Opinion
Docket No. 25773.
1951-01-12
WIENER MACHINERY CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Emanuel W. Staft, Esq., for the petitioner. William E. Murray, Esq., and Michael J. Kenney, Esq., for the respondent.
Emanuel W. Staft, Esq., for the petitioner. William E. Murray, Esq., and Michael J. Kenney, Esq., for the respondent.
The petitioner had unused excess profits credits in 1942, 1943, and 1944 which it could apply as carry-over or carry-back credits in computing its excess profits tax for other years under the provisions of section 710(c) of the I.R.C., but it did not apply the unused credits properly under section 710(c). Its error consisted of failing, first to carry back to a preceding year the unused credit of a taxable year to apply to the excess profits income of the preceding year. Petitioner, in each instance, erred in first carrying over the unused credit to a succeeding year. If petitioner had complied with the carry-back provisions of section 710(c), an unused excess profits credit for 1942 would have been carried back to 1941, would have been absorbed, and petitioner would have had a lower excess profits tax for 1941. Similar errors were made in 1943 and 1944. The petitioner failed to file schedules showing the computation and use of its unused excess profits credit with excess profits tax returns, as amended, for 1942, 1943, and 1944, and failed to file claim for refund of excess profits tax for 1941, refund of which is now barred. The respondent, in auditing petitioner's excess profits tax return for 1945, discovered for the first time the petitioner's mistake of law in its carry forward to 1945 of an unused excess profits credit from 1944 which should have been carried back to 1943, and discovered, further, for the first time the error made in failing to carry back unused credits for 1942 and 1941. The deficiency in 1945 excess profits tax results from disallowance of a carry-over from 1944 of an unused excess profits credit. Under section 710(c) there was no unused credit to carry over to 1945 because carry-back to 1943 would have absorbed the credit. Held, (1) that there is no equitable estoppel of the respondent barring his determination for 1945. Petitioner has not been misled at any time by any previous determination of the respondent with respect to the carry-over or carry-back of an unused credit. The deficiency is sustained. Held, further, (2) that the Tax Court has no jurisdiction to apply the doctrine of equitable recoupment by ordering set-off of the amount of overpayment of excess profits tax for 1941 against the deficiency in excess profits tax for 1945. Held, further, (3) that section 3801 of the Code does not give this Court jurisdiction to order credit of the 1941 overpayment against the 1945 deficiency.
The respondent has determined that there are deficiencies in declared value excess-profits tax and excess profits tax for the calendar year 1945 in the amounts of $94.77 and $16,365.52, respectively.
The petitioner concedes that there is a deficiency of $94.77 in declared value excess-profits tax.
The deficiency in excess profits tax results from respondent's determination that the petitioner is not entitled to carry forward from 1944 to 1945 an unused excess profits credit adjustment. Under that determination the respondent disallowed an unused excess profits credit in the amount of $18,232.78 which was carried forward. The petitioner contends either that there is equitable estoppel of the respondent from disallowing the carrying forward of an alleged unused excess profits credit adjustment to 1945, or that under section 3801 of the Internal Revenue Code, it is entitled to receive a ‘set-off‘ credit of about $5,682 against the deficiency in excess profits tax which has been determined for 1945. The dispute between the parties arises under section 710(c) of the Code. Under section 710(c) the petitioner could have applied unused excess profits credit to its excess profits net income for 1941 under a carry-back adjustment, and could have filed a claim for refund of an overpayment of excess profits tax for 1941, but failed to do both, and refund of tax is barred by the statute of limitations. In this proceeding, the petitioner is seeking relief through either a claimed ‘credit‘ against the excess profits tax deficiency for 1945, or the doctrine of equitable estoppel.
Petitioner filed its returns with the collector for the second district of New York.
The facts have been stipulated.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts.
The petitioner filed timely on March 13, 1942, an excess profits tax return, Form 1121, in which it reported as due excess profits tax for 1941. Agents of the respondent reviewed the return under the customary audit and made certain adjustments which resulted in a deficiency of excess profits tax for 1941 to which the petitioner agreed, and it paid the deficiency in tax upon signing waivers of restrictions upon the collection of the tax, Form 870. As of about April 5, 1944, the matter of petitioner's excess-profits tax liability for 1941 was closed. None of the adjustments which the respondent made in auditing petitioner's excess profits tax return for 1941 related to any unused excess profits credit adjustment under section 710(c) of the Internal Revenue Code, and the petitioner did not make any claim for any credit based on the carrying back of any unused excess profits credit.
The petitioner filed corporation income and declared value excess-profits tax returns, Form 1120, for 1941, 1942, 1943, and 1944, and in each instance such return was filed timely. But petitioner did not file an excess profits tax return, Form 1121, for 1942 timely, because it did not have taxable excess profits tax net income for 1942, and no tax was due. When the time came to file an excess profits tax return for 1943 in March of 1944, the petitioner filed Form 1121 for 1942 at the same time it filed Form 1121 for 1943, for the purpose of showing an unused excess profits credit adjustment carry-over from 1942 in the excess profits tax return for 1943. In the 1943 return, the petitioner carried over to 1943 an unused excess profits credit adjustment from 1942. Form 1121 for 1943 showed no excess profits tax due. At no time did the petitioner in any excess profits tax return for any year after 1941 deal with an unused excess profits credit for any year after 1941 in a way which involved first carrying back to 1941 all or part of an unused excess profits credit. It is specified in line 5 of Form 1121 that the taxpayer shall attach to the form a schedule showing the facts about ‘unused excess profits credit adjustment,‘ but the petitioner did not attach such schedule to Forms 1121 for 1942 and 1943 which it executed on March 9, 1944, and filed on or about that date with the collector.
