[677]*677OPINION.
Mellott:
The findings are more comprehensive than would seem to be required under the issues as stated by us in the beginning. The pleadings, stipulations, evidence, and opening .brief of petitioner [678]*678indicate that we are being called upon to decide whether petitioner properly excluded $106,604.02 from its gross receipts in 1935. The first section of its opening brief concludes: “It is submitted that $106,604.02 of petitioner’s 1935 ‘gross receipts’ did not constitute income until the controversies relating thereto were determined in 1937.” Petitioner’s argument may be summarized as follows:
At the end of the taxable year 1935 it had accrued upon its books $105,054.70 as processing taxes. When the act was declared invalid (January 6, 1936) this amount was restored to income. It says: Since, instanter such unconstitutionality was declared, there accrued or vested a substantial possibility that $1.38 per barrel of flour sold (not “processed”) during the injunctive period would have to be disbursed either to customers or to the Government, the amount of $106,604.02 — the estimated amount which it might be required to repay — was set up on its books, held “in abeyance” or in a “suspense account”, and excluded from gross income in its return for 1935. Then, says petitioner, in 1937 the controversies as to these moneys were substantially resolved, whereupon it made reimbursements to its customers totaling $45,865.90 with respect to its 1935 sales. It “then recognized as income, for the first time, all of its 1935 gross receipts except the $43,865.90 thereof which it had refunded to customers. It * * * is not now asking that its income be computed upon the basis of actual income less * * * [the $105,054.70]. * * * It aslcs to. he permitted to deduct only such reimbursements as it actually made to its vendees.” (The quotations are from petitioner’s reply brief.)
Before passing to what seems to be the real issue to be decided on this phase of the proceeding — i. e., the deductibility of $45,865.90 from petitioner’s 1935 gross income — it may be stated that petitioner relies upon Commissioner v. Brown, 54 Fed. (2d) 563; certiorari denied, 286 U. S. 556, as authorizing it to set aside the entire $106,-604.02 in a “suspense account” and in refusing to include it in gross income because “a taxpayer is not required to report as income that which he may never be permitted to retain * * It points out that the moneys received by it upon the consummation of the injunction suit were “hot moneys”; that it was reasonably certain petitioner would be unable to retain them; that it was legally obligated to repay an equitable portion to its vendees; that it never asserted any claim of absolute ownership to the fund, but treated it as a “suspense account” ; and that under the accrual method of accounting such moneys did not become income until all controversy as to their ownership was settled.
The contentions set forth above are not, in our opinion, well founded. No controversy as to the ownership of the proceeds from the sale of petitioner’s flour existed. It had increased the selling [679]*679price of its flour to include the processing tax and the increased price had been paid by its customers with full knowledge of the facts. It had not legally obligated itself to repay any portion of the sale price to its vendees, nor was there any equitable obligation upon it to do so. As pointed out in Moundridge Milling Co. v. Cream of Wheat Corporation, 105 Fed. (2d) 366, the sales contracts fixed a “composite price” and did not designate the product sold and the tax separately or provide for the refund of any portions of the payments made on past deliveries. Cf. Johnson v. Igleheart Brothers, Inc., 95 Fed. (2d) 4; certiorari denied, 304 U. S. 585. If petitioner were able to save on any of the items going to make up the total cost of the flour which it sold, it thereby increased its profits pro tanto. In our opinion the total amount received by petitioner from the sale of its flour constituted gross income to it. North American Oil Consolidated v. Burnet, 286 U. S. 417.
