Opinion
No. K-471.
October 20, 1931.
Suit by H. Lissner Company, Incorporated, against the United States.
Petition dismissed.
This suit was brought to recover $150,000, income and profits tax alleged to have been overpaid on the return filed for the calendar year 1920. The plaintiff, which was incorporated March 20, 1920, pleads its claim in this court in two counts. The first is based upon the acquisition by the corporation of the assets of a predecessor partnership in exchange for its capital stock as of January 1, 1920, and it is contended by the plaintiff that it is entitled to value the merchandise inventory at January 1, 1920, at its then actual market value of $1,054,277.10 instead of valuing the same at cost to the predecessor partnership of $838,721.10 which results in an overpayment of $99,155.76. In support of this claim plaintiff insists that it was a de facto corporation from and after January 1, 1920.
The second cause of action set forth in the petition is that if the court should decide that the plaintiff was not a corporation and did not acquire the inventory until March 20, 1920, it is nevertheless entitled to a refund of $76,241.31 in that it is entitled to have its merchandise inventory valued at its actual market value on March 20, 1920.
The defendant contends: First, that plaintiff may not value its inventory at actual market value on January 1, 1920, inasmuch as it was not incorporated and did not acquire the assets until March 20, 1920; and, secondly, that it cannot recover any amount on the basis of the value of the inventory on March 20, 1920, because its actual value on that date has not been established; and, further, that the claim for refund filed was on the basis of the value of the inventory on January 1, 1920, and was therefore insufficient to constitute a basis for the second cause of action set forth by the plaintiff in its petition.
1. In 1903 a partnership was created under the name of H. Lissner Company, consisting of five members until the death of one of the partners in 1918. In the latter part of 1919 the partners concluded to incorporate the business and decided that the partnership would end December 31, 1919, and that, from thence forward, the business would be conducted by a corporation. Accordingly the partnership was terminated and dissolved December 31, 1919.
The former partners, however, continued until the incorporation on March 20, 1920, to retain the same interest in the business that they previously had as partners. From and after January 1, 1920, the drawings of the former partners, which, prior to December 31, 1919, had been charged against their capital accounts, were discontinued and the amounts paid to them were designated salaries and were paid to them as if they were officers of a corporation. New books of account were opened January 2, 1920, in corporate form. Income received from January 1, 1920, and thereafter, was kept separate from transactions before December 31, 1919, and all such income after January 1 was included in the income and profits tax return filed in 1921 by the corporation for the calendar year 1920. As between themselves, the former partners considered themselves to be doing business as a corporation from January 1, 1920. There is nothing in the evidence to show that the business was so conducted as to advise the public or outside persons with whom business was being done that the parties carrying on the business considered it to be incorporated and were transacting it on that basis, nor is there any evidence that any officers were elected, any meetings held, or resolutions adopted.
Some time in February, 1920, an application was made for a corporate charter. The charter of incorporation of the plaintiff, H. Lissner Company, Inc., was granted by the state of Delaware on March 20, 1920. Plaintiff corporation took over all the assets and assumed all the liabilities of the former partnership as of January 1, 1920, and the stock of the corporation was issued to the former partners for the amount of their investment and interest in the partnership on December 31, 1919.
The closing inventory of the partnership was taken on December 31, 1919, at cost, that basis being lower than the then cost or market. The cost and market value of the merchandise included in the inventory had been and was, on December 31, 1919, rapidly increasing, and this increase in the market continued until May, 1920, after which there was a rapid decline in the market price.
2. On March 15, 1921, plaintiff filed an income and profits tax return for the entire calendar year 1920 in which the date of incorporation was stated "as of January 1, 1920." The return showed the receipt of a net income during the calendar year 1920, that is, from January 1 to December 31, 1920, of $593,371.54. The income and profits tax computed upon this net income was $221,207.63, which was paid by the plaintiff in installments on March 17, June 15, September 15, and December 15, 1921.
