Opinion
Franics R. Lash, of Washington, D.C. (C. Leo DeOrsey, of Washington, D.C., on the brief), for plaintiff.
John A. Rees, of Washington, D.C. and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for the United States.
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, and during all the times material hereto was, a citizen of the United States, a resident of New York, New York, and a member of a partnership known as Baker, Carver & Morrell (hereinafter referred to as the 'partnership'), engaged in the business of selling railroad, steamship, and marine supplies at Number 39-41 Water Street, New York, New York. That partnership was organized about 1894 and Mr. Baker died sometime prior to 1917. Thereafter, and particularly during the year 1917, the partnership was continued at the same location and under the same name by the plaintiff and Joseph B. Morrell as equal partners.
2. The partnership filed its income and profits tax return for the calendar year 1917 on March 28, 1918, reporting thereon an invested capital of $1,121,265.12; a taxable net income of $499,387.91; a partnership excess profits tax of $163,868.93; and a balance of $335,518.98 as net profit to be shared equally by the two partners. That return also reported salaries paid to the two partners in equal amounts of $87,500 each. The excess profits tax of $163,868.93 was timely assessed and paid and is not in controversy herein.
Treasury Department Form 1065, on which the partnership reported its income and profits tax liability for the year 1917, contained the following marked spaces:
I. Total of Items G and H ..............
$499,387.91
J. Less excess profits tax, if any, for taxable year...................
163,868.93
-----------
K. Net income to be shared bypartners..................
335,518.98
3. After a field examination by a revenue agent and upon the basis of his report dated June 14, 1919, the Commissioner of Internal Revenue timely assessed on his August 1919 list an additional excess-profits tax of $126,060.55 against the partnership. Notice and demand therefor was issued on November 10, 1919.
During the years 1917 to 1926, inclusive, Edward S. Greene was the duly appointed and acting attorney-in-fact for the partnership and for each of the two partners individually, in all their Federal tax matters pertaining to the calendar year 1917.
In a letter dated November 21, 1919, the partnership, acting through Greene as general manager, and attorney-in-fact, acknowledged receipt of that notice and demand dated November 10, 1919, and asked for an extension of ten days in which to file a claim for abatement of the additional tax. On November 25, 1919, the partnership, acting through Greene as general manager and attorney-in-fact, filed a tentative claim for abatement and on December 4, 1919, Greene filed a supplemental claim for abatement on its behalf to which there was attached a six-page typewritten brief and protest against the revenue agent's report stating in substance that the additional assessment resulting therefrom was erroneous and excessive. In a letter dated January 7, 1921, the chief field deputy in the office of the collector of internal revenue advised the partnership that he had been directed to take steps to satisfy the Government's claim for $126,060.55 tax for 1917.
In a letter dated March 11, 1921, the Commissioner of Internal Revenue advised the partnership that its claim for abatement had been considered and certain items allowed, resulting in an increase in taxable net income as reported upon its return from $499,387.91 to $544,488.87 and in a decrease of invested capital from $1,121,365.12 to $921,365.12; that a computation of tax liability upon the basis of these adjusted figures disclosed a tax of $214,929.49, resulting in an overassessment of $74,999.99. This letter concluded with a statement that the claim for abatement was therefore allowed for $74,999.99 and rejected as to $51,060.56. Since no part of the additional assessment of $126,060.55 had been paid, the overassessment of $74,999.99 was abated.
4. On May 13, 1921, Greene, as attorney-in-fact for the partnership and plaintiff, signed and mailed in a properly addressed and stamped envelope a letter acknowledging the receipt of the letter of the Commissioner of Internal Revenue dated March 11, 1921. The letter so mailed by Greene objects to the computation of tax liability made by the Commissioner for several reasons, asked to have the demand thereon deferred, and contained the following statement: '(6) A change in the excess profits' tax of the firm for 1917 affects the excess profits' credit on the returns of the individual partners for that year. Would it be possible to have the credit due them, i.e., Mr. Joseph B. Morrell and Mr. Amos D. Carver, on their returns on this account taken care of at the same time?'
