Opinion
No. 42615.
November 4, 1935.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by the Swift Manufacturing Company against the United States.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. Plaintiff is a corporation duly organized under the laws of the state of Georgia. Its principal office and place of business is Columbus, Ga. It is engaged in the manufacture of cotton goods.
2. Plaintiff duly filed its income tax return for the fiscal year ended March 31, 1929. It was rendered on the accrual basis. It showed a taxable net income of $319,181.97, and a tax liability of $38,301.84. The amount of tax was reduced, in accordance with a resolution of the Congress, to $37,503.89. This reduced sum was paid to the collector in quarterly payments on June 20, September 11, December 3, 1929, and March 12, 1930.
3. Plaintiff in its tax return reported its inventory of goods on hand on the basis of cost or market, whichever was lower. The return for 1929 reported the inventory on hand at the beginning of the year as follows:
Raw material ........................... $134,991.94 Work in process ........................ 106,966.63 Finished goods ......................... 377,029.73 ----------- Total .............................. 618,988.30
And at the end of the year as follows:
Raw material ........................... $491,218.62 Work in process ........................ 124,453.18 Finished goods ......................... 294,092.87 ----------- Total .............................. 909,764.67
The return for 1929 carried inventories as shown by the books of the company. The inventories were taken on the same basis plaintiff had used in taking its inventory for the years 1920 to 1930, both inclusive. According to that method, no account was taken in the inventory of waste occurring in its manufacturing operations. That method, for the purpose of determining the cost of goods in process, assumed that all goods in process were equally divided through the various stages of manufacture; that one-half of the goods in process incurred from none to one-half of the manufacturing costs, and that the other one-half of the goods in process incurred the remaining one-half of the total manufacturing costs. The method contemplated the cost of the goods in process to have been increased over the raw material cost by one-half of the total manufacturing costs, and thus produced a fair average of the costs of its goods in process.
In auditing plaintiff's return for the fiscal year 1930, the revenue agent computed plaintiff's income for that year by a different method of computing the cost of the goods on hand, and recommended an increase of $242.45 in the tax for 1930.
4. Plaintiff protested the method used in such recomputations, but without success. Pursuant to the changed method, plaintiff recomputed its taxable net income for the fiscal years 1929 and 1931 and filed its claims for refund. The claim for 1929 was in the sum of $7,141.84.
The claim for refund sets up the inventories at the beginning of the year at a figure $85,932.59 in excess of the amount shown in the return, and sets up at the closing of the year the figure $23,654.15 in excess of the amount shown in the return. Assuming such changes as correct, they produce a decrease in the income of $62,278.44, which sum is further reduced by the claim on an item of $1,491.90, not now in controversy, making a net decrease of $60,781.54 in the 1929 income. This computation would reduce the tax $7,141.84.
No changes in the inventories arise from changing the quantity of the goods on hand or the cost of raw material. Rather, the changes result from an attempt to more clearly charge to the goods in process the manufacturing costs as well as the waste sustained in the manufacturing operations.
A revenue agent examined the claim and recommended its allowance in the amount claimed.
5. On September 20, 1932, the Commissioner of Internal Revenue wrote plaintiff that he was prepared to reject the claim. His letter contained the following
"Your claims for the refund of $7,141.84 and $1,451.75, corporation income tax for the fiscal years ended March 31 1929, and March 31, 1931, respectively, have been examined and will be rejected for the following reasons:
"The claims are based on the statements that the value of inventories as of March 31, 1928, and March 31, 1931, should be adjusted to agree with the value of inventories as at March 31, 1929, and March 31, 1930, as previously accepted by the Bureau in the audit of the fiscal year ended March 31, 1930.
"After careful consideration of the information submitted in connection with the verification of the books of account and records the adjustment as to inventory values for March 31, 1929, March 31, 1930, and March 31, 1931, has been accepted as finally made, but the increase of $85,932.59 to the opening inventory, namely, March 31, 1928, for the fiscal year ended March 31, 1929, is not accepted and is held to the same values as were used in closing the case for the fiscal year ended March 31, 1928, now outlawed, having had the benefit of the lesser amount in closing the fiscal year March 31, 1928, now barred under the principle of estoppel."
On December 3, 1932, plaintiff's claim was rejected.
6. On September 1, 1933, plaintiff submitted a request for reopening and reconsideration of its claim for refund. Its request was supplemented by a brief filed on December 9, 1933. Under date of February 8, 1934, the Commissioner, in denying the request, stated: "After careful consideration of the information submitted it is concluded that the claim was correctly rejected. The file discloses that the taxpayer has had the benefit of the original inventory valuation in the determination of net income for the fiscal year ended March 31, 1928. The claim was filed after the expiration of the period of limitation within which adjustments of tax liability could be made for the fiscal year 1928 and requests the allowance of a refund resulting from a misstatement on the part of the taxpayer as to the value of inventories and on an increase in valuation which has not heretofore been reported for income-tax purposes."
7. No satisfactory evidence was introduced by plaintiff in support of the correctness of the inventory items set out in the claims as presented to the Commissioner.
