Opinion
No. 43149.
June 7, 1937.
William A. Sutherland, of Washington, D.C. (Sutherland, Tuttle Brennan, 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, Sp. Assts. to the Atty. Gen., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by Clifton Manufacturing Company against the United States.
Judgment for plaintiff.
Plaintiff seeks to recover $42,363.02 with interest. This amount represents the unrefunded portion of an admitted overpayment by plaintiff of income and profits taxes for the fiscal year ending March 31, 1919. The Commissioner of Internal Revenue refused to refund this portion of the overpayment on the ground that it was barred by the statute of limitation when he made his final determination of a total overpayment of $103,192.44 for the taxable year in question and notified the plaintiff of that determination on April 16, 1930.
Special Findings of Fact.
1. Plaintiff is, and at all times material hereto was, a domestic corporation organized and existing under and by virtue of the laws of the state of South Carolina, with its principal place of business at Clifton, S.C., engaged in the manufacture and sale of sheetings, drills, and print cloths.
2. On or about June 14, 1919, plaintiff filed with the collector of internal revenue for the District of South Carolina its federal income and profits tax return for the fiscal year beginning April 1, 1918, and ending March 31, 1919 (hereinafter referred to as "the taxable year 1919"), reporting thereon a total income and profits tax liability of $362,384.25, computed under the provisions of the applicable Revenue Act of 1918 ( 40 Stat. 1057). This sum, together with a 25 per cent. penalty of $90,596.06, was timely assessed by the Commissioner of Internal Revenue.
3. The penalty of $90,596.06 was subsequently abated by the Commissioner on March 3, 1920, and the total tax of $362,384.25 reported upon the return, as aforesaid, was paid by plaintiff as follows:
June 16, 1919 ................. $ 9,747.29 June 21, 1919 ................. 90,596.09 Sept. 5, 1919 ................. 80,848.75 Dec. 16, 1919 ................. 90,596.06 Mar. 19, 1920 ................. 90,596.06 ___________ $362,384.25
4. June 17, 1921, the Commissioner timely assessed against plaintiff an additional tax of $86,797.77 for the taxable year 1919, and shortly thereafter notice and demand for payment of said tax was served upon plaintiff.
5. Plaintiff prepared and filed with the collector on July 7, 1921, an amended income and profits tax return for the taxable year 1919, reporting thereon a revised total tax liability of $305,377.04, being $57,007.21 less than the tax originally reported and paid by plaintiff, as aforesaid, which latter amount plaintiff claimed upon such amended return to be an overpayment.
6. On the same day, July 7, 1921, plaintiff filed with the collector four separate claims for the reduction of the tax theretofore assessed and/or paid for the taxable year 1919, said claims being as follows: Claim for credit of $2,252.03 to 1917; claim for credit of $21,620.14 to 1918; claim for refund of $33,135.04; and a claim for abatement of $86,797.77. The aforesaid credit and refund claims covered in full the $57,007.21 shown upon the aforesaid amended return as an overpayment (Finding 5) and the abatement claim covered in full the additional assessment of $86,797.77 made June 17, 1921.
7. The basis of each of the aforesaid claims, inter alia, was that plaintiff's merchandise should be inventoried upon the basis of "cost or market, whichever is lower," as shown by plaintiff's amended return filed the same day.
8. On or about April 6, 1923, plaintiff filed with the Commissioner a sworn brief, dated April 6, 1923, and additional inventory data in support of its aforesaid claims.
9. On or about February 26, 1924, plaintiff filed with the Commissioner a sworn brief, dated February 26, 1924, protesting the additional tax thus proposed and reiterating, inter alia, its contention theretofore made that it should be permitted to value its merchandise inventory upon the basis of "cost or market, whichever is lower."
10. On or about March 9, 1924, plaintiff filed with the Commissioner a waiver of its right to have the taxes due from it for the taxable year 1919 determined and assessed within five years after its return was filed. Prior to the expiration of this waiver, and on or about December 6, 1924, plaintiff filed with the Commissioner a second such waiver. Prior to the expiration of the second waiver, plaintiff filed with the Commissioner a third waiver, dated November 18, 1925, which by its terms expired December 31, 1926. These instruments were accepted in writing by the Commissioner and extended the period for assessment and collection for the taxable year 1919 to December 31, 1926.