Neither the original of this letter nor any copy thereof can now be found in the administrative files of the Bureau of Internal Revenue or in the office of the collector of internal revenue for the district in which the partnership and plaintiff's returns were filed.
By letter dated June 6, 1921, the Commissioner replied to the partnership's previous inquiry bearing upon its claim for abatement of additional taxes for 1917.
5. In a letter dated May 22, 1923, addressed to the Commissioner by Greene, reference was made to the then outstanding and unpaid balance of $51,060.56, the remaining portion of the additional tax assessed on the August 1919 list referred to in finding 3. This letter for the first time requested that the profits-tax liability of the partnership for the calendar year 1917 be redetermined upon the basis of special assessment under the provisions of Section 210 of the Revenue Act of 1917, 40 Stat. 307.
By letter dated February 5, 1924, the Commissioner advised that the request for special assessment could not be entertained for the reason that it was not timely filed. In response to a brief and protest filed on or about February 11, 1925, the Commissioner reconsidered that action with the result that the partnership's claim for special assessment was allowed, and its tax liability for 1917 was redetermined under the provisions of Section 210 of the Revenue Act of 1917. By letter dated August 14, 1925, the Commissioner advised that the reaudit under special assessment disclosed the following:
Net income ......................................
$544,488.87
-----------
Excess-profits tax, Section 210 ..................
161,005.37
Tax assessed, Original return, Account #2800540..................
$163,868.93
Additional assessment, August 1919, page 1, line 2...............
126,060.55
-------------
Total Assessments ...............
289,929.48
Less: Amount abated ..................
74,999.99
-------------
214,929.49
-----------
Over-assessment .................................
53,924.12
Such letter also included the folliwng statement: 'Inasmuch as your informal claim for assessment under the provisions of Section 210 was filed on May 22, 1923, that portion of the over assessment in the amount of $2,863.56 which applies against the tax assessed under the restrictions of Section 281(e) of the Revenue Act of 1924 can not be refunded.'
Thereafter and on or about January 16, 1926, a certificate of over assessment was delivered to the partnership showing a net overassessment for 1917 of $51,060.56 to have been abated. This disposed of the remaining unpaid balance of $51,060.56 of the additional partnership profits tax assessed as aforesaid on the August 1919 list.
The allowance of special assessment and the resulting reduction in the profits tax liability of the partnership, as aforesaid, also resulted in a change in the distributive shares of the two partners which were recomputed as follows:
Taxable net income ..........................
$544,488.87
Less: Excess-profits tax .....................
161,005.37
-----------
Amount to be distributed ..................
383,483.50
Joseph B. Morrell (50.27%) .....
$192,777.16
Amos D. Carver (49.73%) .........
190,706.34
-------------
383,483.50
Although these two men were, as hereinbefore stated, equal partners and entitled to share equally in the partnership profits, certain adjustments by way of interest were made to compensate each for the use by the partnership of prior years' profits not withdrawn and for withdrawals in excess of salary and accumulated earnings.
6. Plaintiff filed his individual income tax return for the calendar year 1917 on March 30, 1918, reporting thereon a total gross income of $276,626.75; a total taxable net income of $231,349.03; and a tax thereon of $68,389.98, which was paid on June 5, 1918. A portion of this sum is sought to be recovered in the instant suit.
Policy No. N 485157,
executed
March 10, 1925,
for
$64,000
" " N 705296,
"
Nov. 2, 1927,
"
$50,000
" " N 771925,
"
Dec. 12, 1928,
"
$25,000
" " N 771926,
"
Dec. 21, 1928,
"
$15,000
" " N 773481,
"
Jan. 2, 1929,
"
$5,000
" " N 773482,
"
Jan. 2, 1929,
"
$5,000
Plaintiff's gross income of $276,626.75, reported as aforesaid, included the sum of $166,739.84 as his distributive share of the net profits of the partnership of Baker, Carver & Morrell. As shown in finding 2, that partnership had reported taxable net income of $499,387.91, a partnership profits tax of $163,868.93, and the balance of $335,518.98 as distributable net income to be shared equally by the two partners. Plaintiff's share was one-half and would have been $167,759.49. He actually reported only $166,739.84, as aforesaid, and the apparent explanation for his failure to include the difference of $1,019.65, although not considered material to any controverted issue, is that it probably represented an interest adjustment as explained in the last paragraph of finding 5.
