MR. JUSTICE DOUGLAS, with whom MR. JUSTICE BLACK and MR. JUSTICE
FORTAS concur, dissenting.

															The statutory words "while away from home," 26 U.S.C. §
162(a)(2), may not, in my view, be shrunken to "overnight" by
administrative construction or regulations. "Overnight" injects a
time element in testing deductibility, while the statute speaks
only in terms of geography. As stated by the Court of Appeals:

															"In an era of supersonic travel, the time factor is hardly
relevant to the question of whether or not travel and meal expenses
are related to the taxpayer's business, and cannot be the basis of
a valid regulation under the present statute." Correll v. United States, 369 F.2d 87, 89-90.

															I would affirm the judgment below.


U.S. Supreme Court United States v. Skelly Oil Co., 394
U.S. 678 (1969) United States v. Skelly Oil
Co. No. 280 Argued January 15,
1969 Decided April 21,
1969 394
U.S. 678 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE TENTH
CIRCUIT Syllabus Respondent, a natural gas producer, in 1958 refunded $505,536 to
two customers for excess amounts it had collected during the
previous six years under a minimum price order which this Court
subsequently invalidated. In its tax returns for those years,
respondent included that sum in its gross income and it also
included that amount in its "gross income from the property," which
§ 613 of the Internal Revenue Code of 1954 makes the basis for the
27 1/2% depletion allowed upon the production of oil and natural
gas. Respondent's actual increase in taxable income attributable to
the receipts in question was thus $36,513. However, in its tax
return for 1958, respondent attempted to deduct the $505,536,
claiming that § 1341 permitted it to deduct the full amount of the
overcharges refunded to respondent's customers. Under that section,
income which a taxpayer receives under a claim of right is included
as gross income in the year of receipt, and, under § 1341(a)(4) (on
which respondent relies here), a deduction may be claimed in the
year of repayment. Section 1341 applies if (1) "an item was
included in gross income for a prior taxable year (or years)" under
a claim of right: (2) "a deduction is allowable for the taxable
year because it was established after the close of such prior
taxable year (or years) that the taxpayer did not have an
unrestricted right to such item", and (3) the deduction exceeds
$3,000. The Commissioner reduced the amount of the deduction by the
2 1/2% depletion allowance which respondent had taken in its
returns for the years 1952-1957. Respondent paid the deficiency,
and, after disallowance of its claim, instituted this action for a
refund. The District Court upheld the Commissioner, but the Court
of Appeals reversed. Held: Under § 1341 of the Internal Revenue Code of
1954, the deduction allowable in the year of repayment must be
reduced by the percentage depletion allowance granted respondent in
the years of receipt as a result of the inclusion of the
later-refunded items in respondent's "gross income from the
property" in those years, since Congress did not intend to give
taxpayers, and the Code should not be interpreted Page 394 U. S. 679 as allowing, a deduction for refunding money that was not taxed
when received. Pp. 394 U. S.
680 -687.

															32 F.2d 128, reversed and remanded.

															MR. JUSTICE MARSHALL delivered the opinion of the Court.

															During its tax year ending December 31, 1958, respondent
refunded $505,536.54 to two of its customers for overcharges during
the six preceding years. Respondent, an Oklahoma producer of
natural gas, had set its prices during the earlier years in
accordance with a minimum price order of the Oklahoma Corporation
Commission. After that order was vacated as a result of a decision
of this Court, Michigan Wisconsin Pipe Line Co. v. Corporation
Comm'n of Oklahoma, 355 U. S. 425 (1958), respondent found it necessary to settle a number of claims
filed by its customers; the repayments in question represent
settlements of two of those claims. Since respondent had claimed an
unrestricted right to its sales receipts during the years 1952
through 1957, it had included the $505,536.54 in its gross income
in those years. The amount was also included in respondent's "gross
income from the property" as defined in § 613 of the Internal
Revenue Code of 1954, the section which allows taxpayers to deduct
a fixed percentage of certain receipts to compensate for the
depletion of natural resources from which they derive income.
Allowable percentage depletion for receipts from oil and gas wells
is fixed at 27 1/2% of the "gross income from the property." Since
respondent Page 394 U. S. 680 claimed and the Commissioner allowed percentage depletion
deductions during these years, 27 1/2% of the receipts in question
was added to the depletion allowances to which respondent would
otherwise have been entitled. Accordingly, the actual increase in
respondent's taxable income attributable to the receipts in
question was not $505,536.54, but only $366,513.99. Yet, when
respondent made its refunds in 1958, it attempted to deduct the
full $505,536.54. The Commissioner objected, and assessed a
deficiency. Respondent paid, and, after its claim for a refund had
been disallowed, began the present suit. The Government won in the
District Court, 255 F.
Supp. 228 (D.C.N.D. Okla.1966), but the Court of Appeals for
the Tenth Circuit reversed, 392 F.2d 128 (1968). Upon petition by
the Government, we granted certiorari, 393 U.S. 820 (1968), to
consider whether the Court of Appeals decision had allowed
respondent "the practical equivalent of double deduction," Charles Ilfeld Co. v. Hernandez, 292 U. S.
62 , 292 U. S. 68 (1934), in conflict with past decisions of this Court and sound
principles of tax law. We reverse. I The present problem is an outgrowth of the so-called
"claim-of-right" doctrine. Mr. Justice Brandeis, speaking for a
unanimous Court in North American Oil Consolidated v.
Burnet, 286 U. S. 417 , 286 U. S. 424 (1932), gave that doctrine its classic formulation.