In preparing the return for the calendar year 1920 plaintiff included therein an opening inventory of $838,721.10, being the closing inventory of the partnership on December 31, 1919, and being the cost of the merchandise on hand at January 1, 1920, to the partnership. The closing inventory of the plaintiff corporation at December 31, 1920, was $316,165.33, and that value is not in controversy here.
3. October 3, 1921, the books of the plaintiff were examined by an agent of the Internal Revenue Bureau in connection with the return for 1920. He made a report to the Commissioner of Internal Revenue recommending an additional tax for 1920 of $210.02 based on a disallowance of an item of depreciation of $2,500 and stated in his report: "* * * The corporation was incorporated under the laws of Delaware and took over as of January 1, 1920, the business formerly conducted by H. Lissner Company, a copartnership, same interest remaining in control. The assets so acquired consisted of merchandise, cash, outstanding accounts, investments, furniture and fixtures, plant; the liabilities so acquired consisted of accounts and bills payable. The total par value of the stock issued therefor was $1,000,000 preferred stock and 10,000 shares of no par value common stock. Value of each class of assets as carried on the books of the predecessor concern is identical with the value at which the items were carried on the books of the corporation with the exception of securities which were taken over at market value by the corporation, market value in this case being lower than cost." This report further stated, "Inventories analyzed and methods used by corporation in accordance with prevailing regulations." This report of the internal revenue agent was adopted and confirmed by the Commissioner of Internal Revenue, and the additional tax of $210.02 was assessed and paid by the plaintiff.
The inventory taken at December 31, 1919, at cost to the partnership, and included in the income and profits tax return filed by plaintiff as the opening inventory at January 1, 1920, was $838,721.10, composed of the following items:
Piece goods .................. $442,587.07 Pants in stock ............... 70,192.70 Pants in work ................ 196,841.74 Pants in cutting ............. 55,779.65 Trimmings .................... 73,319.94 ___________ Total .................... 838,721.10
The actual market value of the merchandise comprising said inventory on December 31, 1919, and January 1, 1920, was $1,054,277.10, as follows:
Piece goods ....................... $570,217.96 Pants in stock .................... 84,633.83 Pants in work ..................... 240,370.78 Pants in cutting .................. 70,849.25 Trimmings ......................... 88,205.28 ____________ Total ............................. 1,054,277.10
4. On March 20, 1920, the date on which plaintiff was incorporated, the assets of the corporation consisted of $1,991,637.05, the liabilities consisted of $802,970.90, and the net worth of the corporation was $1,188,666.15. Included among such assets was the merchandise inventory in the sum of $922,903.61 computed on the basis of cost thereof, which was lower than market.
The net worth of the business on January 1, 1920, was $1,022,924.18. The difference in net worth between January 1, 1920, and March 20, 1920, was $165,741.97.
December 31, 1920, the total assets of the corporation were $1,689,627.04, the total liabilities were $74,642.37, and the net worth was $1,614,984.67. The merchandise inventory at December 31, 1920, included in these assets was $316,165.33, taken on the basis of cost or market, whichever was lower.
The gross sales of the business between January 1, 1920, and March 20, 1920, amounted to $1,260,000. The gross sales for the entire calendar year 1920 amounted to $5,444,897.07. The percentage of profit on gross sales for the year was 20 4/5 per cent.
No actual inventory of the merchandise on hand was taken on March 20, 1920.
5. On February 24, 1926, plaintiff filed a claim for refund of $41,207.63 for 1920. The grounds stated in this claim were that: "The audit by the department of the return filed by this corporation has not been completed and the correct amount of the tax liability determined. The taxpayer has not received the benefit of certain reductions in income and adjustments of invested capital." This claim for refund is in evidence as Exhibit 6 and is made a part hereof by reference.
On June 14, 1926, plaintiff filed with the Commissioner of Internal Revenue an income and profits tax waiver for 1920 under the provisions of section 284(g) of the Revenue Act of 1926 (26 USCA § 1065(g).