Petitioner next contends that it agreed to settle or compromise its vendees’ claims for reimbursement in the year of shipment and that therefore, under a ruling of the Department,1 it is entitled to treat the reimbursements as deductions from gross income for that year. The substance of the ruling is that processors, keeping their accounts and filing their returns on the accrual basis, may deduct from gross income “for the year in which they agreed with the vendees to settle or compromise the disputed claims”, the amounts so agreed upon. Petitioner argues that it “acknowledged its liability in 1935 and has maintained a consistent position throughout.” It relies chiefly upon the statements made by its officers to its customers to the effect that they would be treated fairly and as liberally as customers of other mills were treated, which, it says, constituted an agreement ultimately carried out. We do not agree with this contention. The so-called “treat fairly” agreements were no more than assurances given by petitioner to its customers to retain their good will. The testimony of petitioner’s officers indicates that they did not intend to bind petitioner to make any repayments to its vendees. Petitioner’s counsel and auditor had advised that “it was unsafe to make any definite promises as to amounts that might be paid to the flour buyer.” The officers recognized— indeed deliberately chose to bind petitioner no further — that whether any amounts were ever paid to its vendees “would depend upon some other agreement later made.” The later agreements, rather than the “treat fairly” promises, were, in our opinion, the bases upon which the payments aggregating $45,865.90 were made.
Having held, as we do that the $45,865.90 must be included in computing petitioner’s gross income for the year 1935 and having also held that the payments to its vendees, aggregating that amount, were not [680]*680made pursuant to a specific obligation incurred during the year 1935, we pass to petitioner’s contention that the respondent erred “in failing to give due and proper effect to the requirements of sections 41, 4-2 and 43 of the Revenue Act of 1934 which require the Commissioner to consider credits and deductions for the taxable year in which ‘paid or accrued’ or ‘paid and incurred’, dependent upon the method of accounting upon the basis of which the net income is computed and in so disregarding the mandatory provisions of said sections 41, 42 and 43 as to distort and improperly reflect petitioner’s income for said period * * 2
The sections relied upon are shown in the margin.3
The identical question was before us in Cannon Valley Milling Co., 44 B. T. A. 763, (on appeal C. C. A., 8th Cir.). The petitioner in that case, though under no enforceable obligation in 1935 to pay over to its vendees any of the amount refunded to it in 1936, nevertheless in 1937 paid over a substantial portion of it to them in order to avoid threatened litigation, to keep their good will, and to compromise their claims. We pointed out that the amounts so paid were ordinary and necessary expenses of carrying on a trade or business, citing Superheater Co., 12 B. T. A.
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[677]*677OPINION.
Mellott:
The findings are more comprehensive than would seem to be required under the issues as stated by us in the beginning. The pleadings, stipulations, evidence, and opening .brief of petitioner [678]*678indicate that we are being called upon to decide whether petitioner properly excluded $106,604.02 from its gross receipts in 1935. The first section of its opening brief concludes: “It is submitted that $106,604.02 of petitioner’s 1935 ‘gross receipts’ did not constitute income until the controversies relating thereto were determined in 1937.” Petitioner’s argument may be summarized as follows:
At the end of the taxable year 1935 it had accrued upon its books $105,054.70 as processing taxes. When the act was declared invalid (January 6, 1936) this amount was restored to income. It says: Since, instanter such unconstitutionality was declared, there accrued or vested a substantial possibility that $1.38 per barrel of flour sold (not “processed”) during the injunctive period would have to be disbursed either to customers or to the Government, the amount of $106,604.02 — the estimated amount which it might be required to repay — was set up on its books, held “in abeyance” or in a “suspense account”, and excluded from gross income in its return for 1935. Then, says petitioner, in 1937 the controversies as to these moneys were substantially resolved, whereupon it made reimbursements to its customers totaling $45,865.90 with respect to its 1935 sales. It “then recognized as income, for the first time, all of its 1935 gross receipts except the $43,865.90 thereof which it had refunded to customers. It * * * is not now asking that its income be computed upon the basis of actual income less * * * [the $105,054.70]. * * * It aslcs to. he permitted to deduct only such reimbursements as it actually made to its vendees.” (The quotations are from petitioner’s reply brief.)
Before passing to what seems to be the real issue to be decided on this phase of the proceeding — i. e., the deductibility of $45,865.90 from petitioner’s 1935 gross income — it may be stated that petitioner relies upon Commissioner v. Brown, 54 Fed. (2d) 563; certiorari denied, 286 U. S. 556, as authorizing it to set aside the entire $106,-604.02 in a “suspense account” and in refusing to include it in gross income because “a taxpayer is not required to report as income that which he may never be permitted to retain * * It points out that the moneys received by it upon the consummation of the injunction suit were “hot moneys”; that it was reasonably certain petitioner would be unable to retain them; that it was legally obligated to repay an equitable portion to its vendees; that it never asserted any claim of absolute ownership to the fund, but treated it as a “suspense account” ; and that under the accrual method of accounting such moneys did not become income until all controversy as to their ownership was settled.