Treasury Department Form 1040, on which the plaintiff reported his income and profits tax liability for the calendar year 1917, did not contain any marked space or instructions for the credit provided for by section 29 of the Revenue Act of 1916, as amended by the Act of Oct. 3, 1917, 40 Stat. 337.
In determining and reporting his taxable net income and the tax due thereon, plaintiff did not take as a credit against his net income his proportionate share of the partnership's excess profits tax although, as shown in finding 5, the partnership's taxable net income had been reduced by that tax in determining the partnership profits distributable and taxable to him.
7. After a revenue agent's examination and report dated March 26, 1919, the Commissioner of Internal Revenue determined and allowed an overassessment of $5,088.08 in plaintiff's tax liability for 1917. This overassessment was found to be an overpayment and was applied in full as a statutory credit to an outstanding additional tax due from the plaintiff for the calendar year 1916.
8. Pursuant to a waiver executed by plaintiff and dated March 12, 1925, which was received by the Commissioner of Internal Revenue on March 14, 1925, and accepted in writing, a so-called 30-day letter was addressed by him to the plaintiff on March 28, 1925, proposing a deficiency of $22,214.02 in plaintiff's tax liability for 1917. This letter was superseded by a further 30-day letter addressed to the plaintiff on August 26, 1925, proposing a deficiency of $31,137.75 in his tax liability for that year. On October 14, 1925, a so-called 60-day letter was addressed to the plaintiff showing, for the year 1917, 'the determination of a deficiency in tax of $31,137.75, as shown in Bureau letter dated August 26, 1925. ' That amount was assessed upon the Commissioner's January 1926 list. Thereafter and on December 8, 1926, the Commissioner sent to plaintiff, by registered mail, another 60-day letter also showing a determination of the deficiency of $31,137.75 'as shown in Bureau letter dated August 26, 1925, and attached statement. ' The statement advised plaintiff in detail of the computation of his tax liability and showed, among other things, that it was based upon a determined net income of $288,918.52 which included $190,706.34 as his share of the net profits of the partnership of Baker, Carver & Morrell, computed as shown in finding 5.
9. From the Commissioner's determination of deficiency, set forth in his letter of December 8, 1926, plaintiff filed a timely appeal with the United States Board of Tax Appeals on February 7, 1927. On June 11, 1928, and before the Commissioner had taken any action with reference to the plaintiff's request, set out in paragraph 6 of the letter of May 13, 1921, plaintiff's duly appointed and acting attorney-in-fact addressed a letter to the General Counsel, Bureau of Internal Revenue, wherein he proposed that the pending appeal be settled upon the basis of a recalculation of plaintiff's tax under a ruling promulgated February 4, 1927, known as Treasury Decision 3971, C.B. VI-I, 246 (1927).
The plaintiff's attorney-in-fact wrote a further letter to the General Counsel, dated July 30, 1928. His offer was accepted and approved by the General Counsel and a redetermination of plaintiff's tax liability was made upon the basis of the net income, as shown in the 60-day letter, reduced by $80,502.69, being one-half of the partnership profits tax of $161,005,37, determined as shown in finding 5. That computation showed plaintiff's corrected tax liability of $59,487.63, a net payment of $63,301.90 on June 5, 1918, as shown in finding 6, and an outstanding and unpaid assessment of $31,137.75. On August 22, 1928, counsel for the respective parties filed a stipulation with the Board agreeing that a correct determination of plaintiff's tax for the year 1917 disclosed an overpayment in the amount of $3,814.27. Pursuant to that stipulation the Board, on August 25, 1928, entered the following order in plaintiff's case from which no appeal was taken: 'Ordered and Decided: That, upon redetermination, there is an overpayment for 1917 of $3,814.27.'