The petitioner had excess profits tax net income for 1944 and filed Form 1121 for 1944 timely. However, it executed and filed an amended excess profits tax return for 1944 on or about March 12, 1946. Petitioner executed, also, at the same time, on March 12, 1946, amended excess profits tax returns for 1942 and 1943, and filed them on or about March 12, 1946. Amended Forms 1121 were filed for 1942 and 1943 for the purpose of making adjustments or changes in the amount of the unused excess profits credit adjustment for 1942, in the amount of the unused credit adjustment carry-over from 1942 to 1943, and in the amount of the unused credit adjustment carry-over from 1943 to 1944. Petitioner did not attach to any of the amended Forms 1121 which it filed on or about March 12, 1946, for the years 1942, 1943, and 1944 the schedule called for on line 5 of Form 1121. As a result of carrying forward to 1943 and to 1944 unused excess profits credit adjustments, the petitioner did not have any excess profits tax for 1943 and 1944.
The respondent's agents reviewed petitioner's excess profits tax returns for 1944 in September of 1946. The reviewing agent stated in his reports as follows: ‘Excess profits credit for current year (1944) was substantially correct as reported.‘ But, in the agent's report, no comment was made about an excess profits credit adjustment carry-over from a preceding year.
The petitioner filed an excess profits tax return for 1945 in which it applied as an excess profits credit adjustment carry-over to 1945 an unused excess profits credit adjustment in the amount of $18,232.78. The respondent's agents in reviewing Form 1121 for 1945 disallowed the carry-over credit adjustment, and the petitioner received notice thereof in November of 1948, which notice was based upon an agent's report dated October 26, 1948. In this agent's report, a review was made by the respondent's agent for the first time of the petitioner's treatment of the excess profits credit adjustment carry-over for the years 1942, 1943, and 1944, and of the excess profits tax for 1941, and it was found by the agent that the petitioner had made a series of errors in making its excess profits credit adjustments under section 710(c) of the Code for the 4 years, 1941 to 1944, both inclusive, by having failed to comply with the statutory requirement that, under section 710(c)(3), there shall be, first, a carry-back of an unused excess profits credit. Proper compliance with section 710(c) of the Code required a carry-back to 1941 of the unused credit of 1942, and a carry-back from 1944 to 1943 of an unused credit adjustment, with the result that there was no unused excess profits credit adjustment to carry forward to 1945.
The petitioner overpaid excess profits tax for 1941 to the extent of roughly $6,700. It failed to file timely a claim for refund of overpaid tax for 1941, and the parties did not execute any waiver of the statute of limitations for 1941 under section 276(b) of the Code. The year 1941 is closed, and recovery of overpayment of tax for that year is barred.
If the petitioner had complied with the provisions of section 710(c), or if the respondent had made a timely determination with respect to petitioner's excess profits tax liability for 1943, there would have been a deficiency in excess profits tax for 1943 in the amount of about $1,086. The year 1943 is now closed, and the respondent is barred from assessing a deficiency in excess profits tax for 1943. No waivers were executed under section 276(b) of the Code with respect to the year 1943.
OPINION.
HARRON, Judge:
There is no dispute between the parties about the facts. The underlying dispute revolves around the application of section 710(c) of the Code to petitioner's excess profits tax years back to 1941. The pivotal year which determines the application of section 710(c) of the Code is the calendar year 1942, as the facts show. Subsection (3) of section 710(c) provides that if a taxpayer has an unused excess profits credit for ‘any taxable year beginning after December 31, 1941,‘ such unused excess profits credit ‘shall be an unused excess profits credit carry-back for each of the two preceding taxable years,‘ excepting that a year beginning before January 1, 1941, is not included. The petitioner concedes that the respondent, in his review of its excess profits tax return for 1945, has applied property to the years 1941, 1942, 1943, and 1944 the statutory provisions set forth in section 710(c), as the petitioner must do because the procedures set forth for the computation, and carry-back, and carry-over of the unused excess profits credit adjustments are mandatory. Also, the petitioner, at lease in effect, concedes that it erred in its treatment of unused excess profits credit adjustments during the period 1942 through 1945, i.e., in carrying unused credit adjustments forward. The pleadings in this proceeding do not present any issue involving either the construction or the application of section 710(c), or the correctness of the respondent's regulations with respect thereto, Regulations 112, section 35,710-3(b), which provides, in part, that ‘The unused excess profits credit for any taxable year beginning after December 31, 1939, to the extent that it is not used as a carry-back, is carried forward to the two succeeding taxable years and forms part of the unused excess profits credit adjustment for such of those succeeding taxable years as begin after December 31, 1940.‘ (Emphasis added.)