The contentions set forth above are not, in our opinion, well founded. No controversy as to the ownership of the proceeds from the sale of petitioner’s flour existed. It had increased the selling [679]*679price of its flour to include the processing tax and the increased price had been paid by its customers with full knowledge of the facts. It had not legally obligated itself to repay any portion of the sale price to its vendees, nor was there any equitable obligation upon it to do so. As pointed out in Moundridge Milling Co. v. Cream of Wheat Corporation, 105 Fed. (2d) 366, the sales contracts fixed a “composite price” and did not designate the product sold and the tax separately or provide for the refund of any portions of the payments made on past deliveries. Cf. Johnson v. Igleheart Brothers, Inc., 95 Fed. (2d) 4; certiorari denied, 304 U. S. 585. If petitioner were able to save on any of the items going to make up the total cost of the flour which it sold, it thereby increased its profits pro tanto. In our opinion the total amount received by petitioner from the sale of its flour constituted gross income to it. North American Oil Consolidated v. Burnet, 286 U. S. 417.
Petitioner next contends that it agreed to settle or compromise its vendees’ claims for reimbursement in the year of shipment and that therefore, under a ruling of the Department,1 it is entitled to treat the reimbursements as deductions from gross income for that year. The substance of the ruling is that processors, keeping their accounts and filing their returns on the accrual basis, may deduct from gross income “for the year in which they agreed with the vendees to settle or compromise the disputed claims”, the amounts so agreed upon. Petitioner argues that it “acknowledged its liability in 1935 and has maintained a consistent position throughout.” It relies chiefly upon the statements made by its officers to its customers to the effect that they would be treated fairly and as liberally as customers of other mills were treated, which, it says, constituted an agreement ultimately carried out. We do not agree with this contention. The so-called “treat fairly” agreements were no more than assurances given by petitioner to its customers to retain their good will. The testimony of petitioner’s officers indicates that they did not intend to bind petitioner to make any repayments to its vendees. Petitioner’s counsel and auditor had advised that “it was unsafe to make any definite promises as to amounts that might be paid to the flour buyer.” The officers recognized— indeed deliberately chose to bind petitioner no further — that whether any amounts were ever paid to its vendees “would depend upon some other agreement later made.” The later agreements, rather than the “treat fairly” promises, were, in our opinion, the bases upon which the payments aggregating $45,865.90 were made.
Having held, as we do that the $45,865.90 must be included in computing petitioner’s gross income for the year 1935 and having also held that the payments to its vendees, aggregating that amount, were not [680]*680made pursuant to a specific obligation incurred during the year 1935, we pass to petitioner’s contention that the respondent erred “in failing to give due and proper effect to the requirements of sections 41, 4-2 and 43 of the Revenue Act of 1934 which require the Commissioner to consider credits and deductions for the taxable year in which ‘paid or accrued’ or ‘paid and incurred’, dependent upon the method of accounting upon the basis of which the net income is computed and in so disregarding the mandatory provisions of said sections 41, 42 and 43 as to distort and improperly reflect petitioner’s income for said period * * 2
The sections relied upon are shown in the margin.3
The identical question was before us in Cannon Valley Milling Co., 44 B. T. A. 763, (on appeal C. C. A., 8th Cir.). The petitioner in that case, though under no enforceable obligation in 1935 to pay over to its vendees any of the amount refunded to it in 1936, nevertheless in 1937 paid over a substantial portion of it to them in order to avoid threatened litigation, to keep their good will, and to compromise their claims. We pointed out that the amounts so paid were ordinary and necessary expenses of carrying on a trade or business, citing Superheater Co., 12 B. T. A. 5; affd., 38 Fed. (2d) 69; O'Day Investment Co., 13 B. T. A. 1230; H. M. Howard, 22 B. T. A. 375; International Shoe Co., 38 B. T. A. 81, 95; Helvering v. Hampton, 79 Fed. (2d) 358; and Welch v. Helvering, 290 U. S. 111, and that they were so considered by the Treasury Department;4 held that section 43 was not [681]*681meaningless and should be applied in proper cases; expressed the opinion that the Department could not, by regulation, limit the scope of the section; and concluded that the payments made to the vendees should be allowed as a deduction in computing the taxpayer’s income for 1935, since they related to the sales made in that year and did not relate to the sales made in the later period. There is no substantial difference between the facts in the instant proceeding and those in the cited case. The $45,865.90 paid by this petitioner to its vendees represented payments under claims relating to sales made in 3935. If such sales had not been made there would have been no basis for the claims and no reimbursements would have been made. On the authority of the cited case and for the reasons stated therein, we hold that the $45,865.90 in issue here should be allowed as a deduction in computing petitioner’s income tax for the year 1935.
