Opinion
No. L-508.
February 3, 1936.
Howe P. Cochran, of New York City (C. Leo De Orsey, of Washington, D.C., on the brief), for plaintiff.
John A. Rees, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judge.
Action by Laurence R. Connor and others, trustees in bankruptcy of the W.E. Tillotson Manufacturing Company, against the United States.
Judgment for plaintiffs in accordance with opinion.
The Tillotson Manufacturing Company overpaid its taxes for 1917 in the amount of $26,864.94, of which the defendant in 1926 refunded $8,900.41 by credit but declined in 1930 to refund the balance, $17,964.53, which was due plaintiff under a decision of the United States Board of Tax Appeals entered for 1918 and 1919 upon a stipulation filed with the Board by the Commissioner of Internal Revenue and the corporation with respect to certain questions which affected the tax liability for 1917, as well as the years before the Board. The Commissioner declined and refused to refund the remaining overpayment of $17,964.53 on the ground that the only refund claim filed in time was not sufficient and that any refund in excess of the amount of $8,900.41, previously paid, was barred by the statute of limitation.
The overpayment here claimed is admitted, and the defendant further properly admits that the original and amended refund claims filed by plaintiff were sufficient and timely, but it is insisted by the defendant that such claims were finally disallowed and rejected by the Commissioner more than two years prior to the institution of the suit and no recovery can therefore be had.
Special Findings of Fact.
1. The W.E. Tillotson Manufacturing Company, hereinafter referred to as the taxpayer, was adjudicated a bankrupt in 1931 and plaintiffs were appointed trustees. The taxpayer duly filed its income and profits tax return for 1917 showing a tax of $65,931.70 which was assessed and paid June 15, 1918. On March 15, 1923, none of plaintiff's returns for 1917, 1918, or 1919 had been audited by the Commissioner.
By reason of the approaching expiration of the period of limitation within which a claim for refund could be filed for 1917, the taxpayer, on March 15, 1923, prepared and filed a formal claim for refund for $1 "or such greater amount as is legally refundable," and further stated therein as follows: "There is reason to believe that in the preparation of your deponent's return for the year 1917, taxable income was incorrectly computed. The said return, however, has not yet been finally audited by the Bureau of Internal Revenue, and should it be discovered after five years from the date the return was due, that your deponent is entitled to a credit or refund of taxes paid in excess, the same could not be allowed in the absence of a claim filed within the said five years. This claim is therefore filed in compliance with the provisions of section 252 of the act of 1921. It will be amended as soon as the amount of excess payment made, if any, is determined."
Prior to the filing of the above-mentioned claim, plaintiff on December 4, 1918, had filed a refund claim for $18,324.68 for 1917, and, while that claim is not in evidence and is not of importance here, it appears to have related to special assessment which was not granted by the Commissioner. During the year 1921 a revenue agent was assigned to make a field investigation and audit of plaintiff's books and records, and its returns for 1916, 1917, and 1918, inclusive, and on June 22, 1921, he filed a report of his audit with the Commissioner's office.
2. In April, 1921, before the field investigation and audit had been completed, the Commissioner made a jeopardy assessment of an additional tax of $13,024.39 for 1918 and the taxpayer filed a claim for abatement and bond. After the revenue agent's report was filed, the Commissioner, in October, 1921, held that special assessment was not justified. Thereafter the Commissioner's office proceeded with the consideration and audit of the years 1917 and 1918 and, prior to September, 1924, included the year 1919 in said consideration and audit upon the taxpayer's contentions, which had also been advanced before the revenue agent during his field investigation of the years 1917 and 1918: (1) That it was entitled to additional deductions for depreciation on the basis of the correct March 1, 1913, value of property and the costs of subsequent additions thereto (the revenue agent allowed certain additional depreciation as a result of which he recommended an overassessment of $7,306.41 for 1917, hereinafter mentioned); (2) that insurance premiums paid on policies on the life of an officer, under which policy the corporation was not beneficiary, constituted proper deductions from income; (3) that prewar income as shown in the returns should not be reduced; and (4) that invested capital should be increased and a paid-in surplus allowed on the basis of actual cash value of tangible and intangible property acquired in 1901. On these contentions the taxpayer insisted that the taxes for 1917 and 1918 had been overpaid in considerable amounts. While the cases were thus under consideration, and before the Commissioner had given the taxpayer any advice as to his views on any of the matters involved and before the taxpayer had been able to complete the preparation and submission of its contentions, evidence, and computations in detail, the taxpayer, by reason of the approaching expiration of the period within which a claim for refund for 1917 could be filed, prepared in somewhat general terms the formal refund claim, hereinabove quoted, and filed the same on March 15, 1923. This was the last day of the five-year period from the statutory due date of the 1917 return (section 252, Revenue Acts of 1918 and 1921, 40 Stat. 1085, 42 Stat. 268).