On March 29, 1927, within the time allowed by law, plaintiff filed a further claim for refund of $150,000 for 1920 on the ground, among others, that in making the return for 1920 plaintiff had failed to assign the correct value to certain assets acquired by the corporation as of January 1, 1920, in exchange for its stock, said assets being inventory, outstanding contracts, and good will, by reason of which the plaintiff had overstated its gross income for 1920 and consequently had overpaid its tax for that year. This claim for refund is in evidence as Exhibit 7 and is made a part hereof by reference.
6. After the filing of these claims and prior to September 22, 1927, plaintiff submitted to the Commissioner of Internal Revenue sundry evidences tending to support its claim. The evidence so submitted to the commissioner was for the purpose of supporting the claim of plaintiff that the inventory at January 1, 1920, should be valued at actual market value, which was considerably higher than the cost to the predecessor partnership used in the return. On September 22, 1927, the Commissioner of Internal Revenue advised plaintiff by letter that the information which had been submitted was not sufficient to warrant adjustment of the inventory. In this letter the commissioner also advised plaintiff as follows: "In this connection you are advised that it will be necessary for the corporation to submit the original inventory records which should be analyzed in such manner as to show in detail quantities and values of raw materials, stock in process, finished goods, supplies, etc., included in the original inventory, and as revised shown in columnar form for ready comparison. In addition to the above it will be necessary to submit purchase invoices at or near the inventory date to show replacement cost or market value and in their absence sales slips of the corporation's usual supplies covering actual transactions in reasonable volume at or near the inventory date to establish replacement costs. * * *"
Plaintiff in compliance with these instructions filed with the commissioner on December 8, 1927, the original inventory records and the other information requested. This inventory and the information submitted in connection therewith showed a market value for the inventory on January 1, 1920, of $1,054,277.10. Thereafter, on March 21, 1928, the Commissioner of Internal Revenue instructed the internal revenue agent in charge at New York to make a further investigation of the books, records, and affairs of the plaintiff corporation in connection with its claim for adjustment of its inventory value. The internal revenue agent in charge examined the books and records of the plaintiff and investigated the market conditions with regard to the value of the inventory at January 1, 1920, and particularly investigated the values claimed by plaintiff for the merchandise inventory on January 1, 1920. The internal revenue agent found and reported on April 19, 1928, that the actual market value of the merchandise inventory at January 1, 1920, was $1,058,451.12, or $219,730.02 in excess of the amount shown in the return. He recommended the allowance of an overassessment of $112,047.82 for 1920.
Thereafter conferences were held between the plaintiff's representatives and the Commissioner of Internal Revenue, and at a conference in the commissioner's office on May 21, 1928, the question of the effect of incorporation of plaintiff on March 20, 1920, upon the question of the inventory, its value, and the tax liability was discussed and considered. Certain additional facts were submitted to the commissioner by plaintiff relative to the matter of incorporation on March 20, 1920, in connection with the question of whether it was a de facto corporation from January 1 to March 20, 1920, and, subsequently, another hearing in the commissioner's office was held.
7. Thereafter on May 2, 1929, the Commissioner of Internal Revenue by letter rejected the claims for refund filed by plaintiff and, after making reference to the hearings and the facts submitted with reference to the effect of incorporation on March 20, 1920, on the inventory question, stated that, "No difference of opinion has resulted from the additional fact submitted at this hearing, and it is therefore the conclusion of that office that since the company was not actually incorporated until March, 1920, the question of assignment of erroneous asset values as at January 1, 1920, is immaterial."
Benjamin B. Pettus, of Washington, D.C. (Edward F. Colladay, of Washington, D.C., Edwin M. Oyterbourg and Charles A. Houston, both of New York City, and Colladay, McGarraghy, Pettus Wallace, of Washington, D.C., on the brief), for plaintiff.