11. By a thirty-day letter, dated January 10, 1925, plaintiff was advised by the Bureau that its request for special assessment had been denied, of a proposed deficiency of $2,764.60, and that its four claims filed July 7, 1921, as stated in Finding 6, supra, "will be rejected."
12. The Commissioner mailed to plaintiff, in accordance with the provisions of section 274 of the Revenue Act of 1926 ( 44 Stat. 55), a sixty-day letter dated May 26, 1926, in which he advised plaintiff of a proposed overassessment of $25,968.35 for the taxable year 1919. In a statement attached to such letter plaintiff was advised in part as follows:
"Reference is made to your brief dated February 26, 1924, in which you protest against * * * (2) failure of the Bureau to adjust merchandise inventory to the basis of `cost or market value, whichever is lower' * * *.
"After a careful review of your protest and of all the evidence submitted in support of your contentions, you are advised that the Bureau holds that * * * (2) your contention with respect to inventory adjustments is not conceded for the reason that the evidence submitted does not justify the change requested. * * *
"An examination of your brief dated April 6, 1923, indicates that your amended merchandise inventory as at March 31, 1919, was taken on the basis of cost or market, whichever was lower. In view of the fact that your original inventory as at March 31, 1919, was taken on the basis of cost, as disclosed by your returns, no change in the method of valuing your inventories can now be made. Where amended returns are filed, it is not permissible to value the inventories in the amended returns on a basis different from that employed in the original returns, unless the audit of the returns in this office reveals the necessity for employing a different basis. * * *
"In accordance with the above conclusions, your * * * 1919 claim for abatement of $86,797.77, refund of $33,135.04, credit of $21,620.14, and credit of $2,252.03, aggregating $143,804.98, will be allowed for $25,968.35 and rejected for $117,836.63. * * *
"In accordance with the provisions of section 283(e) of the Revenue Act of 1926 ( 44 Stat. 63), the right of appeal to the United States Board of Tax Appeals under section 274 of the Revenue Act of 1926 as indicated on page one of this letter, refers also to the determination for the fiscal year 1919."
13. On September 15, 1926, the Commissioner approved and signed a schedule of overassessments embracing one in favor of the plaintiff for the taxable year 1919 in the sum of $25,968.35 representing a portion of the additional tax assessed on June 17, 1921, referred to in Finding 4, supra, still outstanding and unpaid. This portion of that assessment was abated and plaintiff was notified thereof by appropriate certificate of overassessment.
14. Upon receipt of notice and demand for payment of the unabated balance of the aforesaid additional assessment, namely, $60,829.42, plaintiff paid the same to the collector under protest on October 15, 1926, together with statutory interest thereon of $19,017.11.
15. On September 20, 1928, plaintiff filed with the collector a claim for refund of $100,000 (or such greater amount as is legally refundable) of the tax theretofore paid by it for the year 1919. This claim was prepared on Treasury Department Form 843 and set forth therein the following reason for the allowance of the claim, viz.: "Commissioner erred in disallowing taxpayer's claim that its inventory be taken at cost or market whichever is lower instead of at cost, thus overstating taxpayer's income for the year 1919."
In support of this claim plaintiff filed with the Commissioner a sworn brief dated October 25, 1928. Exhibits thereto prepared by a recognized firm of public accountants gave all merchandise inventory data from 1909 to 1921, inclusive. Upon receipt from the collector of that refund claim the Commissioner forwarded both the claim and plaintiff's brief to the internal revenue agent in charge for an investigation and report.