On June 1, 1923, the taxpayer prepared and filed with the Commissioner a written document consisting of seventeen pages setting forth the grounds of its claims, as above mentioned, with a detailed statement of facts relied upon, together with certain schedules of values of property supplementing an appraisal theretofore filed. This written statement opened with a reference to the taxes paid for 1917 and 1918, which were the only years then under consideration by the Commissioner, and to the revenue agent's report in which he had recommended an overassessment of $7,306.41 for 1917 and an additional tax of $44,492.76 for 1918, and then stated: "In order to protect your claimant's interest an informal claim was filed on January 19, 1923 [that date was the date of execution, the claim having been filed March 15, 1923], or the refund of excess taxes paid for the year 1917, the amount of the excess payment not being then determined. The subsequent formal perfection of the claim is made herein, as required in 14 Op.Atty.Gen. 615. This brief is offered to the department for the purpose of presenting in detail that part of the history of the corporation which bears upon its organization and invested capital, and other facts in support of its claim for a capital surplus adjustment."
3. The Income Tax Unit of the Bureau of Internal Revenue proceeded with the consideration and audit of the cases upon the contentions advanced by the taxpayer, and upon information and evidence submitted, until September 18, 1924, on which date the Bureau, having taken up for consideration the year 1919 which involved the same questions as the years 1917 and 1918, mailed the taxpayer thirty-day notices proposing deficiencies for the taxable periods January 1 to November 19, 1919, and November 20 to December 31, 1919. The year 1919 was divided into two taxable periods by reason of a change in the method of accounting. Following these preliminary deficiency notices the Commissioner, on September 30, 1924, mailed to the taxpayer for the first time thirty-day notices for 1917 and 1918 proposing an overassessment of $7,306.41 for 1917, as recommended by the revenue agent, and a deficiency of $44,492.76 for 1918. These notices were merely preliminary audits for the years 1917 to 1919, inclusive, inviting protest and exceptions and offering the taxpayer an opportunity to be heard on any questions raised.
4. Upon receipt of these detailed audit letters for the years 1917 to 1919, inclusive, the taxpayer on October 25, 1924, within the time permitted and in accordance with Treasury Decision 3616, filed a detailed protest under oath consisting of 34 pages which contained, among other things, a detailed computation of the taxes for the years involved, first, on the basis of the adjustments contended for by the taxpayer, and, second, on the basis of those adjustments without the allowance of a paid-in surplus. The preliminary audit letters mailed to plaintiff, as hereinbefore mentioned, did not allow any of the contentions advanced by the taxpayer.
On the basis of the contentions advanced by the taxpayer in its refund claim theretofore filed, as amended by the memorandum of June 1, 1923, the taxpayer computed and claimed in the document filed October 25, 1924, a refund of $45,815.40 for 1917 and of $6,333.86 for 1918. On the basis of the allowance of the adjustments claimed, but without the allowance of a paid-in surplus, the taxpayer computed and claimed in this document a refund of $28,122.92 for 1917 and showed an additional tax of $9,209.48 for 1918 in excess of the tax of $75,632.27 shown and paid on the original return. In this protest the taxpayer further stated, as follows:
"The alleged deficiency is partly the result of the Unit's rejection of a request for assessment under section 328 of the Act of 1918, of the Company's income for 1918, and of the Unit's failure to consider that part of the company's brief of June 1, 1923, which related to the year 1917 and to the claim made therein for allowance of an earned and paid-in surplus as of April 25, 1901, amounting to $330,831.89.
"Since the Unit has accepted without change, however, the revenue agent's report of an examination for the years 1916, 1917, and 1918, the alleged deficiency is based upon the agent's recommendation and upon the facts reported by him. The within protest must therefore go to that part of the agent's report which, in your claimant's opinion, incorrectly reflects its income and invested capital for the years 1917 and 1918. Those findings of the agent, and of the Unit, to which exception is taken, are therefore as follows: (1) March 1, 1913, value adopted; (2) Disallowance of deductions for premiums on insurance policies covering the life of an officer, and the allegation that the company was a beneficiary thereunder; (3) Reduction of amount of taxable income for the prewar years; (4) Failure to allow a surplus adjustment as of April 25, 1901. * * *
"Insofar as the year 1917 is concerned a formal claim for the refund of $18,324.18 was filed December 4, 1918, and, in order to protect your claimant's interests a further tentative claim was filed March 15, 1923, for the refund of such an amount as might be found upon final audit of the return, to have been overpaid for that year. It was at that time impossible to determine the actual amount refundable because a claim for consideration under section 210 of the act of 1917 was then before the Bureau. * * * In lieu thereof a formal claim for the refund of $45,815.40 is filed herewith. This claim is based upon the facts herein submitted and in accord with the computation annexed hereto as page 27.
"Since the taxpayer filed within one year from the due date of his 1917 return, and within one year from the date of payment of the entire tax assessed for 1917, a claim for the refund of a substantial part of said tax, and since a further claim for refund was filed March 15, 1923, the within claim comes within the provisions of section 281(b)(1) and (2) of the act of 1924.
"As to the year 1918 a waiver was filed with the Bureau on February 18, 1924, so that the within claim for the refund of $6,333.86 may under subdivision (e) of said section, be filed at any time prior to April 1, 1925."
