Opinion
No. K-515.
November 14, 1932.
Edward H. Green, of New York City, and Lawrence A. Baker, of Washington, D.C. (Henry Ravenel, of Washington, D.C., on the brief), for plaintiff.
Charles B. Rugg, Asst. Atty. Gen. (Charles P. Pollard, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by George W. Johnson against the United States.
Judgment of dismissal.
This suit was instituted to recover $5,969.56, with interest, overpayment of income tax for 1917.
The question presented is whether plaintiff is entitled to maintain this suit upon a claim for refund filed June 12, 1924, or upon that claim with an alleged amendment filed November 14, 1928.
The defendant insists that the claim of June 12, 1924, was not based upon any fact or ground upon which the overassessment of $5,969.56 indicated by the commissioner was determined; that the basis of this suit was not set forth in said claim as a reason or ground for the allowance of the overpayment therein claimed; and that the first claim could not be amended after it had been rejected and after the expiration of the statute of limitation for filing a claim.
Special Findings of Fact.
1. During 1917 plaintiff was a member of the partnership of Endicott, Johnson Co., of New York, engaged in the business of manufacturing shoes. April 1, 1918, said partnership filed a return for 1917, pursuant to the Act of October 3, 1917 ( 40 Stat. 300), showing a total tax of $1,413,028.55. Of this amount $31,061.56 was refunded, making a net payment of profits tax by the partnership of $1,381,966.99.
2. March 30, 1918, plaintiff filed an individual income tax return for 1917 showing a net income of $160,256.75, upon which he paid a tax of $35,245.12 on June 13, 1918. In this return plaintiff included his share of income of the partnership as shown by said partnership return for 1917, but he did not take as a credit against his net income his proportionate share of the excess profits tax of $1,381,966.99 paid by said partnership.
3. Thereafter during 1921 the Commissioner of Internal Revenue caused to be made an examination of the books and records of the partnership of which plaintiff was a member, which investigation indicated an additional tax due by the partnership. The only changes in the substance of the return of the plaintiff as filed by him for 1917 which were recommended by the revenue agent were based on the changes made by said agent with respect to the return filed by the partnership.
February 15, 1922, the partnership, through its attorneys, requested a conference with the Bureau of Internal Revenue for the purpose of presenting reasons and evidence in opposition to an additional assessment against the partnership. March 21, 1923, the commissioner made a jeopardy assessment against the partnership of an additional tax of $139,465, of which notice was mailed to the partnership on the same date. An additional tax of $13,566.90 was proposed against plaintiff for 1917 by reason of an increase in the partnership's net income. Thereafter during 1923, 1924, and 1925, numerous conferences were held in the offices of the Bureau of Internal Revenue, and briefs, appeals, and evidence were filed with the commissioner on behalf of plaintiff, individually, and on behalf of said partnership.
Several waivers were executed and filed by plaintiff individually extending the period for assessment for 1917, the last waiver being executed December 3, 1926, extending the period for assessment until December 31, 1927.
During the progress of the conferences in the bureau the parties pursued the plan of concluding consideration of the partnership case before determining the tax liability of the members, including the plaintiff. This was necessary inasmuch as the correct net income of the partners depended on the net income of the partnership.
4. June 12, 1924, plaintiff filed a claim for refund, Form 843, for $35,245.12, being the entire income tax paid by him for 1917. This claim, together with the appeal therein referred to, is in evidence as Exhibit A and is made a part of this finding by reference. The refund claim contained the following statement:
"Deponent verily believes that this application should be allowed for the following reasons:
"This taxpayer has filed with the Commissioner of Internal Revenue his appeal, verified March 28th, 1923, from a proposed additional assessment for the year 1917, said appeal setting forth the reasons and facts upon which he is entitled not merely to the cancellation of the proposed additional assessment, but also to a refund of taxes. The grounds for this claim for refund are the grounds set forth in the said appeal."
The appeal referred to in the above-mentioned refund claim was signed and verified by plaintiff March 28, 1923, and had been filed as a protest against the proposed additional assessment of $13,566.90 against him for 1917, as set forth in the commissioner's letter of March 7, 1923. In this protest the plaintiff contended that the partnership of which he was a member should be consolidated with certain corporations for excess profits tax purposes and that certain items of expense had been erroneously capitalized or disallowed completely, and made reference to the valuation of certain items for the purpose of invested capital. Finally, the appeal stated that: "The taxpayer here is thus presenting the matter only in its preliminary aspects; and if it must be determined to proceed with these questions it requests an opportunity to set forth in detail its objections to the proposed additional assessment, and to furnish evidence in support thereof."
