Commissioner of Internal Revenue v. Birch Ranch & Oil Co

192 F.2d 924 COMMISSIONER OF INTERNAL REVENUE v. BIRCH RANCH & OIL CO. No. 12639. United States Court of Appeals Ninth Circuit. November 19, 1951. Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott, Melva M. Graney and Irving Axelrad, Sp. Assts. to Atty. Gen., for petitioner. George Acret, Los Angeles, Cal., for respondent. Before BONE and POPE, Circuit Judges, and FEE, District Judge. POPE, Circuit Judge. 1 The Tax Court held that the respondent taxpayer-corporation was entitled to deduct payments made by it to a California reclamation district, upon assessment calls for sums required for district bond interest charges, and thus compute a net operating loss for fiscal year 1944. If such loss existed, it is conceded that it may constitute a carry-back deduction for fiscal 1942, the year for which a deficiency had been determined by the Commissioner. 2 Upon this petition for review, the Commissioner contends that under the circumstances presented here, the payment was not deductible under § 23(c) (1) (E) of the Internal Revenue Code as "taxes paid", 1 as the Tax Court held. The Commissioner further contends that although the sum here in dispute was…

I concur.

The policy of the State of California to promote reclamation of arid land is reflected in the provisions which levy taxes to cover the cost of such benefits to the public, together with maintenance and interest charges. Sec. 23 specifically permits deduction of sums paid for “taxes.” As Judge Pope’s able opinion shows, no other questions are involved.

The Tax Court held that the respondent taxpayer-corporation was entitled to deduct payments made by it to a California reclamation district, upon assessment calls for sums required for district bond interest charges, and thus compute a net operating loss for fiscal year 1944. If such loss existed, it is conceded that it may constitute a carry-back deduction for fiscal 1942, the year for which a deficiency had been determined by the Commissioner.

Upon this, petition for review, the Commissioner contends that under the circumstances presented here, the payment was not deductible under § 23(c) (1) (E) of the Internal Revenue Code as “taxes paid”, 1 as the Tax Court held. The Commissioner further contends that although the sum here in dispute was “simply a payment of interest”, it is not deductible as interest because of the “economic identity” between the paying corporation and the ultimate recipients of the greater portion of the sums paid, and because, as interest, it was paid on indebtedness incurred to carry tax-exempt securities, within the meaning of § 23(b).

In 1918, the so-called Conaway Ranch, in Yolo County, California, was owned by the Birch Oil Company, a partnership…