5. Following the filing of the above-mentioned claims and computations, the taxpayer, on November 1, 1924, filed, in further amendment of its refund claim theretofore filed, a formal claim for refund of $45,815.40 in which it stated that "the foregoing claim is based upon information contained in a lengthy brief filed with the office of the Commissioner at Washington on October 27 [25], 1924." At the time of filing this claim, the Commissioner had not acted upon the refund claim, as amended, previously filed. Thereafter consideration of the cases proceeded in the Bureau and hearings were held between the taxpayer and the Commissioner with respect to the contentions advanced and upon the evidence submitted. As a result of these hearings the taxpayer's contentions 2 and 3, that insurance premiums paid on policies covering the life of an officer should be allowed as deductions from gross income and that the taxable income for the prewar period, as shown in the returns, should not be reduced, were allowed, and its contentions 1 and 4, that additional depreciation should be allowed on the corrected March 1, 1913, value of property and that invested capital should be increased and a paid-in surplus allowed on the basis of the cash value of tangible and intangible property acquired in 1901, were not allowed. Before this conclusion had been reached by the Income Tax Unit and during the consideration of the cases, the Commissioner, in June 1925, made a second jeopardy assessment of a further additional tax of $31,468.37 for 1918 and the taxpayer filed a claim for abatement.
As a result of the above-mentioned conclusions the overassessment of $7,306.41, proposed in a 30-day letter, was increased to $8,900.41, and the additional tax of $44,492.76 proposed for 1918, a jeopardy assessment of which had been made, was reduced to $30,599.82, resulting in an overassessment of $13,892.94 being determined.
Deficiencies were determined for the two taxable periods in 1919. These overassessments and deficiencies were approved on final audit in the Bureau on April 19, 1926, and, on the following day, April 20, the Commissioner mailed to the taxpayer sixty-day deficiency notices of a deficiency of $8,507 for the taxable period January 1 to November 19, 1919, and $15,943.61 for the taxable period November 20 to December 31, 1919. On the following day, April 21, 1926, the Commissioner mailed to the taxpayer certificates of overassessment to which were attached computations showing an overassessment of $8,900.41 for 1917 and $13,892.94 for 1918. These certificates of overassessment stated that the claims for refund for 1917 and the claims for abatement and refund for 1918 had been given consideration. No statement was made in these certificates of overassessment nor in any other communication to the taxpayer that claims for refund in excess of the overassessments determined were rejected in whole or in part and no schedule of rejection was ever signed by the Commissioner. Neither the certificate of overassessment for 1917 nor for 1918 contained any statement of the account based upon the overassessments disclosed by the audit.
6. On June 22, 1926, within sixty days after the mailing of certificates of overassessment for 1917 and 1918 and the deficiency notice for 1919, the taxpayer instituted proceedings before the United States Board of Tax Appeals for 1918 and the two taxable periods in 1919 in which it assigned as errors the Commissioner's failure to determine invested capital on the basis of the cash value of the property acquired in 1901 and to determine depreciation deductions on the basis of an increased March 1, 1913, value of the property and the costs of subsequent additions thereto. These questions, as the Bureau of Internal Revenue had recognized throughout the consideration of these cases, affected the income and profits tax liability for 1917 in the same way, and substantially to the same extent, as the tax liability for 1918 and 1919 would be affected in the event the taxpayer's contentions should finally be approved in whole or in part. Although an overassessment had been determined by the Commissioner for 1918, that year was subject to consideration by the Board for the reason that the tax liability as finally determined was in excess of the tax shown on the taxpayer's return. The year 1917 was not subject to consideration by the Board for the reason that the tax determined for that year was less than that shown upon the taxpayer's return.
Overassessments for 1917 and 1918 were scheduled to the collector for the district in which the taxpayer filed its returns, and the amount of the overassessment for 1917, being found by the collector to be an overpayment, was credited to the additional tax assessed for 1918 and the overassessment for 1918, not having been paid, was abated. This occurred May 24, 1926.