George H. Foster, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
This suit was instituted to recover $150,000, but in the brief plaintiff claims that if it is entitled to value its inventory at January 1, 1920, at actual market value, it is entitled to judgment for $99,155.76 with interest. In the alternative it is claimed that for the period March 20, 1920, to December 31, 1920, it overpaid its tax in the amount of $76,241.31.
The controversy arises over the fact that although it is claimed that the business was carried on and conducted in all respects as if it had been a corporation on and after January 1, 1920, the corporation charter was not, in fact, issued and the plaintiff corporation did not exist and was not organized until March 20 of that year, and, although it made a tax return to the commissioner in 1921 for the entire calendar year 1920 and paid the tax as shown thereon, the commissioner refused to allow any portion of the claim for refund of taxes for 1920 on the ground that the plaintiff was not a corporation during the period January 1 to March 20 of that year. No defense is interposed on behalf of the defendant to the proposition that if the case is to be treated the same as if the plaintiff had been incorporated on the 1st day of January, 1920, it is entitled to have its income and tax recomputed for that year on the basis of actual market value of the inventory on January 1, 1920, which the facts clearly establish to have been $1,054,277.10. The result of such computation would show an overassessment and overpayment of tax for that year in an amount substantially as claimed by the plaintiff. Munising Motor Co., 1 B.T.A. 286; Walker-Crim Co., Inc., 1 B.T.A. 599; Rouse, Hempstone Co., Inc., 7 B.T.A. 1018.
It is contended on behalf of plaintiff by reason of matters shown by the facts that it was a de facto corporation from January 1, 1920, and that defendant by reason of having assessed and collected the tax for the whole of the year is now estopped from claiming that the corporation did not exist on January 1, 1920. It further contends that even if the corporation was not in existence until March 20 of that year, the facts show that it was an association which would have paid the same rate of tax, and that it would be entitled to the same recovery.
On behalf of the defendant it is contended that the doctrine of estoppel cannot be applied to the government and that the plaintiff, not having been in existence on January 1, 1920, could not have acquired the inventory on that date and could not have issued its stock therefor at that time.
The question whether the plaintiff was a de facto corporation beginning with January 1, 1920, depends upon how the interested parties conducted the business and upon what was done, if anything, in the way of complying with the requirements of the law for the creation of a corporation. The former partners, as between themselves from and after January 1, 1920, seem to have regarded themselves as doing business as a corporation, and opened books in corporate form. Whatever sums they withdrew were charged to their individual accounts and the amounts paid for their services were designated as salaries and were paid as though they were corporate officers. The facts do not show that the books designated them as corporate officers. But all of this could have been done as a partnership or association; and it should also be observed that there is nothing in the record to show that the business was so conducted as to advise the public or outside persons with whom business was being done that the parties carrying on the business considered it to be incorporated and were transacting it on that basis, nor is there any evidence that any officers were elected, any meetings held, or any resolutions adopted.
Under such circumstances it cannot be said that they were in fact doing business as a corporation. Moreover, nothing was actually done in the way of performing any of the acts required by law to obtain a charter until long after January 1, 1920. The date on which the charter was applied for is not shown, but it was near the date on which the charter was issued. It is evident that none of the legal steps necessary to create a corporation was taken until a considerable time after January 1. Where nothing is done in transacting the business that could not also have been done by a partnership or an association, or which would inform the public or parties with whom dealings were had of any claim that the business was being carried on as by a corporation, and none of the proceedings which the law required in order to create a corporation was had or taken, we think a de facto corporation cannot be said to exist. Whether plaintiff was a de facto corporation at any time prior to the date on which its charter was granted it is not necessary to determine. See Niles Fire Brick Co., 6 B.T.A. 8; Treasury Department Rulings, O.D. 1016, 5 C.B., p. 231; O.D. 1078, 5 C.B., p. 232; O.D. 1121, 5 C.B., p. 233. It is urged by plaintiff that if it was not a de facto corporation from January 1 to March 20, 1920, it must have been an association and that its return of taxation would be the same as for a corporation. It may be that it was an association during that period and taxable under the same statutory provision as a corporation, but the conclusion that the total amount of the tax for the calendar year 1920 of the two taxable entities would be the same does not follow. There were different inventories and very different amounts of profit. The total amount of tax that might be due by the different taxable entities in existence from January 1 to March 20, 1920, and from the latter date to December 31, 1920, is immaterial to the decision in this case, since we are here concerned only with the plaintiff corporation which was in existence only from and after March 20, 1920. Had the plaintiff filed a claim for refund on the basis that its tax should be determined for the period March 20, 1920, to the end of the year, its rights would have been altogether different from what they are under the refund claim filed.