10. From and after the date on which the plaintiff's return for the year 1917 was filed, and continuing until February 4, 1927, the Commissioner had held that the distributive income of every partnership for the year 1917, a proportionate part of which was taxable to each of its partners, should be determined by reducing the partnership's taxable net income by the excess-profits tax imposed thereon and that the balance remaining (distrivutive income should then be allocated to the partners upon their individual returns. However, he further held, at that time, that after thus allocating the partnership's distributive income to the partners, no credit should be allowed them upon their individual returns for their proportionate shares of the excess-profits tax imposed upon and paid by the partnership.
On February 4, 1927, such practice of the Commissioner was changed with the promulgation of Treasury Decision 3971, C.B. VI-I, 246 (1927), containing a ruling that, in accordance with the decision of the Court of Appeals, Second Circuit, in Reid v. Rafferty, 15 F.2d 264, not only should the partnership's taxable net income be reduced by the excess-profits tax thereon, in determining the balance available for distribution to the partners, but in addition each partner should receive as a credit against the net income upon his individual return his proportionate share of such excess-profits tax.
The recomputation of plaintiff's tax liability made in connection with the settlement of his appeal to the Board, as shown in finding 9, was in accordance with the practice under Treasury Decision 3971, supra.
11. The additional tax and deficiency of $31,137.75, assessed against plaintiff on the January 1928 list, as shown in finding 8, was in part satisfied and collected by statutory credits of overpayments of $20,273.12 and $9,369.92, made by plaintiff for the years 1918 and 1919 respectively, amounting to a total of $29,643.04. Those credits were made October 10, 1928.
On a schedule of overassessments signed November 12, 1928, the Commissioner abated in full the above-stated deficiency and on November 28, 1928, delivered to plaintiff a certificate of overassessment reading in part as follows:
Overassessment ....................
$34,952.02
Barred by statute of limitations ....
3,814.27
-------------
Overassessment allowable ..........
$31,137.75
The certificate of overassessment was contained in a letter stating in substance that the overpayment found was barred by the provisions of subdivision (e) of section 284 of the Revenue Act of 1926, 44 Stat. 66, as amended.
The credits of $20,273.12 and $9,369.19, above mentioned were subsequently reversed by the Collector of Internal Revenue, upon instructions from the Commissioner, and those amounts, as 1918 and 1919 overpayments, were repaid to plaintiff, with interest thereon, by Treasury check dated December 19, 1928, in the sum of $46,029.73.
12. On October 7, 1932, plaintiff filed with the Collector of Internal Revenue for his District a claim for refund in the amount of $29,643.04, based in part on the facts above stated. This claim was disallowed by the Commissioner on a schedule dated December 11, 1933, and plaintiff was so advised by letters dated November 24, and December 11, 1933. This claim is now abandoned.
13. No part of the overpayment of $3,814.27, found by the Board of Tax Appeals, has been repaid to plaintiff.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
GREEN, Judge.
This action involves income taxes which became due more than twenty years ago but which was only submitted to this court at the last term thereof. If the proceedings since the tax was assessed had at certain stages thereof received a tithe of the attention given to the case since the action was begun in 1934, the result would probably have been quite different. Indeed, it is possible there would have been no suit whatever.
The plaintiff filed his individual Federal income tax return for the year 1917 on March 30, 1918, reporting thereon a tax of $68,389.98 which was paid June 5, 1918. The income reported included plaintiff's share of the net profits of the partnership in which the plaintiff and Joseph B. Morrell were equal partners.
During 1921 a Mr. Greene was attorney in fact for the partnership and the plaintiff and on May 13, 1921, he mailed a letter to the Commissioner of Internal Revenue duly stamped and addressed. This letter contained a statement which plaintiff contends amounted to an informal claim for refund. This statement will be hereinafter set out and considered.
On May 22, 1923, Greene addressed another letter to the Commissioner in which he referred to the outstanding and unpaid balance of $51,060.56 and asked that the partnership's profits tax liability be redetermined on the basis of special assessment. The Commissioner first denied this request and then after receipt of a brief and protest filed about February 11, 1925, allowed the special assessment and redetermined the profits tax liability. About January 16, 1926, a certificate of overassessment was delivered to the partnership showing a net overassessment of $51,060.56 to have been abated. This disposed of the remaining balance of the additional tax of $126,060.55 which had been assessed during 1919.