															"If a taxpayer receives earnings under a claim of right and
without restriction as to its disposition, he has received income
which he is required to return, even though it may still be claimed
that he is not entitled to retain the money, and even though he may
still be adjudged liable to restore its equivalent."

															Should it later appear that the taxpayer was not entitled to
keep the money, Mr. Justice Brandeis explained, he would be
entitled to a deduction in the year of repayment; the taxes due for
the year of receipt would Page 394 U. S. 681 not be affected. This approach was dictated by Congress'
adoption of an annual accounting system as an integral part of the
tax code. See Burnet v. Sanford & Brooks Co., 282 U. S. 359 , 282 U. S.
365 -366 (1931). Of course, the tax benefit from the
deduction in the year of repayment might differ from the increase
in taxes attributable to the receipt; for example, tax rates might
have changed, or the taxpayer might be in a different tax
"bracket." See Healy v. Commissioner, 345 U.
S. 278 , 345 U. S.
284 -285 (1953). But, as the doctrine was originally
formulated, these discrepancies were accepted as an unavoidable
consequence of the annual accounting system.

															Section 1341 of the 1954 Code was enacted to alleviate some of
the inequities which Congress felt existed in this area. [ Footnote 1 ] See H.R.Rep. No.
1337, 83d Cong., 2d Sess., Page 394 U. S. 682 887 (1954); S.Rep. No. 1622, 83d Cong., 2d Sess., 118-119
(1954). As an alternative to the deduction in the year of repayment
[ Footnote 2 ] which prior law
allowed, § 1341(a)(5) permits certain taxpayers to recompute their
taxes for the year of receipt. Whenever § 1341(a)(5) applies, taxes
for the current year are to be reduced by the amount taxes were
increased in the year or years of receipt because the disputed
items were included in gross income. Nevertheless, it is clear that
Congress did not intend to tamper with the underlying
claim-of-right doctrine; it only provided an alternative for
certain cases in which the new approach favored the taxpayer. When
the new approach was not advantageous to the taxpayer, the old law
was to apply under § 1341(a)(4).

															In this case, the parties have stipulated that § 1341(a)(5) does
not apply. Accordingly, as the courts below recognized,
respondent's taxes must be computed under § 1341(a)(4), and, thus,
in effect, without regard to the special relief Congress provided
through the enactment of § 1341. Nevertheless, respondent argues,
and the Court of Appeals seems to have held, that the language used
in § 1341 requires that respondent be allowed a deduction for the
full amount it refunded to its customers. We think the section has
no such significance. Page 394 U. S. 683 In describing the situations in which the section applies, §
1341(a)(2) talks of cases in which

															"a deduction is allowable for the taxable year because it was
established after the close of [the year or years of receipt] that
the taxpayer did not have an unrestricted right to such item. . .
."

															The "item" referred to is first mentioned in § 1341(a)(1); it is
the item included in gross income in the year of receipt. The
section does not imply in any way that the "deduction" and the
"item" must necessarily be equal in amount. In fact, the use of the
words "a deduction" and the placement of § 1341 in subchapter Q --
the subchapter dealing largely with side effects of the annual
accounting system -- make it clear that it is necessary to refer to
other portions of the Code to discover how much of a deduction is
allowable. The regulations promulgated under the section make the
necessity for such a cross-reference clear. Treas.Reg. on Income
Tax (1954 Code) § 1.1341-1(26 CFR § 1.1341-1). Therefore, when §
1341(a)(4) -- the subsection applicable here -- speaks of "the tax
. . . computed with such deduction," it is referring to the
deduction mentioned in § 1341(a)(2), and that deduction must be
determined not by any mechanical equation with the "item"
originally included in gross income, but by reference to the
applicable sections of the Code and the case law developed under
those sections. II There is some dispute between the parties about whether the
refunds in question are deductible as losses under § 165 of the
1954 Code or as business expenses under § 162. [ Footnote 3 ] Although, in some situations, the
distinction may have relevance, cf. Equitable Life Ins. Co.
of Page 394 U. S. 684 Iowa v. United States, 340 F.2d 9 (C.A. 8th Cir.1965),
we do not think it makes any difference here. In either case, the
Code should not be interpreted to allow respondent "the practical
equivalent of double deduction," Charles Ilfeld Co. v.
Hernandez, 292 U. S. 62 , 292 U. S. 68 (1934), absent a clear declaration of intent by Congress. See
United States v. Ludey, 274 U. S. 295 (1927). Accordingly, to avoid that result in this case, the
deduction allowable in the year of repayment must be reduced by the
percentage depletion allowance which respondent claimed and the
Commissioner allowed in the years of receipt as a result of the
inclusion of the later-refunded items in respondent's "gross income
from the property" in those years. Any other approach would allow
respondent a total of $1.27 1/2 in deductions for every $1 refunded
to its customers.