The petitioner has not made it clear whether it contends that the respondent should be held to approve a carry-over to 1945 from 1944 of an unused credit adjustment as a matter of consistency, solely because an agent of the respondent did not question a carry-over to 1944 of an unused credit adjustment from 1943, when the agent made his review of the excess profits tax return for 1944. The agent said in his report, inter alia, that the ‘excess profits credit‘ for 1944 was substantially correct as reported. For one thing, the statement of the agent in his report may be an ambiguous one because there is nothing in the report to show that the agent was referring to the ‘unused excess profits adjustment‘ carry-over on the return from 1943 to 1944, rather than the amount of ‘excess profits credit‘ based on income, which we think is the item to which the agent made reference. At any rate, if the petitioner made such contention, it could not be sustained. The respondent is bound to apply section 710(c) properly in making his determination of the amount of the excess profits tax for 1945 in accordance with the statute, and if his agents erred in failing to find error in the petitioner's treatment of the unused excess profits credit adjustments in the excess profits tax returns for 1944 and 1943, the respondent cannot perpetuate errors of either the taxpayer or his agents in determining the amount of the 1945 excess profits tax liability of the petitioner. See Mt. Vernon Trust Co. v. Commissioner, 75 Fed.(2d) 938, certiorari denied, 296 U.S. 587, and Commissioner v. Rowan Drilling Co., 130 Fed.(2d) 62, 65, where the court said:
an unlawful course of procedure, however prolonged, is not made lawful by acquiescence of the Commissioner.
It was held in Mt. Vernon Trust Co., supra, that an error in a return for a year prior to the taxable year cannot be offset by excluding from the taxable year's income ‘income properly returnable in that year.‘
The respondent has acted properly in disallowing a carry-over from 1944 to 1945 of an unused excess profits credit adjustment in the amount of $18,232.78. We are unable to find in the record before us any ground for applying the doctrine of equitable estoppel against the respondent from which it would follow that the respondent erred in denying carry-over from 1944 of a credit adjustment of $18,232.78. For example, the respondent has never made a determination that the petitioner must carry forward from any year beginning after December 31, 1941, to any later year any unused excess profits credit adjustment. The petitioner cannot say that a determination of the respondent lulled it into the belief that it should pursue any unlawful or improper course under section 710(c). The record before us shows that prior to the audit of Form 1121 for 1945 respondent's agents did not make any determination relating to excess profits credit adjustments, as to either the carry-back or carry-over thereof. The petitioner is not entirely without fault in the matter of the apparent oversight of respondent's agents in reviewing Forms 1121 which were filed for 1942, 1943, and 1944 because it failed to attach to Forms 1121 the schedule called for on line 5 thereof. But, if the respondent's agents acquiesced in petitioner's erroneous carry-overs to succeeding years of credit adjustments without first making a carry-back as section 710(c) requires, their erroneous acquiescence in errors of the petitioner does not provide estoppel of the respondent from making a correct determination in the matter under section 710(c) for 1945. See Bryan v. United States, 99 Fed.(2d) 549, certiorari denied, 305 U.S. 661, and Mertens, Law of Federal Income Taxation, Vol. 10-A, par. 60-14, pp. 193-197.
The petitioner's contention that the respondent is barred by estoppel from disallowing the carry-over from 1944 to 1945 of an excess profits credit adjustment of $18,232.78 is denied. It follows that the respondent's determination that there is a deficiency in excess profits tax for the year 1945 in the amount of $16,365.52 is correct.
The petitioner contends that in the event that this Court sustains the determination of the respondent that there is no unused excess profits credit adjustment to carry over to 1945 to apply in the computation of its excess profits tax for 1945, then it is entitled to obtain refund of overpayment of excess profits tax for 1941, or other relief under section 3801 of the Internal Revenue Code. In general, the relief which is envisioned by section 3801 is mitigation of the effect of limitations provisions, but before a taxpayer can pursue the relief afforded by section 3801, there must be a ‘determination‘ as is defined by subsection (a)(1). The bringing of this proceeding to this Court and a decision by this Court which becomes final is a first step in petitioner's obtaining relief from the respondent under section 3801. The definition of ‘determination‘ includes a decision by this Court which has become final. Under the holding made above, decision will be entered for the respondent. Thereafter, the petitioner may take further steps as are set forth in section 3801.
This Court has no power to order a refund of tax or a credit of any overpayment of tax for an earlier year against the 1945 tax. In this proceeding we can do no more than decide whether or not respondent has correctly determined that there is a deficiency in tax for 1945. Our considerations cannot reach section 3801. See Anton Dolenz, 41 B.T.A. 1091, 1101, where section 820 of the Revenue Act of 1938 was considered, from which section 3801 of the Code is derived.
The petitioner contends further that under the doctrine of equitable recoupment it is entitled to offset the amount of the overpayment of the 1941 excess profits tax against the deficiency in the 1945 excess profits tax. This Court lacks the power to apply the doctrine of equitable recoupment. Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418, and Robert G. Elbert, 2 T.C. 892.
Decision will be entered for the respondent.