Opinion
Nos. 42394, M-155.
June 1, 1936.
I. Herman Sher, of New York City (Satterlee Green, of New York City, on the brief), for plaintiff.
Guy Patten, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and LITTLETON, WILLIAMS, and WHALEY, Judges.
Two suits by the Foundation Company against the United States.
Petition in one suit dismissed, and, in the other suit, judgment granting plaintiff partial relief.
In these two cases plaintiff seeks to recover a total of $400,532.17, income and profits tax of $362,909.43, and $35,692.91 alleged to have been erroneously and illegally collected for 1918 and 1920, respectively, with interest from certain dates on which various amounts making up the total claimed were paid or collected by credit, and $1,929.83 as interest alleged to have been allowed but not paid for 1924. Case No. 42394 relates to 1918 for which the Commissioner collected an additional tax of $362,909.43, which plaintiff claims was barred by the statute of limitation. The amount of $274,348.05 of this tax was collected by credit of overpayments totaling that sum for 1917, 1919, 1920, 1921, 1924, and 1926. The balance of $88,561.38 was paid in cash. In this case plaintiff sues also, in the alternative, for the overpayments for the years mentioned with interest.
Case M-155 relates to 1920 for which plaintiff claims an additional overpayment of $35,692.91, with interest, based upon certain questions relating to invested capital, additional credit for foreign taxes, and also the question of the statute of limitation involved in the 1918 case inasmuch as an overpayment for 1920 was credited to the additional tax for 1918.
In addition, the above-mentioned interest of $1,929.83 is sought to be recovered on the ground that it was shown on the certificate of overassessment for 1924 and not refunded or credited.
The defendant contends that the additional tax for 1918 was legally assessed and collected within the time allowed by law, and that the tax for 1920 was correctly determined by the Commissioner, except that an adjustment should be made increasing invested capital on account of the deduction therefrom of taxes in excess of the amounts due for other years, and that by reason of this adjustment plaintiff is entitled to recover $4,356.76 for 1920, with interest.
Special Findings of Fact.
1. Plaintiff is a New York corporation, and its business has always been that of an engineering and contracting company specializing in foundations and construction work, including subaqueous work of all kinds, the building of industrial plants, power developments, railroads, bridges, and general building construction. It was organized with an authorized capital stock of $50,000, consisting of 500 shares of common stock, par value $100 a share. In 1903 its capital stock was increased to $100,000, consisting of 1,000 shares of common stock of the par value of $100 a share. All authorized stock was issued prior to 1905 for cash of $75,000 and tangible property of an aggregate cash value, when paid in for said stock, of $25,000.
2. The Foundation Company, hereinafter called the Delaware company, was organized May 18, 1911, under the general corporation law of the state of Delaware, with an authorized capital stock of $2,100,000, consisting of 5,000 shares of preferred stock of the par value of $100 a share and 16,000 shares of common stock of the par value of $100 a share. The Delaware Company was organized for the objects and purposes, among others, to engage in business as an engineering, contracting, and construction company. However, this corporation was, during all of the times hereinafter mentioned, only a holding company.
May 19, 1911, the Delaware company issued all its preferred stock, par value of $500,000, to the order of the subscribers thereof, for cash of $500,000, which it then received. A list of the original purchasers of preferred stock is as follows:
Franklin Remington .............. 475 Edwin S. Jarrett ................ 475 John W. Doty .................... 475 Louis L. Brown .................. 475 Daniel E. Moran ................. 475 Edwin F. Kellogg ................ 125 C.D. Backus ..................... 100 E.L. Bell ....................... 500 F.N.B. Colse .................... 25 E.C. Converse ................... 200 Wm. C. Heinkel .................. 250 T.W. Lamont ..................... 100 F. Hoffman ...................... 150 William E. Lake ................. 50 N.S. Meldrum .................... 25 Edgar L. Marston ................ 75 A. Monell ....................... 200 Charles D. Norton ............... 100 D.E. Pomeroy .................... 75 T.A. Gillespie .................. 25 Charles H. Sabin ................ 50 William P. Holly ................ 100 F.I. Kent ....................... 50 Otis H. Cutler .................. 30 John H. Lewis ................... 70 W.H. Porter ..................... 100 John H. Lewis ................... 25 Benj. Strong Jr. ................ 100 John H. Lewis ................... 100 _____ 5,000
Shares of preferred stock purchased.
3. On May 19, 1911, the 1,000 shares of plaintiff's stock then outstanding were held as follows:
---------------------------------------------------- | Number | | | Acquired and held Stockholder | of shares | | | since before | held | ----------------------|-----------|------------------- | | Franklin Remington .. | 190 | January 3, 1907. Edwin S. Jarrett .... | 190 | May 3, 1905. John W. Doty ........ | 190 | January 8, 1910. Louis L. Brown ...... | 190 | January 8, 1910. Daniel E. Moran ..... | 190 | January 3, 1906. Edwin F. Kellogg .... | 50 | September 3, 1908. | | -------------------------------------------------------
4. May 19, 1911, the Delaware company acquired all of the 1,000 shares of the then outstanding stock of plaintiff, from Franklin Remington (190 shares), Edwin S. Jarrett (190 shares), John W. Doty (190 shares), Louis L. Brown (190 shares), Daniel E. Moran (190 shares), and Edwin F. Kellogg (50 shares), and paid therefor by then issuing all of the common stock of the Delaware company of the par value of $1,600,000 and paying cash of $500,000 to said individuals or their nominees.