															Under the annual accounting system dictated by the Code, each
year's tax must be definitively calculable at the end of the tax
year.

															"It is the essence of any system of taxation that it should
produce revenue ascertainable, and payable to the government, at
regular intervals." Burnet v. Sanford & Brooks Co., supra, at 282 U. S. 365 .
In cases arising under the claim-of-right doctrine, this emphasis
on the annual accounting period normally requires that the tax
consequences of a receipt should not determine the size of the
deduction allowable in the year of repayment. There is no
requirement that the deduction save the taxpayer the exact amount
of taxes he paid because of the inclusion of the item in income for
a prior year. See Healy v. Commissioner, supra. Nevertheless, the annual accounting concept does not require us
to close our eyes to what happened in prior years. For instance, it
is well settled that the prior year may be examined to determine
whether the repayment gives rise to a regular loss or a capital
loss. Arrowsmith Page 394 U. S. 685 v. Commissioner, 344 U. S. 6 (1952).
The rationale for the Arrowsmith rule is easy to see; if
money was taxed at a special lower rate when received, the taxpayer
would be accorded an unfair tax windfall if repayments were
generally deductible from receipts taxable at the higher rate
applicable to ordinary income. The Court in Arrowsmith was
unwilling to infer that Congress intended such a result.

															This case is really no different. [ Footnote 4 ] In essence, oil and gas producers are taxed on
only 72 1/2% of their "gross income from the property" whenever
they claim percentage depletion. The remainder of their oil and gas
receipts is in reality tax-exempt. We cannot believe that Congress
intended to give taxpayers a deduction for refunding money that was
not taxed when received. Cf. O'Mearo, v. Commissioner, 8
T.C. 622, 63635 (1947). Accordingly, Arrowsmith teaches
that the full amount of the repayment cannot, in the circumstances
of this case, be allowed as a deduction.

															This result does no violence to the annual accounting system.
Here, as in Arrowsmith, the earlier returns are not being
reopened. And no attempt is being made to require the tax savings
from the deduction to equal the Page 394 U. S. 686 tax consequences of the receipts in prior years. [ Footnote 5 ] In addition, the approach here
adopted will affect only a few cases. The percentage depletion
allowance is quite unusual; unlike most other deductions provided
by the Code, it allows a fixed portion of gross income to go
untaxed. As a result, the depletion allowance increases in years
when disputed amounts are received under claim of right; there is
no corresponding decrease in the allowance because of later
deductions for repayments. [ Footnote 6 ] Therefore, if a deduction for 100% of the
repayments were allowed, every time money is received and later
repaid the taxpayer would make a profit equivalent to the taxes on
27 1/2% of the amount refunded. In other situations when the taxes
on a receipt do not equal the tax benefits of a repayment, either
the taxpayer or the Government may, depending on circumstances, be
the beneficiary. Here, the taxpayer always wins and the Government
always loses. We cannot believe that Congress would have intended
such an inequitable result.

															The parties have stipulated that respondent is entitled to a
judgment for $20,932.64 plus statutory interest for Page 394 U. S. 687 claims unrelated to the matter in controversy here; the District
Court entered a judgment for that amount. Accordingly, the judgment
of the Court of Appeals is reversed and the case is remanded to
that court with instructions that it be returned to the District
Court for reentry of the original District Court judgment. Reversed and remanded. [ Footnote 1 ]

															Section 1341(a) provides:

															"If -- "

															"(1) an item was included in gross income for a prior taxable
year (or years) because it appeared that the taxpayer had an
unrestricted right to such item;"

															"(2) a deduction is allowable for the taxable year because it
was established after the close of such prior taxable year (or
years) that the taxpayer did not have an unrestricted right to such
item or to a portion of such item; and"

															"(3) the amount of such deduction exceeds $3,000,"

															"then the tax imposed by this chapter for the taxable year shall
be the lesser of the following: "

															"(4) the tax for the taxable year computed with such deduction;
or"

															"(5) an amount equal to -- "

															"(A) the tax for the taxable year computed without such
deduction, minus"

															"(B) the decrease in tax under this chapter (or the
corresponding provisions of prior revenue laws) for the prior
taxable year (or years) which would result solely from the
exclusion of such item (or portion thereof) from gross income for
such prior taxable year (or years)."