16. After a field audit the examining revenue agent made a report dated December 22, 1928, wherein he set forth in customary detail a computation of plaintiff's income and profits tax for the taxable year 1919, adjusting plaintiff's merchandise inventory for that year on the basis of cost or market, whichever is lower. As a result of such adjustment, the agent computed an overassessment of $103,192.44 for the taxable year 1919 but recommended that the amount of refund be limited to $60,829.42, being that portion of the total tax paid within the four-year period immediately preceding the filing of the claim referred to in Finding 15, supra. The material portion of that report reads as follows:
"Net income as disclosed by A-2, Letter dated 5/26/26 .............................. $ 810,046.71 As corrected ................................. 667,568.79 ____________ Net adjustment ............................ 142,477.92 ============ Unallowable deductions and additional income: (a) Decrease in Inventories 3/31/18 $ 26,191.64 Total .................................. 26,191.64 Nontaxable income and additional deductions: (b) Decrease in Inventories 3/31/19 ...................... $168,669.56 Total .................................. 168,669.56 ___________ Net adjustment as above ...................... 142,477.92
* * * * * * * * *
Invested capital per A-2, Letter 5/26/26 $2,592,913.20 (a) Add difference in 1918 Tax Proration ..... 3,934.98 _____________ 2,596,848.18 (b) Less Decrease in Inventories 3/31/18 26,191.64 _____________ Corrected Invested capital ............... 2,570,656.54
* * * * * * * * *
Total War Excess Profits and Income Taxes ...................................... $ 320,021.23
Tax previously assessed: Original Tax Return Acct. #40039 July .................. $362,384.25 Additional Tax, May 1921, List Page 4, line 3 .......... 86,797.77 ___________ 449,182.02 Less: A-2 Letter 6/26/26 ......... 25,968.35 __________ 423,213.67 __________ Overassessment actual ............ 103,192.44 Overassessment limited to amount paid in last few years ............ 60,829.42
"No portion of the original tax paid may be refunded, since the tax was paid more than four years before the claim for refund. The additional assessment of $86,797.77 was disposed of on Oct. 15, 1926, by the payment of $60,829.42 and the abatement of $25,968.35. The amount refundable is therefore limited to the $60,829.42 paid on 10/15/26."
17. A copy of the revenue agent's report was furnished plaintiff whose attorney in fact, acting on its behalf, accepted and approved the agent's computation of plaintiff's tax liability for the fiscal year ending March 31, 1919, in a letter dated March 20, 1929, but did not accept or prove the agent's conclusions as to the amount which he thought was refundable. The revenue agent's report, plaintiff's original and amended returns for the taxable year 1919, refund claim filed September 20, 1928, the brief dated October 25, 1928, and the attorney's letter of March 20, 1929, were transmitted to the Commissioner by the internal revenue agent in charge with a letter dated March 28, 1929, recommending a refund of $60,829.42 to the plaintiff for the taxable year 1919.
18. The Commissioner thereafter considered plaintiff's refund claim filed September 20, 1928, approved the recommendation of the revenue agent and adjusted that claim upon a schedule of overassessments signed October 24, 1929, embracing among other overassessments one in favor of the plaintiff for the taxable year 1919 in the amount of $60,829.42. That schedule on Treasury Form 7920 included the customary instructions to the collector relating to his certification thereon of amounts abated, credited, and to be refunded. It was forwarded by the Commissioner to the collector with instructions to the latter to check his records and report the condition of plaintiff's account. This the collector did and he made appropriate entries upon this schedule showing the entire overassessment of $60,829.42 to be refundable and also showing as refundable a further sum of $19,017.11, which was the item of interest collected as stated in Finding 14, supra. The collector signed his certificate appearing upon the schedule of overassessments on October 29, 1929, and returned the schedule to the Commissioner who thereafter made further entries upon the same showing interest of $12,700.01 allowable upon the item of $60,829.42, and interest of $3,970.41 allowable upon the item of $19,017.11.
19. The tax and interest shown upon the schedule of overassessments as aforesaid in the sum of $96,516.95 were certified for refund and paid to the plaintiff by Treasury check dated April 14, 1930. This check, together with a certificate of overassessment and a notice of interest refund, was delivered to the plaintiff on April 16, 1930.
20. The material part of the certificate of overassessment received by the plaintiff is as follows:
"Treasury Department Office of Commissioner of Internal Revenue, Washington Certificate of Overassessment
Number: 2066725. Allowed: $60,829.42. Schedule No. 36360. Dated Oct. 24, 1929. Clifton Manufacturing Company, Clifton, South Carolina.
Sirs: An audit of your income tax return, Form 1120, and a consideration of all the claims (if any) filed by you for the fiscal year ended March 31, 1919, indicates that the tax assessed for this year was in excess of the amount due:
Original assessment, Account #40039 ...... $362,384.25 Additional assessment, May 1921, Page 4, Line 3 .................................. 86,797.77 __________ 449,182.02 Less: Amount previously allowed .......... 25,968.35 __________ Net tax assessed ...................... 423,213.67 Tax liability ............................ 320,021.23 __________ Overassessment ......................... 103,192.44 Barred by statute ........................ 42,363.02 __________ Net overassessment ..................... $ 60,829.42
This overassessment is recommended in the revenue agent's report, which is approved by this office and has been accepted by you.