5. From 1905 to May 19, 1911, the stock of plaintiff could be sold only in accordance with the provisions of a certain stockholders' agreement. During that period and for some time thereafter this stock was closely held, was not listed on any exchange, and was not generally dealt in.
6. The capital and surplus of plaintiff for each of the years 1908, 1909, and 1910, arrived at without including as an asset any amount on account of patents, good will, or other intangible property, and the net income of the plaintiff for each of said years, were as follows:
---------------------------------------------------- | Capital and | | surplus | Net income --------------------|--------------|---------------- | | 1908 .............. | $10,481.59 | $250,645.51 1909 .............. | 158,127.10 | 120,756.83 1910 .............. | 223,883.93 | 21,804.41 |--------------|---------------- Total ......... | 392,492.62 | 393,206.75 | | ----------------------------------------------------
The capital and surplus of plaintiff on May 19, 1911, arrived at without including as an asset any amount on account of patents, good will, or other intangible property, were $500,000.
The intangible property of the plaintiff on May 19, 1911, if computed in accordance with A.R.M. 34 (2 Cumulative Bulletin 31), had a value at that time of $1,005,017.85, computed as follows:
(1) Average net income for each of the calendar years 1908, 1909, and 1910 ... $131,068.91
(2) Fair return on average capital and surplus (exclusive of Intangible property) for each of the calendar years 1908, 1909, and 1910 at 8 per cent (0.08×$130,830.87) ........... 10,466.47 ____________
(3) Average net income for each of the calendar years 1908, 1909, and 1910 attributable to intangible property for said years .................... 120,602.44
(4) Average net income, item (3) above, capitalized at 12 percent ......... 1,005,017.85
7. May 17, 1917, the then stockholders of plaintiff filed in the office of the secretary of state of the state of New York a certificate of reorganization of plaintiff, which recapitalized plaintiff and increased its authorized stock from $100,000, consisting of 1,000 shares of common stock, to $2,100,000, consisting of 5,000 shares of preferred stock of the par value of $100 a share, and 16,000 shares of common stock without par value.
8. In May, 1917, plaintiff acquired all preferred stock of the Delaware company of the par value of $500,000 from the preferred stockholders of the Delaware company, and paid therefor by then issuing all of its preferred stock of the par value of $500,000 and paying cash of $50,000 to the preferred stockholders of the Delaware company. At the same time plaintiff issued all of its common stock, consisting of 16,000 shares without par value, to the holders of the common stock of the Delaware company, for which plaintiff then received all of the common stock of the Delaware company of the par value of $1,600,000.
9. May 31, 1917, plaintiff canceled its original common capital stock of the par value of $100,000. Until May, 1917, this stock of plaintiff was continuously held by the Delaware company. The Delaware company was dissolved October 11, 1917.
10. All of the new common stock of plaintiff issued in 1917, as aforesaid, was outstanding on January 1, 1920, and during the entire calendar year 1920.
11. The Commissioner of Internal Revenue determined and held that plaintiff was not affiliated with the Delaware company during the year 1917, within the purview of section 1331 of the Revenue Act of 1921 ( 42 Stat. 319), and finally determined their income and profits tax liability for 1917 accordingly. This decision is not questioned.
12. From January, 1916, to May 19, 1917, the stock of the Delaware company was bought and sold in New York as an unlisted stock. About May 19, 1917, the stock of the plaintiff began so to be bought and sold. William H. Quaw, for many years a dealer in securities, sold most of the stock of plaintiff and the Delaware company that was traded in during 1917. Quaw traded approximately 20,000 shares of the Delaware company and plaintiff stock during 1917 and approximately 20,000 shares of plaintiff's stock during each of the years 1918 and 1919. He merely acted as broker, and as such did whatever he could to balance the supply and demand; he did not fix or control prices at which the stock was traded; and the trading took place between willing buyers and sellers.