Frank L. Warfield, of Washington, D.C. (Stanley Worth, of Washington, D.C. on the brief), for plaintiff.
George H. Foster, of Washington, D.C. and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Plaintiff seeks to recover an alleged overpayment of income tax for 1929 in the amount of $7,141.84 on the theory that it has proved its inventories were incorrectly stated in its return and that when correctly stated they reflect a reduction in income which will show an overpayment of the amount sought to be recovered.
The facts in this case show that plaintiff had been following a certain inventory method since about 1920, and upon examination of its return for 1930 the Commissioner prescribed a different basis and accordingly adjusted the inventories for that year by the use of this new basis, thereby producing a small deficiency. Thereafter plaintiff filed claims for refund for 1929 and 1931 in which it contended that a refund should be granted because the inventories had been correctly revised under the same basis employed by the Commissioner for 1930. The Commissioner accepted the inventory adjustments for 1931, but refused to accept them for 1929. During a consideration of the claim for 1929 the Commissioner referred the claim to a revenue agent, who examined it and recommended its allowance but the Commissioner refused to allow the claim. No other proof is offered as to the correctness of the inventory for which plaintiff contends.
We are here concerned with the use of inventories, a question that was left by Congress largely to the discretion of the Commissioner.
Section 22(c) of the Revenue Act of 1928 ( 26 USCA § 22 note), which governs the case at bar, reads: "(c) Inventories. Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income."
As this court said in Clark Distilling Company v. United States, 66 Ct. Cl. 726, certiorari denied, 279 U.S. 868, 49 S. Ct. 482, 73 L. Ed. 1005, "Both the use and the basis of inventories were matters left to the administrative discretion of the commissioner" and in Riverside Manufacturing Company v. United States, 67 Ct. Cl. 117, certiorari denied, 279 U.S. 863, 49 S. Ct. 479, 73 L. Ed. 1002, "The basis of inventories was one specifically confided by Congress to the commissioner and Secretary." In the exercise of that administrative discretion, the Commissioner, in the case before us, rejected plaintiff's claim for an inventory adjustment. Under such circumstances a heavy burden is placed on plaintiff of showing that the Commission's action was plainly arbitrary or capricious. Lucas v. Kansas City Structural Steel Company, 281 U.S. 264, 50 S. Ct. 263, 74 L. Ed. 848, and Finance Guaranty Co. v. Commissioner (C.C.A.) 50 F.2d 1061. The record fails to disclose anything of an arbitrary or capricious nature in the Commissioner's action. The closing inventory for 1929 is the opening inventory for 1930 and the opening inventory for 1929 the closing inventory for 1928, and in that way inventory adjustments directly affect income for other years. In the year in which the changed method was first applied (1930) only an insignificant change in tax liability occurred, whereas if the closing inventory for 1928, which is also the opening inventory for 1929, is opened up, the tax liability for 1928 and 1929 will be changed so that a refund may be given for 1929, but a deficiency determined for 1928 which is outlawed. This shows the inequity which would result. The Commissioner made the change where no inequity would result, but refused to extend the change to years where it would be detrimental and prejudicial to the interests of the government. It appears to us that in so deciding he exercised sound discretion.
A further obstacle to recovery by plaintiff is the fact that it has failed to prove there was an overpayment. In an action to recover taxes paid the burden is on the taxpayer not only to show that the assessment as made by the Commissioner was erroneous, but also to show facts from which a determination can be made of the amount to which he is entitled. Helvering v. Taylor, 293 U.S. 507, 55 S. Ct. 287, 79 L. Ed. 623. The proof in the case at bar falls far short of the above requirements. What the plaintiff relies on is that it presented the claim to the Commissioner which it contended was prepared on the same basis as that used by the Commissioner in determining plaintiff's tax liability for 1930. During a consideration of the claim the Commissioner referred it to a revenue agent who examined it and recommended its allowance, but the Commissioner refused to concur in the recommendation of the revenue agent. A mere statement of this nature is not sufficient to show what in fact was plaintiff's correct inventory for the year in question. A recommendation by a revenue agent which is not accepted by the Commissioner is not binding on the Commissioner and does not become the Commissioner's act. The Commissioner in rejecting the claim referred to estoppel as the basis for his action and made no reference to any error in plaintiff's inventory computation, but there is no statutory requirement that the Commissioner shall assign a reason for his action, nor does it follow that recovery can be had, even though an erroneous reason may be assigned for the rejection. It may well be that the Commissioner considered estoppel of itself sufficient to justify the disallowance of the claim without even considering the merits of the inventory adjustment. Merely because the Commissioner rejected the claim on the ground mentioned, we cannot say that he thereby approved the correctness of the claim on its merits. That is in substance the plaintiff's proposition. In our opinion such proof is not sufficient to support a judgment.
There is no evidence in the record to enable the court to ascertain the correct amount refundable to the plaintiff if it were entitled to recover. The court would have to accept plaintiff's figures as set out in the claim without satisfactory proof of the correctness of the items.
It follows that the petition must be dismissed. It is so ordered.
BOOTH, Chief Justice, and WILLIAMS and GREEN, Judges, concur.
LITTLETON, Judge, dissents.