Fawsett v. Commissioner

*908 This proceeding was initiated to test the correctness of the respondent's determination of a deficiency of $296.48 in income tax for the year 1930. The deficiency arises from the action of the Commissioner *909 in disallowing as a deduction so much of a tax paid by petitioner to the State of Wisconsin as the Supreme Court of the United States in Hoeper v. Tax Commission of Wisconsin,284 U.S. 206, held that the State of Wisconsin was without authority to levy.

FINDINGS OF FACT.

The petitioner in the year 1929 filed with the State of Wisconsin his state income tax return in which was included the*1247 income of his wife, Florence B. Fawsett. The tax assessed on the income so returned was the sum of $9,077.36, which became due and payable on or before July 1, 1930, and was paid by petitioner to the State of Wisconsin on June 27, 1930. The amount so paid was exacted from petitioner as a tax due to the State of Wisconsin and no part thereof has ever been refunded or repaid to the petitioner, and under the laws of the state the time within which petitioner might apply for a refund has expired.

Petitioner and his wife filed separate Federal income tax returns for the year 1930. Petitioner's return was filed on the cash receipts and disbursements basis and in his return he deducted the sum paid to the State of Wisconsin as a tax. The respondent disallowed as a deduction from petitioner's gross income that portion of the payment made to the State of Wisconsin which was due to including in the return of petitioner the income of petitioner's wife. This action was taken by the respondent in view of the decision of the Supreme Court of November 30, 1931, in the case of Hoeper v. Tax Commission of the State of Wisconsin, supra, in which the Court declared that portion of the*1248 Wisconsin statute requiring the income of the wife to be included with that of the husband, and the tax thereon to be computed and paid by the husband, to be unconstitutional and void.

OPINION.

ARUNDELL: In disallowing a portion of the deduction claimed by petitioner as taxes paid to the State of Wisconsin, the respondent relies upon the proposition that amounts paid as taxes under unconstitutional statutes are not taxes at all, in view of the established doctrine that an unconstitutional act is wholly void and "in legal contemplation, as inoperative as though it had never been enacted." Norton v. Shelby County,118 U.S. 425. There have been several cases somewhat close to this on the facts. In Philip C. Brown,10 B.T.A. 1122, and Inland Products Co.,10 B.T.A. 235; affd., 31 Fed.(2d) 867, the amounts illegally exacted were refunded to the taxpayers, and it was held that, having been made whole, they were not in a position to claim deductions. Similarly, in *1249 Lehigh Valley*910 Coal Sales Co.,15 B.T.A. 1401, it was held that invested capital should not be reduced on account of excessive taxes later refunded. In E. L. Bruce Co.,19 B.T.A. 777, the taxpayer made a payment in compromise of an amount demanded as a tax under a state statute which was later held invalid, and there, as here, the taxpayer was unable to obtain a refund. We held that, although the amount paid was not deductible as a tax, it was deductible as a loss or as a business expense. From this brief recital of the salient facts in the cited cases it is apparent that the facts here are sufficiently different so that those cases are of doubtful authority upon the question here presented.

Here the amount in controversy was demanded and paid as a tax, and the same statute which imposed the levy prevents a recovery by reason of the limitation period it prescribes. Under the circumstances present here we believe that section 23(c) of the Revenue Act of 1928, permitting deductions for "taxes paid," should be construed to allow the deduction claimed. Particularly so, where the amount was demanded by and paid over to the sovereign*1250 under a statute which had been tested in the courts and had been held valid, State v. Frear,148 Wis. 456; 134 N.W. 73, and the time has gone by in which the taxpayer can secure a refund, Whitbeck v. Wisconsin Tax Commission,239 N.W. 655; 240 N.W. 804. However, we need not rest our decision entirely on this view of the Federal statute. Petitioner argues, and we think correctly, that the Hoeper decision does not automatically establish that he has made an overpayment to the State of Wisconsin. The Hoeper decision did not declare invalid the entire statute under which petitioner made his payment to the state; it went only to the one feature, namely the taxing to the husband of his wife's income. And so, while that decision is apparently applicable to petitioner's case, it would affect only the one item in petitioner's return, that is, the income of the wife reported by petitioner. The other items making up petitioner's own income remain unaffected and in order for him to secure a refund - assuming a timely application - the amount paid on account of the income of his wife might well be offset by other items*1251 in his own income or deductions. We know from experience in deciding tax cases that a tax proposed by the Government on an erroneous theory may be sustained on another ground. So here, although petitioner might be entitled to a refund on the phase of his case involved in the Supreme Court decision, the state government might well be able to retain the entire payment on matters pertaining to his own income. In this view of the case it appears that the mere citation of the Hoeper case, conceding the facts here to be the same, does not establish that any *911 portion of the amount paid by petitioner to the state was not a tax. We accordingly hold that petitioner is entitled to the deduction claimed.

Reviewed by the Board.

Decision will be entered for the petitioner.