															"For purposes of paragraph (5)(B), the corresponding provisions
of the Internal Revenue Code of 1939 shall be chapter 1 of such
code (other than subchapter E, relating to self employment income)
and subchapter E of chapter 2 of such code."

															Section 1341(b)(2) contains an exclusion covering certain cases
involving sales of stock in trade or inventory. However, because of
special treatment given refunds made by regulated public utilities,
both parties agree that § 1341(b)(2) is inapplicable to this case
and that, accordingly, § 1341(a) applies.

															[ Footnote 2 ]

															In the case of an accrual basis taxpayer, the legislative
history makes it clear that the deduction is allowable at the
proper time for accrual. H.R.Rep. No. 1337, 83d Cong., 2d Sess.,
A294 (1954); S.Rep. No. 1622, 83d Cong., 2d Sess., 451-452
(1954).

															[ Footnote 3 ]

															The Commissioner has long recognized that a deduction under some
section is allowable. G.C.M. 16730, XV-1 Cum.Bull. 179 (1936).

															[ Footnote 4 ]

															The analogy would be even more striking if in Arrowsmith the individual taxpayers had not utilized the
alternative tax for capital gains, as they were permitted to do by
what is now § 1201 of the 1954 Code. Where the 25% alternative tax
is not used, individual taxpayers are taxed at ordinary rates on
50% of their capital gains. See § 1202. In such a
situation, the rule of the Arrowsmith case prevents
taxpayers from deducting 100% of an item refunded when they were
taxed on only 50% of it when it was received. Although Arrowsmith prevents this inequitable result by treating
the repayment as a capital loss, rather than by disallowing 50% of
the deduction, the policy behind the decision is applicable in this
case. Here it would be inequitable to allow a 100% deduction when
only 72 1/2% was taxed on receipt.

															[ Footnote 5 ] Compare the analogous approach utilized under the "tax
benefit" rule. Alice Phelan Sullivan Corp. v. United
States, 180 Ct.Cl. 659, 381 F.2d 399 (197); see Internal Revenue Code of 1954 § 111. In keeping with the analogy,
the Commissioner has indicated that the Government will only seek
to reduce the deduction in the year of repayment to the extent that
the depletion allowance attributable to the receipt directly or
indirectly reduced taxable income. Proposed Treas. Peg. §
1.613-2(c)(8), 33 Fed.Reg. 10702-10703 (1968).

															[ Footnote 6 ]

															The 10% standard deduction mentioned in MR. JUSTICE STEWART's
dissent, post at 394 U. S. 697 ,
differs in that it allows as a deduction a percentage of adjusted
gross income, rather than of gross income. See § 141; cf. §§ 170, 213. As a result, repayments may in certain
cases cause a decrease in the 10% standard deduction allowable in
the year of repayment, assuming that the repayment is of the
character to be deducted in calculating adjusted gross income. See § 62.

															MR. JUSTICE DOUGLAS, dissenting.

															I share MR. JUSTICE STEWART's views as to this case, and add
only a word.

															If we sat in chancery reviewing tax cases, much of what the
Court says would have appeal. But we do not sit to do equity in tax
cases; that is one of Congress' main concerns.

															The search for equity in the tax laws is wondrous and elusive.
As Edmond Cahn said: "[T]hose only are equal whom the law has
elected to equalize." E. Cahn, The Sense of Injustice 14
(1949).

															Percentage depletion had its roots in granting a reward to men
who go into undeveloped territory in search of oil and gas. But
today it is granted anyone who has an interest in oil or gas; the
beneficiary need not live the life of the oil wildcatter or bear
his risks to obtain the benefits of percentage depletion.

															When it comes to capital gains, what "equities" are to be
applied? Is it fair that earned income pay a heavier tax?

															A son who spends $1,000 on his destitute father does not get the
same tax benefit as he who pays a like sum to his alma mater. Louis
Eisenstein pursues example after example of so-called inequities in
tax laws in his book The Ideologies of Taxation (1961). For
example, the profits on the sale of unbred pigs are taxable as
ordinary income, while the profits on the sale of pigs once
bred Page 394 U. S. 688 are taxable as capital gains. Id. 174. The same is true
of turkeys, but not of chickens, even though "a bred chicken and a
bred turkey are similarly situated. Each has feathers and two
legs." Ibid. Treasury recently noted numerous basic inequities resulting in
preferred tax treatment for some people's dollars. Tax Reform
Studies and Proposals, U.S. Treasury Dept., Joint Publication of
House Committee on Ways and Means and Senate Committee on Finance,
91st Cong., 1st Sess., pt. 1, pp. 13-17 (Comm.Print 1969).