Plaintiff is not entitled to have its tax computed on the basis of the calendar year beginning January 1, 1920, and may not use as its opening inventory the actual market value of the merchandise on hand by the predecessor partnership at December 31, 1919, since it was not in existence until March 20, 1920. Younker Bros., Inc., 8 B.T.A. 333; Isidor Hellman v. United States, 44 F.2d 83, 70 Ct. Cl. 498.
The second ground upon which plaintiff sues is that the income of the business from January 1 to March 20, 1920, should be eliminated and a refund of $76,241.31 should be made. In other words, that the opening inventory should be valued at March 20, 1920, and that it should be relieved of any tax which it paid upon any income for the period January 1 to March 20, 1920.
The defendant insists that plaintiff is not entitled to maintain this suit upon this ground for the reason that the claim for refund filed, the rejection of which forms the basis of this suit, made no mention of this ground and was based entirely upon the ground that the plaintiff was entitled to an increased value for its inventory at January 1, 1920. We are of opinion that the position of the defendant is correct. No mention whatever was made in the claim for refund, or in any of the hearings before the Commissioner of Internal Revenue, that the merchandise inventory should be valued at March 20, 1920, or that the tax liability of the corporation should be determined for the period March 20 to December 31, 1920. It appears that notwithstanding the fact that during the consideration of plaintiff's claim for refund the commissioner's office called its attention to the fact that it was not incorporated until March 20, 1920, the plaintiff took no steps to amend its claim for refund so as to claim an overpayment on any ground other than the valuation of its inventory on January 1, 1920. It submitted no facts whatever to the commissioner as to the value of the merchandise inventory on hand on March 20, 1920, or with reference to its net income from March 20 to December 31, 1920, and claimed no refund on that ground.
No claim for refund upon the ground upon which plaintiff's second cause of action is based was filed with the Commissioner of Internal Revenue, as required by the statutes and the regulations, and there was nothing in the claim for refund filed or in the facts submitted to the commissioner, or the papers and documents filed or presented to him in connection therewith, to inform the commissioner that plaintiff was claiming a refund on the ground upon which it bases its second claim for recovery here, namely, that it was taxable for the period March 20 to December 31, 1920, and that its inventory should be valued and its net income determined accordingly. The claim of March 29, 1927, was not sufficient to entitle the plaintiff to sue upon its second claim. One of the principal objects of the requirements of the statute with reference to the filing of a claim for refund is to advise the appropriate officials of the demands or claims intended to be asserted so as to insure an orderly administration of the revenue, and a claim which gives no notice of the amount or nature of the claim for which the suit is brought and refers to no facts upon which it may be founded does not satisfy the requirements of the statute. United States v. Felt Tarrant Mfg. Co., 283 U.S. 269, 51 S. Ct. 376, 75 L. Ed. 1025. "Meticulous compliance by the taxpayer with the prescribed conditions must appear before he can recover." Maas Waldstein Co. v. United States, 283 U.S. 583, 51 S. Ct. 606, 608, 75 L. Ed. 1285. Wausau Sulphate Fibre Co. v. United States, 49 F.2d 665, decided by this court May 4, 1931.
Plaintiff is not entitled to recover on the first ground stated in the petition, and it cannot maintain the suit on the second ground alleged. The petition is therefore dismissed, and it is so ordered.