The appeal of March 28, 1923, which was made the basis of the claim for refund filed, does not contain any statement that the plaintiff was entitled to deduct on his individual tax return his proportionate share of excess profits tax paid by the partnership.
Prior to September 15, 1924, the partnership had filed an application for determination of its profits tax under the special relief provisions of the act of 1917. July 15, 1924, the commissioner having made a determination of the net income and invested capital, the partnership acquiesced in his determination of such income and invested capital as a condition to a consideration of the matter of special relief. Such acquiescence was given by the partnership July 18, 1924. Subsequently no dispute existed with respect to the income and invested capital of the partnership, the commissioner making his final determination of the partnership liability based on the agreed income and invested capital. In such determination the commissioner allowed an overpayment by the partnership of $49,864.01 for which certificate of overassessment was issued and a refund made.
From and after the date on which plaintiff's return for 1917 was filed, and continuously until February 4, 1927, when the Treasury Department promulgated Treasury Decision 3971 containing a ruling that the partners were entitled to deduct from their distributive net income of the partnership a pro rata proportion of the excess profits tax paid by the partnership in accordance with the decision of the Circuit Court of Appeals, Second Circuit, in Reid v. Rafferty, 15 F.2d 264, the commissioner had held that the excess profits tax paid by a partnership for 1917 should be deducted from the partnership's gross income in determining the distribution to be shown in the partners' individual returns. But after making the distribution of income from the remaining balance on the partnership return to the individuals, no further credit was allowed to the individual for his pro rata share of the excess profits tax paid by the partnership. By the above-mentioned ruling this practice was changed and the overpayment which is sought to be recovered in this suit results from a credit against such distributive share of the net income of the partnership of his pro rata share of the profits tax paid by the partnership for 1917.
Plaintiff's claim for refund was considered and rejected by the commissioner December 16, 1927, on which date the commissioner advised the plaintiff by letter as follows:
"A review of your income-tax returns for the years 1917 to 1920, inclusive, in connection with the report of the internal-revenue agent in charge, * * * dated January 31, 1922, covering an investigation of your books of account and records, discloses overassessments and a deficiency in tax as follows:
------------------------------------------------------------ Year | Deficiency | Overassessment | in tax | ---------------------|-------------------|------------------ 1917 ............... | ................. | $ 5,969.56 1918 ............... | ................. | 14,187.55 1919 ............... | ................. | 9,760.01 1920 ............... | $7,954.32 | ................. |-------------------|------------------- Total ........... | 7,954.32 | 23,947.56 -------------------------------------------------------------
Barred by statute.
Waiver.
"The adjustments made to the examining officer's report have been fully explained to your representatives at recent conferences held in this office, and, as you have signed an agreement consenting to the deficiency for 1920, the case will be closed at once.
"With regard to the overassessment of $5,969.56 for 1917, which is barred by statute, you are advised that this overassessment results from the allowance as a deduction from net income your pro rata share of partnership [Endicott, Johnson Company] excess-profits taxes in the amount of $78,417.86, as provided in Treasury Decision No. 3971. As the claim for refund filed by you does not cover this point, no overassessment can now be allowed."
December 16, 1927, the time for filing a new claim for refund for 1917 had expired.
6. November 14, 1928, plaintiff by his attorney in fact presented to the commissioner an additional Form 843, styled "Amendment of Claim for Refund," asking for the refund of the said $5,969.56 for 1917, under T.D. 3971, and on the further ground that all the necessary facts in support of taxpayer's claim were contained in the returns filed by the partnership and himself and in other records in the possession of the bureau.
7. The commissioner declined consideration of the amendment on the ground that the time had expired for filing a new claim for refund and so notified plaintiff by letter of December 7, 1928.
The question presented in this case is whether plaintiff is entitled to maintain this suit to recover an overpayment of $5,969.56 for 1917 under a claim for refund filed June 12, 1924, and whether a claimed amendment of the aforesaid claim for refund made November 14, 1928, had the effect of making the previous claim, if insufficient, valid for the purpose of suit.
So far as material to a decision of the question presented, the facts in substance are that the partnership of Endicott, Johnson Co., of which plaintiff was a member, filed a partnership return for 1917 disclosing an income upon which the partnership paid an excess profits tax of $1,413,028.55, a portion of which was refunded.
In March, 1918, plaintiff filed his individual income tax return for 1917 showing a tax of $35,245.12, which he paid. In this return he did not take a deduction from his distributive share of the partnership net income of his proportionate share of the excess profits tax paid by the partnership on its return for 1917.