															Apart from certain aspects of percentage depletion were the
reduced taxation on long-term capital gains and the exclusion of
interest on state and local government bonds. The examples are
legion. The Tax Reform study gives an unusual example:

															"An individual had a total income of $1,284,718 of which
$1,210,426 was in capital gains, the remaining $74,292 from wages,
dividends, and interest. He excluded one-half of his capital gains,
which he is allowed to do under present law, thereby reducing his
present law (adjusted gross) income to $679,405 (after allowing for
the $100 dividend exclusion). From this income he subtracted all
his personal deductions, which amounted to $676,419 and which
included $587,693 for interest on funds borrowed presumably for the
purpose of purchasing the securities on which the capital gains
were earned. As a result, after allowing $1,200 of personal
exemptions, his taxable income was reduced to $1,786 and he paid a
tax of $274. His overall tax rate, therefore, was about
two-hundredths of one percent." Id. at 15.

															This was made possible by using a taxpayer's deductions only
against that part of his income which is subject to the tax,
ignoring the excluded part. Page 394 U. S. 689 Tax laws are indeed arbitrary; the lines they draw are the
products of pressures inside the Congress with compromises carrying
the day.

															The Court of Appeals held that the "item" here in question was
properly included in "gross income" prior to 1958 and was an
allowable "deduction" in 1958 because the taxpayer did not have "an
unrestricted right" to a "portion of such item," and that the
amount of such deduction exceeds $3,000 -- all as provided in §
1341. [ Footnote 2/1 ] Skelly Oil
Co. v. United States, 392 F.2d 128, 131.

															There is no irregularity on the face of the return. There is no
conflict with any decision of any other Court of Appeals. We are
asked, however, to put a gloss on the statute that Treasury
desires. I would adhere to the construction given by the Court of
Appeals, leaving to Congress the correction of any inequities in
the tax scheme. Page 394 U. S. 690 The Congress many years ago created the Joint Committee on
Internal Revenue Taxation, which is a standing committee. 26 U.S.C.
§ § 8001-8005, 8021-8023. One of its statutory mandates is "[t]o
investigate the operation and effects of the Federal system of
internal revenue taxes." Id. § 8022.

															In that connection, a recent report states:

															"[T]he Joint Committee staff has in recent years been used as a
committee liaison with the Treasury Department in working on tax
proposals for the committee. The staff aids the two tax committees
in explaining provisions, in writing committee reports, and in
aiding in the drafting of bills."

															The Joint Committee makes regular reports to Congress for
revision of the tax laws. Inequities that arise as a result of
interpretations that are given existing laws either at the
administrative or judicial level can be quickly corrected by this
agency of oversight. [ Footnote
2/2 ]

															Treasury unhappily has developed the habit of jockeying in the
courts, testing one theory against another. In California, it may
take one position and in Massachusetts the opposite position, the
issue in each being the same. The hope is that conflicts over
litigious and important issues will develop and the case will be
brought here. [ Footnote 2/3 ]

															If we were trained in the art and science of taxation, we might
serve a useful function. But taxation is a Page 394 U. S. 691 specialty in which we have only sporadic, and no continuous,
experience. It has been said that one of our decisions is like a
"lightning bolt" that "illuminates only a very small portion of the
landscape," leaving a darkness that later decisions do not remove.
R. Paul, Studies in Federal Taxation 249-250 (3d series 1940). Our
contributions, if such they can be called, are dubious indeed, for
the Joint Committee can and does rewrite the Code frequently.

															It is therefore the rare tax case [ Footnote 2/4 ] we should consider, except the even rarer
constitutional case. The present case has no constitutional
overtones; the taxpayer followed the words of the tax law
literally, using no new or strained construction of words to find a
tax advantage; there is no conflict between this case and any other
decision. The Solicitor General only claims that the result reached
by the Court of Appeals does not fit the neat logic which he finds
in a group of related tax cases.

															An account of the cost, confusion, and inequity in tax
administration that ensues while everyone waits for a conflict
among the Circuits (which takes at least 10 years) is related in
Griswold, The Need for a Court of Tax Appeals, 57 Harv.L.Rev. 1153
(1944). The role we presently play was stated as follows:

															"Our present system of tax adjudication inevitably leaves nearly
every question uncertain during the entire period while it must be
dealt with, usually in thousands of instances, by the
administrative officers. And yet that is just the period when there
should be an authoritative rule if the system is to work smoothly,
effectively, speedily, fairly, and Page 394 U. S. 692 without discrimination. Under our present system, delay and
discrimination are typical and inevitable." Id. at 1161.

															In absence of an unmistakably clear conflict among the Circuits,
I would abide by the opinions of the Courts of Appeals in tax cases
and leave to the Joint Committee whether the gloss which Treasury
now tries to put on the statute is or is not desirable.