7. Soon after the mailing of the notices with reference to the years 1917 to 1919, inclusive, the administrative files and all the papers in connection therewith were transmitted to the office of the General Counsel of the Bureau of Internal Revenue, whose duty it was to represent the Commissioner before the Board of Tax Appeals and whose office at that time was the designated division of the Bureau of Internal Revenue, to consider, for approval by the Commissioner, the settlement of the cases after the Income Tax Unit had completed its audit and mailed to the taxpayer final notices thereof. Cases subject to review by the Board of Tax Appeals, and for any other taxable years affected by questions involved for the years subject to such review, were assigned to an attorney in the Appeals Division in the office of the General Counsel for consideration and recommendation to the General Counsel of any settlement that was believed to be proper, or, if no agreement of settlement was reached, for defending the Commissioner's determination before the Board of Tax Appeals. The cases herein mentioned were assigned to Mr. L.L. Hight, an attorney in the Appeals Division of the office of the General Counsel of the Bureau of Internal Revenue, and beginning in May, 1926, and continuing until shortly before the death of Mr. Hight on March 7, 1929, conferences were held between Mr. Hight and the representatives and attorney for the taxpayer with reference to the taxable years 1917 to 1919, inclusive. These conferences were held with the view of effecting a settlement of the questions in controversy without the necessity of a trial before the Board of Tax Appeals; in these conferences, at some of which the attorney representing the Commissioner, and assigned to handle these cases, heard testimony of witnesses produced before him by the taxpayer on the question of value of property for invested capital and depreciation purposes. From the beginning of these conferences, the year 1917, as to which the Commissioner had made a partial allowance of the claimed refund, was discussed and considered, as well as the years 1918 and 1919, upon the understanding that the invested capital and the depreciation allowances claimed affected all three years equally and were substantially the same in each of the three years. It was also the understanding between the attorney representing the Bureau and counsel for the taxpayer that the year 1917 was still open for further adjustment and that whatever adjustments might be agreed upon and recommended for approval by the attorney for the Commissioner should be carried out and recommended for 1917 also. As a result of these conferences a basis of settlement of the questions involved was agreed upon between the attorneys for the parties upon which Mr. Hight was to prepare a memorandum and recommend it to the General Counsel for approval and recommendation to the Commissioner. The basis of this settlement was that the taxpayer's invested capital should be increased in an amount less than that claimed by the taxpayer on account of the assets acquired in 1901 and that the taxpayer should also be given additional deductions for depreciation on an increased March 1, 1913, value of property. This proposed settlement, had Mr. Hight been able to reduce it to writing and recommend it for approval before he died, would, if approved, have increased the overpayment for 1917 and reduced the additional tax determined for 1918 and 1919.
8. On July 7, 1928, the Board of Tax Appeals set the cases for hearing on November 15 and a joint motion was filed by the attorney for the taxpayer and the Commissioner asking the Board to place the case on its reserve calendar to await the result of negotiations for settlement of the cases then pending between the parties, and because of the illness of the Commissioner's counsel. This motion was allowed and the cases were finally settled and stipulated, as hereinafter mentioned. The attorney in the Appeals Division of the General Counsel's office to whom the cases were assigned, as above mentioned, with the approval of the head of that division, had authority to effect settlement of the cases subject to the approval of the General Counsel.
9. On August 1, 1927, the special advisory committee of the Bureau of Internal Revenue was organized to aid the Commissioner in the consideration, adjustment, and settlement of cases subject to review by the Board of Tax Appeals, as well as cases involving refunds, that had been finally audited by the Income Tax Unit. The duties of the committee were officially announced at the same time. This special committee, which at that time consisted of nine members, was organized for the purpose of receiving and considering proposals of taxpayers to settle cases pending before the Board of Tax Appeals, as well as cases in which the Income Tax Unit had made a final audit and mailed notices of results thereof which were subject to review by the Board, and any other cases involving a taxable year, or years, not subject to consideration by the Board of Tax Appeals and assigned to that committee by the Commissioner or by the General Counsel representing the Commissioner. The committee also had authority at the time it took up consideration of the case at bar as hereinafter mentioned to consider the tax liability and any refund claim for a prior year in connection with a case, or cases, before the Board of Tax Appeals for a subsequent year when the issue or issues were the same for all years involved. Such consideration of a year not before the Board of Tax Appeals, where the same question was involved in a case for a prior or subsequent year pending before the Board, followed as a matter of course, but cases involving overpayments or refunds on an issue or issues not involved in any case before the committee or a case pending before the Board of Tax Appeals were handled by the Income Tax Unit in the usual manner, unless specifically referred by the Commissioner to the advisory committee for recommendation. This special advisory committee had no authority to make final or direct settlements with the taxpayers in cases before it without the approval of the Commissioner. The functions and duties of this committee were to receive proposals of settlements from taxpayers and hold conferences with the taxpayers and their representatives thereon; to consider and decide the propositions submitted in the light of information furnished to the committee and the entire administrative files of the Bureau of Internal Revenue; and to recommend for approval by the Commissioner such adjustments or changes in the determinations theretofore made as the committee, in its judgment, believed to be proper. The committee was divided into sections of three members each. Each member had several conferees especially qualified by training and experience to assist him in the preparation of recommendations for the rejection or approval, in whole or in part, of settlements proposed by taxpayers for submission to the special committee and for its recommendation to the Commissioner. The member and these conferees held conferences with the taxpayers and their representatives, and the conferees did the preliminary work in effecting settlements. At the conclusion of these conferences a proposed stipulation of settlement, along the lines agreed upon, was written in the committee and signed by the taxpayer or its duly authorized attorney or representative; such proposed stipulation was then submitted by the conferees to the committee member in charge of the matter. This member then took the matter up with two other members of his division and the conclusion reached by such division was placed before the chairman of the special committee. If the chairman approved the report of the three members he forwarded it to the Commissioner of Internal Revenue with a recommendation that the adjustments set forth therein be approved. If the chairman did not approve the report of the three committee members, it was referred to the entire committee for approval, modification, or disapproval. The purpose of obtaining agreements to stipulate was to furnish the committee and the Commissioner a summary of the proposed adjustments forming the basis of the findings and the recommendation of the committee. When the recommended adjustments were approved, a detailed computation was then made carrying out the adjustments in all the years before the committee, and mentioned in the settlement agreement. When the Commissioner approved the recommendation of the advisory committee, the cases involved were forwarded to the General Counsel for the preparation and filing of a stipulation with the Board of Tax Appeals and the results of the adjustments so approved in the cases pending before the Board, as well as those involving any other years not before the Board, but which were included in the approved adjustments, were carried out by the Income Tax Unit.