The remaining issue arises in connection with respondent’s claim that $2,649.25 should be added to petitioner’s gross income for the year 1935. His contention is that petitioner, in 1939, was allowed a refund of processing taxes in the total principal amount of $15,928.85, of which $2,649.25 pertained to the taxable year 1935. The stipulated facts have been shown in our findings. They are not entirely clear unless reference is made to some of the figures shown in detail in the exhibits.
During the period the processing tax was being collected (1933 to 1935, inclusive) petitioner deducted from its gross income processing taxes aggregating $318,183.18; $89,151.77 was deducted in 1933, $176,761.05 in 1934, and $52,870.96 in 1935. In the computation attached to the closing agreement the Title VII refund was determined to be $15,928.82 and interest was added in the amount of $4,546.06, making a total- of $20,474.88. Petitioner’s tax liability under Title III, tax on unjust enrichment, was determined to be $36,880.21. The difference between the latter amount and $20,474.88 or $16,405.33 was paid by petitioner in conformity with the closing agreement. The portion of the “refund” allocable to 1935 was determined by taking 528709%i878378 °f $15,928.82.
Petitioner contends that the closing agreement was a compromise settlement of its Title III and Title VII controversies upon an aggregate, net basis and that no item in the accompanying schedule can be segregated and held to be a “refund” for the year 1935. It argues that the schedules became submerged into and were superseded by the written agreement; that it is the only competent evidence of the transaction; that it shows merely a payment of an additional amount of tax ($16,405.33) by petitioner; that no amount was ever “refunded” to it; and that even if a “refund” were actually made, it can not be allocated to the various years. We do not believe that any [682]*682of these contentions are sound. All of the documents should be considered together. Collectively they show that petitioner was allowed a refund of $20,474.88, which, together with payment of $16,405.38, settled its tax on unjust enrichment under Title III. We think, therefore, that the only question to be considered is whether the refund in 1939 of the amount paid in 1935 as an unconstitutional tax should be determined to be income in the year of receipt, or restored to income for the year in which the deduction was taken.
The question was recently discussed at length by this Board in E. B. Elliott Co., 45 B. T. A. 82, the majority holding “that all refunds of paid taxes are to be adjusted to the years in which the taxes were paid and deductions claimed, as the best method to reflect income; the only proper departure from the rule of adjustment of the refund in the years of payment is where the statute of limitations or some other consideration has made it impossible. In such cases it is obviously inequitable to allow the taxpayer the unjust enrichment which would result and the refund must then be treated as income in the year of receipt.” This is determinative of the present controversy. It may be added that, in view of the conclusion reached upon the first issue, it would be highly inequitable to the fiscus to deny the claimed adjustment. On the authority of the cited case this issue is resolved in favor of the respondent.
Beviewed by the Board.
Decision will be entered under Bule 50.
Smith, Kern, and Opper concur in the result on the authority of E. B. Elliott Co., 45 B. T. A. 82, as to both points.
Sternhagen, Van Foss an, Murdock, and Ttson dissent.