															[ Footnote 2/1 ]

															Section 1341 reads as follows:

															"(a) General rule. If -- "

															"(1) an item was included in gross income for a prior taxable
year (or years) because it appeared that the taxpayer had an
unrestricted right to such item;"

															"(2) a deduction is allowable for the taxable year because it
was established after the close of such prior taxable year (or
years) that the taxpayer did not have an unrestricted right to such
item or to a portion of such item; and"

															"(3) the amount of such deduction exceeds $3,000,"

															"then the tax imposed by this chapter for the taxable year shall
be the lesser of the following: "

															"(4) the tax for the taxable year computed with such deduction;
or"

															"(5) an amount equal to -- "

															"(A) the tax for the taxable year computed without such
deduction, minus"

															"(B) the decrease in tax . . . for the prior taxable year . . .
which would result solely from the exclusion of such item . . .
from gross income for such prior taxable year. . . ."

															[ Footnote 2/2 ]

															Perhaps the most egregious error that we made in my time (one
for which I take partial blame), was Helvering v. Hallock, 309 U. S. 106 , an
opinion for the Court, written by Mr. Justice Frankfurter, that
overruled Helvering v. St. Louis Trust Co., 296 U. S.
39 , and Becker v. St. Louis Trust Co., 296 U. S. 48 . This
is one classic example of the type of problem which should be left
to the Joint Committee.

															[ Footnote 2/3 ]

															For a classic example, see R. Paul, Studies in Federal
Taxation 449-450 (3d series 1940).

															[ Footnote 2/4 ]

															The validity of Regulations and the effect of reenactment of a
statutory provision on them present distinct questions. Helvering v. Wilshire Oil Co., 308 U. S.
90 ; Commissioner v. South Texas Co., 333 U. S. 496 ; Commissioner v. Stidger, 386 U. S. 287 .

															MR. JUSTICE STEWART, with whom MR. JUSTICE DOUGLAS and MR.
JUSTICE HARLAN join, dissenting.

															The Court today denies the respondent a tax benefit fairly
provided by the Code for no other discernible reasons than that,
under the statute as written, "the taxpayer always wins and the
Government always loses," [ Footnote
3/1 ] and that "the approach here adopted will affect only a few
cases." Ante at 394 U. S. 686 .
But we are not free, even in a few cases, to abandon settled
principles of annual accounting and statutory construction merely
to avoid what the Court thinks Congress might consider an
"inequitable result." [ Footnote
3/2 ]

															"[T]he rule that general equitable considerations do not control
the measure of deductions or tax benefits cuts both ways. It is as
applicable to the Page 394 U. S. 693 Government as to the taxpayer. Congress may be strict or lavish
in its allowance of deductions or tax benefits. The formula it
writes may be arbitrary and harsh in its applications. But where
the benefit claimed by the taxpayer is fairly within the statutory
language and the construction sought is in harmony with the statute
as an organic whole, the benefits will not be withheld from the
taxpayer though they represent an unexpected windfall." Lewyt Corp. v. Commissioner, 349 U.
S. 237 , 349 U. S.
240 .

															From any natural reading of § 1341, it is apparent that Congress
believed the "deduction" in § 1341(a)(2) would be in the amount of
the "item" described in § 1341(a)(1). If that understanding is not
manifest from the face of the statute and the legislative history,
[ Footnote 3/3 ] it is the
unavoidable inference from a study of the pre-1954 law which Page 394 U. S. 694 the Court concedes § 1341(a)(4) was intended to codify. In every
case in this area previously decided by the Court, the amount
deductible in the year of repayment was considered to be exactly
the same as the amount of the previously included item. In two of
the cases most sharply in congressional focus in 1954, the
Government had conceded without hesitation that the taxpayers were
"entitled to a deduction for a loss in the year of repayment of the
amount earlier included in income." Healy v. Commissioner, 345 U. S. 278 , 345 U. S. 284 . See also United States v. Lewis, 340 U.
S. 590 , 340 U. S. 591 .
That has been the express position of the Treasury since at least
1936, [ Footnote 3/4 ] and the Court
today has not cited a single instance of deviation from that
understanding.

															The Court says that § 1341 is not alone controlling, and that
"it is necessary to refer to other portions of the Code to discover
how much of a deduction is allowable." Page 394 U. S. 695 Ante at 394 U. S. 683 .
I agree that § 1341 must be considered in the context of the
Internal Revenue Code as an "organic whole." But no other
provisions of the Code in any manner bolster the Court's argument.
The Court assumes, quite correctly, that either § 162 or § 165 does
permit a deduction for the refund. But it does not, and cannot,
suggest that either of those sections -- or any other statutory
provision -- limits the amount of the deduction for the undeniable
loss of profits in the full amount of the repayment. Instead, the
Court assumes a broad equitable authority to weed out tax benefits
which it calls "double deductions" -- a characterization wholly
inapposite to the facts of this case.