At that time and continuously until February 4, 1927, when the Treasury Department promulgated Treasury Decision 3971 containing the decision of the Circuit Court of Appeals for the Second Circuit in Reid v. Rafferty, 15 F.2d 264, the commissioner had held that the excess profits tax paid by a partnership for 1917 should be deducted from the partnership's gross income in determining the distribution to be shown in the partners' individual returns. But after making the distribution of the income from the remaining balance on the partnership return to the individuals, no further credit was allowed to the individual for his pro rata share of the excess profits tax paid by the partnership. This practice was changed in 1927 and the overpayment which is sought to be recovered in this suit results from a credit against plaintiff's distributive share of the net income of the partnership of his pro rata share of the excess profits tax paid by the partnership for 1917.
In 1921 the commissioner caused an examination to be made of the books and records of the partnership, and in March, 1923, he made a jeopardy assessment of an additional tax against the partnership for 1917. In February, 1922, the partnership requested a conference with the commissioner for the purpose of presenting reasons and evidence in opposition to a proposed assessment against the partnership, and thereafter numerous conferences in connection with the partnership tax, and, also, in connection with that of the plaintiff, were held in 1923, 1924, and 1925, and briefs, appeals, and evidence were filed with the commissioner. In March, 1923, plaintiff filed with the commissioner a verified appeal from the proposed additional assessment against him resulting from the increase in his distributive share of the net income of the partnership resulting from the increase in the partnership income upon which the additional tax had been assessed against the partnership earlier in that month. June 12, 1924, plaintiff filed a claim for refund of $35,245.12 for 1917. Under certain waivers which had been executed by him, this claim was timely. The appeal that had been filed by plaintiff with the commissioner was made a part of this claim as to the facts and the grounds upon which said claim was based. The appeal related to the consolidation of the partnership with certain corporations and questioned the proposed additional assessment against him as a result of the disallowance of items of expense which were proposed to be capitalized or disallowed completely by the commissioner, and other questions were raised as to the valuation of items for the purpose of invested capital.
The question whether the plaintiff was entitled to take a credit against his distributive share of the net income of the partnership of his pro rata share of the excess profits tax paid by the partnership was not mentioned in the appeal which was made the basis of the claim for refund, nor was this matter ever thereafter drawn into question or urged before the commissioner by the plaintiff until November 14, 1928, almost a year after the commissioner, on December 16, 1927, had rejected the claim filed June 12, 1924. In these circumstances, the claim first filed cannot form the basis of this suit to recover the overpayment of $5,969.56 resulting entirely from crediting against plaintiff's distributive share of the net income of the partnership of his pro rata share of the excess profits tax collected from the partnership for 1917. United States v. Felt Tarrant Manufacturing Co., 283 U.S. 269, 51 S. Ct. 376, 75 L. Ed. 1025; Electric Power Light Corporation v. United States, 1 F. Supp. 773, decided by this court November 14, 1932. The attempted amendment of the claim for refund on November 14, 1928, was without effect. Sugar Land Railway Co. v. United States, 48 F.2d 973, 71 Ct. Cl. 628; Mutual Life Insurance Co. of New York v. United States, 49 F.2d 662, 72 Ct. Cl. 204.
It is insisted, however, by the plaintiff that the commissioner had before him all the facts that could be furnished with reference to the net income of the partnership and the plaintiff's distributive share thereof for 1917, and that all the facts necessary to a proper computation of plaintiff's tax were, therefore, adequately known to the commissioner prior to and at the time of the filing of plaintiff's claim on June 12, 1924; that the facts set forth by plaintiff in his appeal to the commissioner in protest of the proposed additional assessment against him for 1917, by reason of an increase in the net income of the partnership, were adequate to show said net income and plaintiff's distributive share thereof and that his failure to point out to the commissioner in the claim that, as a matter of law, he should credit a portion of the excess profits tax paid by the partnership against the distributive share of the partners was not vital to the adequacy of the claim under section 3226, Revised Statutes as amended (26 USCA § 156); that, even if the facts upon which the right of plaintiff to recover the admitted overpayment were omitted in the claim, this would not prejudice the commissioner nor prevent him from making a determination of the amount of the overpayment from the facts otherwise in his knowledge and possession. We cannot agree with this contention. Before a suit can be maintained to recover an overpayment of tax, it must be shown that the nature of the items made the basis of the suit was brought to the attention of the commissioner in connection with plaintiff's claim for a refund. Mutual Life Insurance Co. of New York v. United States, supra. Lancaster Cotton Mills v. United States, 59 F.2d 270, decided by this court May 31, 1932; Electric Power Light Corp. v. United States, supra.
The petition must be dismissed. It is so ordered.