On December 8, 1926, the Commissioner of Internal Revenue advised plaintiff of a deficiency of $31,137.75 for the calendar year of 1917 which was formally assessed. This deficiency letter and the assessment were timely under a waiver which plaintiff had filed.
On February 7, 1927, the plaintiff filed a timely appeal with the United States Board of Tax Appeals from the deficiency letter of December 8, 1926. No hearing was ever had on that appeal. On August 22, 1928, counsel for the respective parties filed a stipulation with the Board agreeing that a correct determination of plaintiff's tax liability for the year 1917 disclosed an overpayment in the amount of $3,814.27, and pursuant to the stipulation the Board entered an order from which no appeal was ever taken reading as follows: 'Ordered and decided: That, upon redetermination, there is an overpayment for 1917 of $3,814.27.'
On November 12, 1928, the Commissioner signed a schedule of overassessments, including one in plaintiff's favor of $31,137.75 for the year 1917 and on November 28, 1928, there was delivered to plaintiff a certificate of overassessment reading in part as follows:
Overassessment ....................
$34,952.02
Barred by statute of limitations ....
3,814.27
------------
Overassessment allowable ...........
31,137.75
The item of $31,137.75 was thereafter abated in full but the Commissioner declined to refund the item of $3,814.27 (which is the amount involved in this suit) upon the ground that it was barred by the provisions of section 507 of the revenue act of 1928, which will be hereinafter set out and the effect of its application to the facts in the case determined.
On October 7, 1932, the plaintiff filed with the collector of internal revenue for his district a claim for refund in the amount of $29,643.04, but any claim for recovery thereon is now abandoned by him. The case of plaintiff is now based on the allegation that plaintiff had filed a timely though informal claim for refund of the overpayment of $3,814.27 determined by the Board of Tax Appeals and this presents the main issue in the case.
As shown in Finding 6, in determining and reporting his taxable net income and the tax due thereon the plaintiff did not take as a credit against his net income his proportionate share of the partnership's excess profits tax. In his letter of May 13, 1921, to which reference has been made above, the attorney for the plaintiff acknowledged the receipt of the letter of the Commissioner dated March 11, 1921, and objected to the computation of the tax liability made by the Commissioner for several reasons. Plaintiff particularly relies upon a statement made in the letter which reads as follows: '(6) A change in the excess profits tax of the firm for 1917 affects the excess profits credit on the returns of the individual partners for that year. Would it be possible to have the credit due them, i.e., Mr, Joseph B. Morrell and Mr. Amos D. Carver, on their returns on this account taken care of at the same time?'
It is argued in behalf of plaintiff that the above statement quoted from the letter of the attorney for the plaintiff constituted an informal claim for a refund.
It will be observed that this statement does not ask for a refund and makes no claim that plaintiff is entitled to one, nor can we find in it any language which might be construed as making such a claim. It is merely an inquiry as to whether a certain thing could be done in making up the accounts of the individual parties. We do not consider it an informal claim which could afterwards be perfected. It is urged on behalf of the plaintiff that it was afterwards perfected by being allowed. It is true that after some long drawn out proceedings the matter of plaintiff's liability for taxes was submitted to the Board of Tax Appeals which found his taxes had been overpaid in the amount for which plaintiff now seeks judgment. If the plaintiff's attorney in the letter of May 13, 1921, had claimed that a recomputation of plaintiff's income tax on the lines suggested in the letter would show it was entitled to a refund, this might have furnished a base for arguing that an informal claim for refund was made in the letter, but no such statement was made. We find nothing in the cases cited by counsel for plaintiff which would sustain a holding that a mere suggestion of a change in the computation of the tax would constitute an informal claim for a refund.
After this letter was written the Commissioner recomputed the tax and held that a deficiency existed. From this determination the plaintiff appealed to the Board of Tax Appeals. Thereafter the Board held and entered an order pursuant to a stipulation on August 25, 1928, that plaintiff had overpaid its taxes for 1917 in the amount of $3,814.27. This decision of the Board of Tax Appeals was not appealed from and became final as to the amount of overpayment and we have frequently held that it may become the basis of a suit to recover the amount thereof, but the right of recovery in cases like the one we have before us is subject to certain statutory restrictions, the effect of which will be hereinafter determined.