															In prior decisions disallowing what truly were "double
deductions," the Court has relied on evident statutory indications,
not just its own view of the equities, that Congress intended to
preclude the second deduction. In those cases, the taxpayers sought
to benefit twice from the same statutory deduction. [ Footnote 3/5 ] In this case, by
contrast, Page 394 U. S. 696 the respondent has taken two different deductions accorded by
Congress for distinct purposes. In the years 1952 through 1957, it
deducted the proper amounts for depletion -- a deduction which is
allowed by Congress "on the theory that the extraction of minerals
gradually exhausts the capital investment in the mineral deposit,"
and which is

															"designed to permit a recoupment of the owner's capital
investment in the minerals so that, when the minerals are
exhausted, the owner's capital is unimpaired." Commissioner v. Southwest Exploration Co., 350 U.
S. 308 , 350 U. S. 312 .
The respondent's 1958 deduction was granted by Congress for the
entirely different reason that the refund of previously reported
income constituted a loss, or business expense. In purpose and
effect the deductions are wholly unrelated, and each is sustainable
on its own merits. Certainly it cannot be said either that the
respondent did not, in fact, exhaust the capital assets for which
the deductions were allowed in 1952 through 1957, or that it did
not suffer a business loss by the 1958 repayment.

															The sole nexus between these distinct transactions on which the
Court constructs its "double deduction" theory is that the
depletion deductions were computed as a percentage of gross income
from the property. But this fact cannot distinguish percentage
depletion from any other deduction. If the respondent had elected
to take cost depletion in 1952 through 1957, for example, there
would also have been a portion of the gross income in those years
-- perhaps less than 27 1/2%, perhaps more -- which was not
included in taxable income. Whether a deduction is computed as a
fixed percentage of income or Page 394 U. S. 697 in some other manner, it always reduces by some percentage the
income which is ultimately taxed. There are other deductions, of
course, whose amount is a function of a certain percentage of the
taxpayer's income. With respect to the individual taxpayer, the
standard 10% deduction, § 141, and those for charitable
contributions, § 170, and medical expenses, § 213, are doubtless
the most frequent. Under the Court's ruling today, any taxpayer who
repays money included in gross income in a prior year in which he
also took one of the above mentioned deductions will have to reduce
his refund deduction by that portion of the previous year's
deduction attributable to the included income. Surely this result
contravenes the purpose of the annual accounting concept to prevent
recomputations of the prior year's tax.

															The Court says today that there can be no deduction "for
refunding money that was not taxed when received." Ante at 394 U. S. 685 .
This means nothing less than that, whenever a taxpayer seeks to
deduct a refund of money received as income under a claim of right
in a prior year, the deduction must be reduced by the percentage of
gross income in that, prior year which, for whatever reason, was
not also taxable income. Otherwise there will be precisely the same
kind of so-called "double deduction" as the Court finds in this
case.

															It is clear that the Court has wrought a major transformation of
the deduction which has heretofore been allowed and which Congress
recognized in § 1341(a)(4). That deduction is permitted because, in
the words of § 1341, the item "was included in gross income for a prior taxable year" (emphasis added), not because it
was included in taxable income. It is no answer to say
that the "annual accounting concept does not require us to close
our eyes to what happened in prior years." Page 394 U. S. 698 Ante at 394 U. S. 684 .
Of course, we must look to the prior years to ascertain the amounts
included in gross income and the nature of that income as it bears
on the provision under which it is deductible in the year of
repayment. Arrowsmith v. Commissioner, 344 U. S.
6 . [ Footnote 3/6 ] But
the very purpose of the annual accounting concept is to preclude
adjustments in the amount of the deduction to reflect the tax
consequences of the item's inclusion in the prior year.

															"Congress has enacted an annual accounting system under which
income is counted up at the end of each year. It would be
disruptive of an orderly collection of the revenue to rule that the
accounting must be done over again to reflect events occurring
after the year for which the accounting is made, and would violate
the spirit of the annual accounting system. This basic principle
cannot be changed simply because it is of advantage to a taxpayer
or to the Government in a particular case that a different rule be
followed." Healy v. Commissioner, 345 U.
S. 278 , 345 U. S.
284 -285.

															One of the major factors, in addition to changes in tax rates
and brackets, that determine who will benefit from adherence to the
annual accounting principles embodied in § 1341(a)(4) is the extent
to which the taxpayer had deductions in the prior or subsequent
taxable years to offset gross income. And it is no less
inconsistent Page 394 U. S. 699 with annual accounting principles to pare down the allowable
loss deduction in the year of repayment because of other deductions
in the year of inclusion than because of a lower tax rate or
bracket in that year.

															Because I cannot agree that the Court's equitable sensibilities
empower it to depart from the sound principles of tax accounting
specifically endorsed by Congress in § 1341, I respectfully
dissent.

															[ Footnote 3/1 ]

															Section 1341, of course, is designed precisely to create a
situation where "the taxpayer always wins and the Government always
loses." Strict adherence to annual accounting and the
claim-of-right doctrine before 1954 sometimes benefited the
taxpayer, sometimes the Government. Section 1341 retains those
principles where they benefit the taxpayer, but allows
recomputation of the taxes of a prior year if that method would
result in a greater tax saving.