Your claim for refund of taxes to the extent not herein allowed was disallowed by the Commissioner as of the date of the schedule above noted.
The amount of the overassessment will be abated, credited, or refunded as indicated below * * *.
Included in the accompanying check is interest in the amount stated below, allowed on the refund or credit. * * *
Refunded: $60,829.42.
Interest: $12,700.01."
The Commissioner in reaching his decision that there was an overassessment and overpayment of $103,192.44 for the fiscal year ending March 31, 1919, considered the whole tax liability of plaintiff for this taxable year and reopened, reconsidered, and reversed his decision of May 26, 1926, on which date he refused to allow the same contention of plaintiff that produced the overpayment of $103,192.44 set forth in the above-quoted certificate of overassessment.
21. The amount of $42,363.02 appearing on the certificate of overassessment, as shown in the preceding finding opposite the words "barred by statute," has never been scheduled by the Commissioner as an overassessment and has never been refunded to plaintiff.
22. The notice of interest refund delivered to the plaintiff with the Treasury check as stated in Finding 19, supra, showed that the check included a refund of $19,017.11 paid by the plaintiff as interest on October 15, 1926, together with accrued interest thereon of $3,970.41.
The overpayment in question is admitted and there is no claim on behalf of the defendant of any error or mistake in its determination. Plaintiff insists that there was an account stated in its favor by the Commissioner of Internal Revenue for $103,192.44, only $60,829.42 of which he paid. Counsel for the defendant take the position that there was no account stated in favor of the plaintiff for the amount of $42,363.02 here sought to be recovered. In this we think counsel are in error.
The Commissioner of Internal Revenue clearly and positively stated the account for the fiscal year ending March 31, 1919, showing a balance due plaintiff of $103,192.44. He then erroneously and illegally held that plaintiff was not entitled to receive payment of $42,363.02 of this balance due for the reason that its payment was barred by the statute of limitation. He, therefore, paid only $60,829.42 of the total overpayment of $103,192.44 determined. The ground on which the Commissioner based his decision that he could not pay the amount of $42,363.02 was that the claim for refund of September 20, 1928, was filed more than four years after the date on which that amount had been paid. However, plaintiff had previously filed a formal claim for refund for 1919 on July 7, 1921, on the identical ground on which the Commissioner finally determined the overassessment and overpayment of $103,192.44 and stated the account in favor of plaintiff for that amount. The second claim of September 20, 1928, was filed because the Commissioner after the filing of the first claim on July 7, 1921, asserted and collected a deficiency on the ground that the contentions made by plaintiff in the first claim for refund were not good. However, when the Commissioner came to consider the second claim filed September 20, 1928, he reopened the question, as he necessarily had to do, went into the whole case, considered it fully upon its merits, and reconsidered and reversed his former decision of May 26, 1926, in which he overruled plaintiff's inventory adjustment claim and asserted a deficiency for the taxable year 1919 under section 274 of the Revenue Act of 1926.
The certificate of overassessment stated that consideration had been given to all the claims filed by plaintiff for the taxable year ending March 31, 1919. The amount of $42,363.02 which plaintiff here seeks to recover was therefore not barred and plaintiff is entitled to judgment therefor with interest under our decisions in Shipley Construction Supply Co. v. United States, 7 F. Supp. 492, 79 Ct.Cl. 736; Gage v. United States, 14 F. Supp. 500, 83 Ct.Cl. 381; Wood v. United States, 17 F. Supp. 521, 84 Ct.Cl. ___.
The preparation of a schedule of overassessment which is sent to the collector before the taxpayer is advised by the Commissioner as to the statement of the account for the taxable year is an administrative action for bookkeeping purposes of which the taxpayer is not advised. The certificate of overassessment or other similar document, and not the overassessment schedule, is the statement of the account. Daube v. United States, 289 U.S. 367, 53 S.Ct. 597, 77 L.Ed. 1261.
Judgment will therefore be entered in favor of plaintiff for $42,363.02 with interest as provided by law. It is so ordered.