10. Between March 7 and May 2, 1929, the cases of this taxpayer for the years 1917 to 1919, inclusive, the last two years being before the Board of Tax Appeals, were assigned to the special advisory committee for consideration and recommendation to the Commissioner as to whether any adjustments should be made in the determinations theretofore made and set forth in the certificates of overassessment for 1917 and 1918 and the deficiency notices for 1919 mailed to the taxpayer on April 21 and April 20, respectively.
11. On March 27, 1929, about the time the taxpayer's cases were referred to the special advisory committee for consideration as to what adjustments should be made in the previous determination, the Commissioner, with the approval of the Secretary of the Treasury, promulgated Treasury Decision 4266, 31 T.D. (Int.Rev.) 23, relating to claims for refund and credit, in which it was provided: "* * * a refund or credit may be allowed after the expiration of such statutory period of limitations, even if no formal claim has been filed prior thereto, in any case in which a so-called informal or defective claim, duly filed prior to the expiration of such period and stating specifically the grounds for the refund or credit, is perfected by the filing of a claim prior to May 1, 1929, which complies with the requirements of T.D. 4265; but (a) only the grounds set forth in such formal claim which were also set forth in such informal or defective claim will be considered, and (b) no claim in respect of which a suit in court has been commenced at any time may be so perfected."
Prior and subsequent to the promulgation of this Treasury decision, the Bureau of Internal Revenue took the position that a claim for refund, whether formal or informal, could be legally perfected after the expiration of the statutory period of limitation within which an original claim could be filed only if the timely formal or informal claim stated the ground or grounds on which the overpayment was claimed and that a refund claim which did not specifically set forth the grounds relied upon could not be legally perfected or amended. Factors' Finance Co. v. United States, 56 F.2d 902, 73 Ct.Cl. 707; Memphis Cotton Oil Co. v. United States, 59 F.2d 276, 75 Ct.Cl. 195.
Following the publication of Treasury Decision 4266, the taxpayer, on April 30, 1929, executed and filed a formal claim for refund for $20,000 for 1917 and stated as the grounds therefor, as follows: "Good will paid in for stock was not included in invested capital as required by law; tangible property paid in for stock was not included at its true worth at date paid in, as required by law; depreciation has not been based on the value as of March 1, 1913, as required by law; invested capital has not been computed as required by law in that assets have not been valued at the date paid in; inventories have not been valued by the government as required by law. This claim is filed only to comply with T.D. 4265 and T.D. 4266 to amend our formal and informal claims, previously filed."
These grounds were the same as those stated in the claim of March 15, 1923, as perfected and amended June 1, 1923, and October 25, 1924.
12. On May 2, 1929, the taxpayer prepared and filed with the special advisory committee its proposal of settlement for the years 1917 to 1919, inclusive. This proposal of settlement stated, among other things, as follows:
"In connection with our case pending before you in the following status: Action on claim for refund for the year 1917; action on claim in abatement for the year 1918; action on deficiency for the year 1919 (two cases 1/1/19 to 11/19/19, 11/19/19 to 12/31/19).
"We beg leave to propose the following settlement —
"1. A proper division of the income between the two 1919 periods as has already been discussed and allowed in conference.
"2. Adjustment of insurance item for the year 1919 as has already been discussed and allowed in conference.
"3. The valuation of intangibles in capital within the limitations as provided by law, namely, 20% of the amount of stock outstanding at 3/3/17 for the year 1917; and 25% of the stock outstanding at 3/3/17 for the years 1918 and 1919.
"4. Adjustment of depreciation on the basis of the value at March 1, 1913, on the following basis —
"Depreciation on the March 1, 1913, value and additions of machinery to be at the rate of 10% with 5% depreciation on additions during the year.
"Depreciation on the March 1, 1913, value of buildings and additions to be at the rate of 5% with 2½% on additions during the year.
"The March 1, 1913, value of buildings as suggested by the agent to be increased from $91,816.65 to $137,724.97 and the value of machinery at March 1, 1913, to be increased from $155,486.45 to $305,500.00.
"We once settled this case, we thought, with Mr. Hight of the General Counsel's office, on a much better basis than the above and Mr. Hight assured us on many occasions that the settlement would go through, but unfortunately Mr. Hight died, leaving us without any settlement at all, and while this suggested proposed settlement is not as good as the one we made with Mr. Hight, we are willing to settle on this basis in order to close up the whole matter. * * *"
13. Thereafter conferences were held from time to time between the advisory committee conferee, to whom the taxpayer's cases had been assigned, and the taxpayer, during which it was agreed by such conferee and the taxpayer that whatever adjustments might be agreed upon would be recommended for all the years 1917 to 1919, inclusive. Before the agreement to stipulate, hereinafter mentioned, was arrived at and signed by the taxpayer on July 5, 1929, the conferee who was first assigned to handle the case was transferred to other duties and another conferee representing the committee took up the cases. During the negotiations thereafter carried on for the settlement of the controversies, this conferee expressed doubt as to whether the year 1917 could be included in the settlement and any adjustments agreed upon carried out in that year in view of the nature of the refund claim that had been filed. He, together with taxpayer's representative, conferred with the head of the audit review section of the advisory committee with reference to the matter and was informed that the year 1917 could be included in whatever settlement might be agreed upon and that any settlement for 1917 could legally be refunded. Thereafter the matter proceeded on that basis until a further question as to the sufficiency of the 1917 refund claim was raised, as hereinafter mentioned.