															[ Footnote 3/2 ]

															Judicial assumptions that Congress did not intend liberal
benefits for taxpayers are particularly suspect in the area of
percentage depletion, perhaps the most generous business deduction
in the Code. And Congress had the recipients of percentage
depletion specifically in mind when it drafted § 1341. The House
bill excluded from the coverage of § 1341 all refunds relating to
inventory sales. The Senate Committee promptly removed refunds by
regulated utilities from this exclusion with the following
remarks:

															"Your committee's bill provides that the exclusion of refunds
pertaining to inventory sales will not exclude from the benefits of
this section refunds made by a regulated public utility where the
refunds are required to be made by the regulatory body, such as the
Federal Power Commission. It is made clear, for example, that
refunds of charges for the sale of natural gas under rates approved
temporarily would be eligible for the benefits of this
section."

															S.Rep. No. 1622, 83d Cong., 2d Sess., 118 (1954).

															[ Footnote 3/3 ]

															The House and Senate Reports give no indication that Congress
thought the deduction would be other than the amount of the item
included in gross income for the prior year. They refer to the
amount of the deduction and of the item interchangeably.

															"If the taxpayer included an item in gross income in one taxable
year, and in a subsequent taxable year he becomes entitled to a
deduction because the item or a portion thereof is no longer
subject to his unrestricted use, and the amount of the deduction is
in excess of $3,000, the tax for the subsequent year is reduced by
either the tax attributable to the deduction or the decrease in the
tax for the prior year attributable to the removal of the item,
whichever is greater. Under the rule of the Lewis case ( 340 U. S. 340 U.S. 590 (1951)),
the taxpayer is entitled to a deduction only in the year of
repayment."

															"In the case of a cash basis taxpayer, in order to be entitled
to a deduction in the later year, the amount must be repaid.
However, in the case of an accrual basis taxpayer, if the item was
accrued but never received, the section applies when the deduction
accrues in the later year although there is, of course, no amount
to be repaid."

															S.Rep. No. 1622, supra, 394
U.S. 678 fn3/2|>n. 2, at 451. See also H.R.Rep. No.
1337, 83d Cong., 2d Sess., A294 (1954).

															[ Footnote 3/4 ] See G.C.M. 16730, XV-1 Cum.Bull. 179, 181 (1936):

															"In the instant case the taxpayer received the income under a
claim of right and without restriction as to its disposition. On
authority of the cases cited herein, this office is of the opinion
that the profits in question should not be eliminated from the
taxpayer's gross income for the years 1928 and 1929 [the years of
inclusion], but that the taxpayer is entitled to a deduction,
for the year in which paid, of the amount of the profits paid. . .
. "

															(Emphasis supplied.) See also 2 J. Mertens, Law of
Federal Income Taxation § 12.106a, p. 431 (P. Zimet & J.
Stanley rev. ed.1967).

															[ Footnote 3/5 ] Charles Ilfeld Co. v. Hernandez, 292 U. S.
62 , and United States v. Ludey, 274 U.
S. 295 , both involved situations in which the taxpayer
tried to take the same deduction twice. In Ilfeld, the
taxpayer had taken deductions, through consolidated returns, for
the annual losses of its subsidiaries; when the subsidiaries'
assets were sold and the companies dissolved, the parent taxpayer
sought to take deductions for losses of its investment in the
subsidiaries. As the Court held, "[t]he allowance claimed would
permit [the parent] twice to use the subsidiaries' losses for the
reduction of its taxable income," a double deduction that "nothing
in the Act . . . purports to authorize. . . ." 292 U.S. at 292 U. S. 68 . In Ludey, the taxpayer had taken deductions for depletion of
his min, but, when the properties were sold in the taxable year in
question, the taxpayer did not, in computing the gain from the
sale, adjust the basis of the property to reflect the depletion
deductions. The Court held that depletion allowances, like those
for depreciation, are granted in recognition of the fact that the
asset is disappearing year by year. When it is disposed of,
therefore,

															"the thing then sold is not the whole thing originally acquired.
The amount of the depreciation must be deducted from the original
cost of the whole in order to determine the cost of that disposed
of in the final sale of properties. Any other construction would
permit a double deduction for the loss of the same capital
assets."

															274 U.S. at 274 U. S.
301 .

															[ Footnote 3/6 ]

															As the Court recognizes, ante at 394 U. S. 685 ,
n. 4, the Court in Arrowsmith did not hold that the amount
of the deduction in the year of repayment would be reduced because
in the year of inclusion the money had been taxed at a lower rate
or had been offset by deductions. It held merely that the losses
fell within the definition of "capital losses" contained in the
sections authorizing deductions for the repayment. The Court does
not in this case point to any comparable statutory provision
affecting the nature or amount of the deduction for the refund.