Before BIGGS and MARTIN, Circuit Judges and KALODNER, District Judge.
KALODNER, District Judge.
The petitioning taxpayer seeks review of the decision of the Tax Court entered September 4, 1944, sustaining the Commissioner's determination of deficiencies in the petitioner's Income and Excess Profits tax for the year 1936 on the basis of including in the petitioner's income for 1936 the sum of $246,021.55, which constituted a refund made to the petitioner in 1936 as an adjustment of the cost of flour purchased by it in 1935.
The relevant statutes are set out in the margin.*fn1 The facts as found by the Tax Court are as follows:
The Freihofer Baking Co. (hereinafter referred to as the petitioner) is a Pennsylvania corporation with principal offices in Philadelphia. Its books were kept and its income tax returns were filed on an accrual basis.
The refund in question was made to petitioner by the Freihofer Flour Mills (hereinafter referred to as the Mills), a copartnership organized by it and an affiliate corporation in 1927 as a medium to assure them a constant and uniform supply of flour. The Mills likewise kept its books and filed its returns on an accrual basis.
During the year 1935, the Mills engaged in the processing of flour and feed products and was therefore, under the Agricultural Adjustment Act, subject to taxes on the first domestic processing of wheat. However, subsequent to April 30, 1935, the Mills refused to pay any further processing taxes, and, later in 1935, secured restraining orders prohibiting the Collector from assessing or collecting any such taxes, although on July 31, 1935, the Mills and the Collector entered into a depository agreement.
During the year 1935, the petitioner received substantially all its flour from the Mills. Pursuant to agreements between the petitioner and the Mills the flour was purchased on the basis of a temporary billing price which was adjusted at the end of the year to the basis of cost. Cost included the processing tax imposed but not paid and deposited in escrow.
In the period from May 1 to December 31, 1935, petitioner paid to the Mills, as part of the cost of flour, $246,021.55, this being the amount of processing taxes imposed on the flour purchased. This sum was deducted from gross income by petitioner on its original corporation income and excess profits tax return for 1935 as a part of the "cost of goods sold".
On January 6, 1936, the United States Supreme Court held the taxing provisions of the Act unconstitutional in the case of United States v. Butler, 297 U.S. 1, 56 S. Ct. 312, 80 L. Ed. 477, 102 A.L.R. 914, and on January 16, 1936, the total amount of the depository account was returned to the Mills. In December of 1936 the Mills transferred to the petitioners the sum of $246,021.55.
On August 14, 1937, petitioner filed an amended corporation income and excess profits tax return for 1935, upon which there was reported, as additional income for that year, $246,021.55, the refund. An additional income tax in the amount of $32,418.94, shown to be due, was paid. On August 9, 1939, petitioner filed a claim for refund of income taxes for 1935 in the amount of $32,418.94.
The Tax Court held that the Commissioner correctly determined that the $246,021.55 transferred to petitioner by the Mills in December, 1936, as reimbursement of processing taxes included in the cost of flour purchased by petitioner, was taxable income in the year 1936.
The sole question is whether this determination by the Tax Court is correct. Petitioner asserts that the Tax Court erred in its conclusion and in failing to determine whether the deduction taken in 1935 was an improper deduction. It is the position of petitioner that its liability for the tax in 1935 was contingent because there existed, either impliedly or expressly, a legal obligation on the part of the Mills to refund that part of the tax included in the cost of flour purchased by petitioner in the event the Mills successfully concluded its litigation against the Collector, and, since it developed in 1936 that the tax was unconstitutional, an appropriate adjustment must be made for the deduction taken in petitioner's return for the year 1935.
This Court is of the opinion that the decision of the Tax Court should be affirmed. The applicable rule of law was clearly set out by the Supreme Court in the case of Security Flour Mills Co. v. Commissioner, 1944, 321 U.S. 281, 64 S. Ct. 596, 88 L. Ed. 725. There the Court stated, at page 286 of 321 U.S., at page 599 of 64 S. Ct., 88 L. Ed. 725: "The uniform result has been denial both to government and to taxpayer of the privilege of allocating income or outgo to a year other than the year of actual receipt or payment, or, ...