Plaintiff contends that as his suit was brought within six years of the time when the Board of Tax Appeals entered its determination he is entitled to recover the $3,814.27 found by the Board to be overpaid. In National Fire Ins. Co. v. United States, 52 F.2d 1011, 72 Ct.Cl. 663, 669, we held following the cases of Ohio Steel Foundry Co. v. United States, 38 F.2d 144, 69 Ct.Cl. 158, and Arthur Curtiss James v. United States, 28 F.2d 140, 69 Ct.Cl. 215, that where the Board of Tax Appeals determines an overpayment and no question of credits is involved, and the refund of the overpayment was not barred by the statute of limitations at the time of the decision of the board, suit might be brought within six years from the date of the board's decision. But section 284(e) of the Revenue Act of 1926, 44 Stat. 66, as amended by section 507 of the Revenue Act of 1928, 45 Stat. 871, provides that when the board finds that the taxpayer has made an overpayment-- 'Unless claim for credit or refund, or the petition, was filed within the time prescribed in subdivision (g) for filing claims, no such credit or refund shall be made of any portion of the tax paid more than four years (or, in the case of a tax imposed by this title, more than three years) before the filing of the claim or the filing of the petition, whichever is earlier.'
The case of National Fire Ins. Co., supra (52 F.2d 1013, 72 Ct.Cl. 663 , like the one at bar, was a suit upon an overpayment determined by the Board of Tax Appeals and it was held therein that the jurisdiction of the board extends 'only to the determination of the fact of overpayment and the amount thereof, ' that the right to sue for the overpayment in such cases depends upon section 284(e) of the act of 1926, as amended, being the provision heretofore set out, and that it is governed thereby 'and not by the provision of section 156 of the Judicial Code (28 U.S.C.A. § 262) as for suits upon claims against the United States. ' The court further held that in such cases 'the right to recover is dependent upon whether a timely and sufficient claim for refund was filed' and, having found that no such claim had been filed within the time allowed by section 284(g) of the Revenue Act of 1926, 44 Stat. 66, it was held that the plaintiff could not recover and the petition was dismissed.
The rules laid down in the National Fire Ins. Co. case, supra, are applicable here.
In the instant case we have held that the so-called informal claim was not in fact any claim for refund whatever. It follows that the provisions of section 284(g) of the Revenue Act of 1926 were not complied with and that plaintiff cannot recover upon the finding and determination of the Board of Tax Appeals.
Subdivision (g) of section 284 of the revenue act of 1926 provided, among other things, with reference to such cases as we have before us, that the credit or refund 'shall be allowed or made if claim therefor is filed either (1) within four years from the time the tax was paid, or (2) on or before April 1, 1926'; also that 'This subdivision shall not authorize a credit or refund prohibited by the provisions of subdivision (d).'
The certificate of overassessment furnishes no better basis for plaintiff's suit than the determination of the Board of Tax Appeals. We have held in several cases that where the Commissioner issues a certificate of overpayment and in the certificate states erroneously that the overpayment is barred and by reason thereof a refund is refused, suit may nevertheless be maintained on the certificate as an account stated, the overpayment not being in fact barred. But here we have a different situation. The refund of the overpayment was barred for the same reason that an action upon the finding of the Board of Tax Appeals was barred, as shown above, and the conclusion of the Commissioner was correct. The certificate of overassessment was brought about by the determination of the Board of Tax Appeals and the statement of the amount of overpayment is merely a restatement of the finding of the board. Conceding arguendo that the certificate of overpayment constituted an account stated in favor of the plaintiff, it is nevertheless governed by statutory provisions. As was said in Goodenough, Trustee, v. United States, 19 F.Supp. 254, 85 Ct.Cl. 258, 299, an account stated gives rise to an implied promise to pay the indebtedness set forth, but 'recovery on this implied promise may be barred by lapse of time' and it may also be barred by an express statutory provision, as it was by the same provisions that barred an action on the determination of the Board of Tax Appeals.
The plaintiff's petition must be dismissed and it is so ordered.
BOOTH, Chief Justice, and WHALEY and WILLIAMS, Judges, concur.