On July 5, 1929, as a result of a conference had between the advisory committee conferee and the taxpayer an agreement to stipulate was arrived at which was reduced to writing by the conferee of the advisory committee and submitted to the taxpayer. This agreement to stipulate stated, so far as material here, as follows:
"Year: 1918 and period ended November 19, 1919. Docket #17570. Claim for refund: 1917.
"* * * The invested capital to include intangibles within the limitations as provided by law, namely, $70,000 for the year 1917, $87,500 for the year 1918, and a proportionate part of $87,500 for the period ended November 19, 1919. * * * The allowable deduction for depreciation for the years 1917 to November 19, 1919, to be computed on the basis of the following 3/1/13 values * * *."
On the same day this agreement was signed by the taxpayer and returned with a letter addressed to the special advisory committee, as follows:
"I return the proposed stipulations signed by me on behalf of the W.E. Tillotson Manufacturing Company and W.E. Tillotson Manufacturing Company, Inc., under authority granted me by power of attorney.
"I understand this settlement covers the years 1917, 1918, period ended November 19, 1919, period November 20, 1919, to December 31, 1919, and I am stipulating with this in view:
"There will be refunds for some years and deficiencies for others. It is stipulated with the understanding that the refunds will be paid and the deficiencies will be paid."
A computation of the tax liability based on this agreement to settle the matters in controversy produced an overpayment for 1917 of $17,964.53 in excess of the amount of $8,900.41 theretofore determined in 1926, when taxpayer's refund claim was partially allowed, and a deficiency for 1918 of $12,441.32, instead of $30,599.82 as previously determined; a deficiency for the period January 1 to November 19, 1919, of $9,823.84, instead of $8,597.11 as previously determined; and a deficiency of $933.80 for the period November 20 to December 31, 1919, instead of a deficiency of $15,943.61, as previously determined. The agreement to stipulate, which produced the above-mentioned adjustments, was submitted by the committee conferee and the taxpayer to the committee member to whom the cases had been assigned for consideration and recommendation by the committee division of three members to the chairman of the committee for recommendation by him, or the full committee, to the Commissioner for approval. A member of the division which first considered the agreement to stipulate and settle the matters in controversy to be carried out in all the years 1917 to 1919, inclusive, was doubtful whether the claim for refund filed March 15, 1923, which was the only pending claim filed within the statutory period of limitation of five years, was sufficient to authorize a refund for 1917, and, for this reason, the agreement, which was not otherwise objected to, was submitted to the special advisory committee which also had some doubt on the question of the sufficiency of the 1917 refund claim. Accordingly, on August 16, 1929, the chairman of the committee, before recommending the adjustments set forth in the settlement agreement to the Commissioner, submitted the question whether the refund claim for 1917 was sufficient to authorize a refund for that year to the General Counsel for an opinion, and on December 19, 1929, the General Counsel wrote the committee that the refund claim filed for 1917 was not sufficient and that it was the opinion of his office that a refund for the taxable year 1917 was barred by the statute of limitation. Thereupon the taxpayer was advised of the ruling of the General Counsel that the 1917 refund claim was insufficient and that any refund for that year was barred. At the same time there was proposed to the taxpayer a new stipulation of settlement of the matters in controversy, the same as the one previously agreed upon for recommendation to the Commissioner but with the year 1917 eliminated therefrom. The taxpayer attempted to convince the committee that its 1917 refund claim as amended was sufficient and that the overpayment was not barred, but without success. Thereupon the taxpayer took up with the Commissioner the question of the refund of the 1917 overpayment resulting from the adjustments theretofore agreed upon with the advisory committee. The matter remained under consideration in the Commissioner's office until March 4, 1930, when he advised the taxpayer by letter, as follows:
"Reference is made to the Form 843 for the year 1917, sworn to April 30, 1929, and filed with the Collector of Internal Revenue at Boston, Massachusetts, on the same date, which is intended to complete formal and informal claims previously filed in accordance with the provisions of Treasury Decision 4266.
"The provisions of Treasury Decision 4266 relative to the perfecting of so-called informal or defective claims, are applicable only in case the informal or defective claims were submitted prior to the expiration of the limitation period, and stated specifically the grounds for the refund or credit. Only those grounds set forth in the formal claim required to be filed prior to May 1, 1929, which were also set forth in the informal or defective claim, may be considered.
"An examination of the file fails to disclose that the specific grounds now relied upon as a basis for refund were presented for the year 1917 within the limitation period prescribed by Section 284 of the Revenue Act of 1926 upon the filing of refund claims.
"In view of the specific provisions of Treasury Decision 4266, the Form 843 filed April 30, 1929, cannot be considered as a valid refund claim, and the redetermination of your tax liability for 1917 is accordingly denied."
The taxpayer attempted to secure a reconsideration of the holding of the Commissioner that the 1917 refund claim was insufficient and the attempted amendment was of no avail and that the overpayment for 1917 was barred, but without success. Thereupon the taxpayer on September 5, 1930, signed the new settlement agreement covering the years 1918 and 1919 which was, in every respect, the same as the original settlement agreement signed by the taxpayer July 5, 1929. This settlement agreement was approved by the special advisory committee and was recommended to the Commissioner and approved by him. In accordance therewith stipulations were filed with the Board of Tax Appeals for the years 1918 and 1919 on the basis of which the Board entered its decisions for those years redetermining the deficiencies to be in the amounts hereinbefore stated.
14. No one acting for or representing the Commissioner of Internal Revenue in the Income Tax Unit, the General Counsel's office, the special advisory committee, or the Commissioner himself ever contended or took the position that the partial allowance of an overassessment of $8,900.41 in April, 1926, was intended as or constituted a disallowance and rejection of taxpayer's refund claim for a much larger overpayment on the basis of the claimed adjustments in invested capital and depreciation. On the contrary, every one who had considered the cases after the Income Tax Unit had made its audit and determination in April, 1926, considered the questions in controversy as relating to the year 1917, as well as to the years 1918 and 1919, and treated the year 1917 as still being open for further adjustment on the basis of the decision finally reached on the matters of invested capital and depreciation, until the question of the legal sufficiency of the 1917 refund claim was raised and finally decided on March 4, 1930, as hereinabove set forth.
The Tillotson Manufacturing Company, herein referred to as the taxpayer, overpaid its income and profits tax for 1917 in the amount of $17,964.53 in excess of the partial allowance of $8,900.41 made by the Bureau of Internal Revenue in April, 1926, which was scheduled in May, 1926, and credited in partial satisfaction of a jeopardy assessment theretofore made for 1918.
There is no question concerning the overpayment and the amount thereof is stipulated. The only question involved, which was raised by the defendant for the first time after this suit had been instituted, is whether the allowance of an overassessment in 1926 of $8,900.41 for 1917 in the circumstances disclosed by the facts in this case constituted a disallowance and rejection of the specific grounds of the taxpayer's claim for refund for that year for a much larger overpayment within the meaning of section 3226 of the Revised Statutes as amended (26 U.S.C.A. §§ 1672-1673). This section provides that suit must be instituted within two years after the disallowance of that portion of the claim to which the suit relates.
Plaintiffs contend: (1) That by reason of the nature of the questions involved which were made the grounds of its claim for refund for 1917, as well as a claim filed for 1918, and by reason of the fact that the questions which involved a determination of values for properties in 1901 and 1913 for invested capital and depreciation purposes affected in like manner the correct tax liability of the taxpayer for the years 1917 to 1919, inclusive, then under consideration, the last two years being subject to review by the Board of Tax Appeals before the Commissioner's decision became final, the Bureau of Internal Revenue did not disallow or reject the 1917 refund claim for the claimed overpayment in excess of the overassessment determined when the sixty-day deficiency notices and the certificates of overassessment for 1917 and 1918 were mailed in 1926. (2) That this was simply a partial allowance of the refund claimed on matters agreed to in the Bureau and that this position is supported by proof which shows that everyone in the Bureau of Internal Revenue who considered the case treated the year 1917 as being still open for further allowance on the claim for refund in the event any change should be made in the determinations theretofore made until the matter of legal sufficiency of the refund claim arose. And (3) that the Commissioner in refusing to refund the additional overpayment for 1917, resulting from the settlement agreement of the matters in controversy, did so not on the ground that the refund claim for 1917 had previously been disallowed, but that the only claim which had been filed in time was legally insufficient and that the attempted amendment under the provisions of Treasury Decision 4266 was invalid because the ground stated in the amendment had not been specified in the timely claim.
The facts established by the evidence support the contention of plaintiffs that the 1917 refund claim was not disallowed and rejected until March 4, 1930. There was no specific disallowance or rejection in 1926, or at any time prior to March 4, 1930, of the grounds of the claim for that portion of the overpayment in excess of the overassessment of $8,900.41. Neither the certificate of overassessment for 1917 delivered to the taxpayer nor the audit letter attached thereto contained any statement that either the refund claim for $1 or the claim for $45,815.40 was or would be rejected for any portion of the amount claimed. The only statement made with reference to the claims was in the certificate of overassessment in which it was stated that the claims for refund had been given consideration.
After the overassessment of $8,900.41 had been computed and scheduled, and the amount thereof credited in partial satisfaction of a jeopardy assessment for 1918, no statement of the account for 1917 was furnished to the taxpayer and the space provided for that purpose on the certificate of overassessment was left blank. There were good and valid reasons why the Bureau of Internal Revenue should not disallow and reject the refund claim at that time. The orderly disposition of all cases in the Bureau involving the same questions without the necessity of separate suits before the court for one year and before the Board of Tax Appeals for other years justified the withholding of a final disallowance and rejection of the claim at the time the partial allowance was determined.