LITTLETON, Judge (concurring)
I concur in all that is said in the foregoing opinion and desire only to point out, first, that the letter of May 13, 1921, written by the attorney-in-fact of the partnership and plaintiff clearly did not have reference to the second or double deduction of the profits tax due by the partnership, as a separate taxable entity, from the plaintiff's distributable share of the net income of the partnership remaining after the deduction from the total net taxable income of the partnership of the total profits tax due by such partnership; and, second, that even if the inquiry of plaintiff's attorney on May 13, 1921, could be regarded as a claim for refund, informal or otherwise, the provisions of the Revenue Act of 1917, which levied an excess profits tax on the net income of the partnership, did not authorize a double deduction of the excess profits tax due by the partnership, first, from the total net income of the partnership in determining the distributable share of the partners; and, second, another deduction of such profits tax by the partners when returning as their income such distributable share of the partnership net income remaining after the first deduction of such profits tax.
At the time the letter of May 13, 1921, finding 4, was written, it was the established and uniform practice of the Bureau of Internal Revenue to determine the total net taxable income of the partnership and in accordance with the provisions of the Revenue Act of 1917 to compute thereon an excess profits tax which was payable by the partnership. After such profits tax had been determined, the amount thereof was deducted from the total net income of the partnership, which, except for such profits tax, would be distributable and taxable to the partners. After the profits tax had thus been deducted from the total net income of the partnership, the balance was treated as the amount distributable and taxable to the partners in the proportion of their interests in the partnership. A second deduction of the profits tax due by the partnership was not under the regulations and decisions then in force allowed to the partners from their distributable income of the partnership as so determined. The letter of May 13, 1921, obviously had reference only to the one deduction of the profits tax which was then being consistently allowed in determining the amount of the distributable income of the partnership taxable to the partners. Its language clearly so shows for the reason that it was simply an inquiry of the Commissioner whether the distributable share of the partners could be determined at the same time the final determination was made in respect of the taxable net income and excess profits tax of the partnership, inasmuch as a change in the excess profits tax of the partnership which was deductible from the total net income of the partnership in determining the remainder distributable and taxable to the partners would affect the amount so distributable and taxable to the partners. It was not until more than five years later, on November 3, 1926, that the case of Reid v. Rafferty, 2 Cir., 15 F.2d 264, was decided in which it was held, and I think erroneously, that notwithstanding the excess profits tax imposed upon and due by the partnership upon its total net taxable income had been deducted from such total net income in determining the distributable share taxable to the partners, the partners were again entitled in reporting such distributable share for income tax purposes to again deduct from such distributable shares the total excess profits tax due by the partnership. The overpayment here sought to be recovered results from such second deduction which was clearly a different ground than that to which the letter of May 13, 1921, had referred. It is obvious that if the attorney of the partnership and plaintiff had been referring to the second deduction, which had up to that time never been allowed, he would have stated his position with reference thereto in language sufficiently clear not to be misunderstood. It is clear, therefore, that even if the letter could be treated as an informal claim for refund, it did not specify the ground or facts upon which this suit is based.
I am of opinion that the Revenue Act o? 1917 authorized and allowed only one deduction of the excess profits tax of the partnership in determining the distributable income of the partnership taxable to the partners and that, for that reason, plaintiff has underpaid rather than overpaid his taxes. In the case at bar the total net taxable income of the partnership was $544,488.87 and the excess profits tax due and paid by the partnership was $161.005.37. After the deduction of this profits tax from the net income of the partnership distributable and taxable to the partners, the amount so distributable and taxable was $383,483.50 (finding 5). The overpayment here sought to be recovered is based upon a deduction the second time of excess profits tax of $161,005.37 from the distributable net income of the partnership of $383,483.50 remaining after the first deduction of such profits tax. The overpayment here sought to be recovered is therefore based upon a deduction by the partners of twice the amount of profits tax of the partnership, or $322,010.74 instead of $161,005.37. In other words, under plaintiff's contention each partner gets a deduction of the entire profits tax of the partnership from his distributable share of the partnership's net income rather than his proportion of the profits tax of the partnership.