The questions at issue and made the grounds of the refund claim had their origin in 1901 and 1913 and it was recognized that if the taxpayer's contentions, which involved questions of fact, were later settled or sustained in whole or in part by the Board of Tax Appeals for the years 1918 and 1919, which were being audited in the Bureau at the same time, the overassessment for 1917, as of course, would be greater than that computed by the Bureau. In addition to this, it is established that immediately following the final audit in the Income Tax Unit and before the years 1918 and 1919 had been taken before the Board of Tax Appeals, the representative of the Commissioner to whom the cases were assigned considered the year 1917 still open for further adjustment and that all other persons under the Commissioner to whom the cases were assigned and who considered them for the purpose of arriving at an agreement of settlement to be recommended to the Commissioner for his approval likewise considered the year 1917, as well as the years 1918 and 1919, and treated the year 1917 as still being open for further adjustment and refund, until December 19, 1929, when the General Counsel ruled that any overpayment for 1917 was barred by the statute of limitation because the refund claim was not sufficient.
The Commissioner, when the matter was taken before him, did not take the position that the claim had previously been rejected, but he refused to refund the overpayment on the ground that the refund claim relied upon was not sufficient to authorize him to make the refund and that the attempted amendments were not proper. In this the Commissioner was in error. Factors' Finance Co. v. United States, 56 F.2d 902, 73 Ct.Cl. 707, affirmed 288 U.S. 89, 53 S.Ct. 287, 77 L.Ed. 633; Memphis Cotton Oil Co. v. United States, 59 F.2d 276, 75 Ct.Cl. 195, affirmed 288 U.S. 62, 53 S.Ct. 278, 77 L.Ed. 619. Counsel for the defendant now properly admits that the refund claim of March 15, 1923, as amended, was both timely and sufficient. In these circumstances we are of opinion that under the facts in this case the refund claim for 1917 was not finally disallowed and rejected until March 4, 1930, and that this suit was therefore timely instituted.
It was the usual practice of the Commissioner's office when disallowing a claim for refund in whole or in part to advise the taxpayer of that fact and to sign a schedule of rejection, neither of which was done in this case. United States v. Michel, 282 U.S. 656, 51 S.Ct. 284, 75 L.Ed. 598; Savannah Bank Trust Co. et al. v. United States, 58 F.2d 1068, 1070, 75 Ct.Cl. 245, 248. In the last-mentioned case this court stated that "the date on which a particular claim is disallowed for the purpose of computing the two-year period provided in section 3226 of the Revised Statutes [26 U.S.C.A. §§ 1672-1673 note] for the institution of suit must be determined upon the facts in each case." In Mutual Chemical Co. of America v. United States, 5 F. Supp. 550, 78 Ct.Cl. 664, we held that the allowance by the Commissioner of a part of a claim for refund is not to be taken as a rejection of the balance of the claim where the facts and circumstances show a lack of intention of such rejection; and where the Commissioner issued a certificate of overassessment for one item of a claim for refund, leaving another item, because of its dependency on a related question before the Board of Tax Appeals, his action was not such a determination of the claim as would start the running of the statutory period of limitation for suit. See also Bourne et al. v. United States, 2 F. Supp. 228, 76 Ct.Cl. 680.
The defendant relies upon Pratt Whitney Co. v. United States, 6 F. Supp. 574, 576, 80 Ct.Cl. 676, in support of its contention that the partial allowance in 1926 of $8,900.41 for 1917 constituted a final disallowance and rejection of the balance of taxpayer's refund claim. The case at bar is clearly distinguishable on the facts which show that the 1917 refund claim was kept open until March 4, 1930. The Pratt Whitney Co. Case did not involve the question presented in the case at bar. In that case the Commissioner computed and scheduled the overassessment involved before the court and there was presented no question as to the partial allowance on one item and withholding rejection of the claim on another. In that case the court pointed out that when the Commissioner computed the amount to be refunded to the plaintiff and paid it, he allowed the claim for refund to that extent, but that when, instead of refunding the remainder of the overassessment scheduled which was found to be an overpayment, he credited it upon the taxes of other years, he rejected the claim for refund to the extent of these credits; and on this point the court said: "If, after the filing of this claim, the Commissioner had announced that he had considered the matter and determined that there was no overpayment, we do not think any one would claim that suit could not then be begun. In the case at bar, after consideration and having found that there was an overpayment, he announced that part of this overpayment would be credited on taxes for other years. This was in effect a disallowance of the part of the claim to which the suit relates and the provisions of section 3226 became applicable."
Plaintiff makes an alternative contention that if the refund claim was rejected in 1926 the facts show that it was reopened and finally rejected March 4, 1930, on a different ground. In view of our conclusion that the claim was not rejected until March 4, 1930, it is not necessary to discuss this point.
Judgment will be entered in favor of plaintiffs for $17,964.53 with interest at 6 per cent. per annum from June 15, 1918, to such date as the Commissioner of Internal Revenue may determine in accordance with section 177(b) of the Judicial Code, as amended (28 U.S.C.A. § 284(b). It is so ordered.