During a period of 12 months beginning July, 1917, and during 1919 the stock of plaintiff traded in by William H. Quaw was actually bought and sold at prices per share ranging between the following bid and asked prices:
--------------------------------------------------------------- | Preferred | Common | | |------------------|------------------------ | | | | | Bid | Asked | Bid | Asked | | | | -------------------|--------|---------|------------|----------- | | | | During 1917-1918: | | | | July ............ | $90 | $95 | $51 3/8 | $55 August .......... | 90 | 95 | 56.50 | 57 5/8 September ....... | 90 | 95 | 60.25 | 67 October ......... | 90 | 95 | 60 | 67 November ........ | 90 | 95 | 57.50 | 62 5/8 December ........ | 90 | 95 | 60 | 62.50 January ......... | 92.50 | 97.50 | 62.50 | 63 February ........ | 92.50 | 97.50 | 62.50 | 67.50 March ........... | 92.50 | 97.50 | 65 | 70 April ........... | 92.50 | 97.50 | 65 | 70 May ............. | 92.50 | 97.50 | 70 | 75 June ............ | 92.50 | 97.50 | 72.50 | 77.50 During 1919: | | | | January ......... | 93.50 | 94 | 69.50 | 71 February ........ | ..... | ..... | 76.50 | 80 March ........... | 95 | 97.50 | 76.50 | 80 April ........... | 97.50 | 100 | 80 | 82 May ............. | ..... | ..... | 82.50 | 86 June ............ | ..... | ..... | 88 | 93 July ............ | ..... | ..... | 105 | 107.50 August .......... | ..... | ..... | 100 | 107.50 September ....... | ..... | ..... | 105 | 108.75 October ......... | ..... | ..... | 105 | 110 November ........ | ..... | ..... | 105.50 | 108.50 December ........ | ..... | ..... | 105 | 108.50 | | | | ---------------------------------------------------------------
Quaw's first important brokerage transaction in stock of the Delaware company was in January, 1916, when he obtained a block of 3,000 shares of its common stock and sold it to a group of three buyers at $15.25 a share. The market for this stock was inactive at that time, but by June, 1916, the market became active, and the prices at which this stock was sold by or through Quaw in 1916, starting with $15.25 a share in January, 1916, advanced $2 a share during each month of 1916. The prices at which the capital stock of the Delaware company was sold during the period January 1 to May, 1917, and at which the common stock of plaintiff was sold during the period May to July 1, 1917, by or through Quaw were between $40 and $50 a share.
13. The 16,000 shares common stock of the Delaware company of the par value of $1,600,000, for which plaintiff in May, 1917, issued all of its common stock consisting of 16,000 shares without par value, as hereinbefore mentioned, were acquired by the holders of the common stock of the Delaware company to whom the common stock of plaintiff was issued, as follows:
------------------------------------------------------------------------------------------------------------------------ Number of | | | shares of the | | Cost of | Delaware | Date acquired | acquisition | Method of computation Company | | | --------------|----------------------------|----------------|----------------------------------------------------------- 9,778 | May 19, 1911 ............. | $614,192 | A part of the common capital stock of the Delaware | | | Company originally issued by it as hereinbefore | | | stated. The cost of acquisition of $614,192 | | | 9,778, | | | represents ------- or 61,1125 percent of the value | | | 16,000 | | | that was paid for the common stock of the Delaware | | | Company by the plaintiff's stockholders on | | | May 19, 1911, to wit, $1,505,017.85 (the then value | | | of the plaintiff's stock) less $500,000 (the cash then | | | received by plaintiff's stockholders). | | | | | | Purchased for cash at a cost per share of not less | | | than — 720 | January 1916 ............. | 10,980 | $15.25 20 | March 1916 ............... | 385 | 19.25 40 | April 1916 ............... | 850 | 21.25 342 | July 1916 ................ | 9,319 | 27.25 100 | September 1916 ........... | 3,125 | 31.25 150 | October 1916 ............. | 4,987 | 33.25 22 | November 1916 ............ | 775 | 35.25 100 | December 1916 ............ | 3,725 | 37.25 600 | January 1917 ............. | 23,550 | 39.25 530 | February 1917 ............ | 21,862 | 41.25 50 | March 1917 ............... | 2,162 | 43.25 100 | August 1917 .............. | 5,650 | 56.50 3,448 | From July 14, 1911, to | .............. | By transfer from others. | March 23, 1917. | | ------ | | -------------- | 16,000 | | 701,562 | | | | ------------------------------------------------------------------------------------------------------------------------ 14. The 5,000 shares of preferred stock of plaintiff of the par value of $500,000 were retired during 1917, 1918, and 1919, as follows:Year retired: Amount
1917 ......................... $20,500.00 1918 ......................... 37,300.00 1919 ......................... 442,200.00 __________ Total ..................... $500,000.00
15. The certificate of incorporation of plaintiff was amended December 10, 1918, and its certificate of reorganization was amendment of August 21, 1919, and April 26, 1920, respectively. In accordance with the amendment of August 21, 1919, the authorized common stock of plaintiff was then increased from 16,000 shares to 20,000 shares without nominal or par value. Of this additional no par common stock there were issued 2,399 shares for cash of $263,890, and 1,601 shares in exchange for preferred stock of plaintiff. This preferred stock was acquired by plaintiff in 1919 in exchange for the retirement price thereof, to wit, $110 a share. All of the additional common stock of plaintiff was outstanding on January 1, 1920, and during the entire year 1920.
16. In accordance with the amendment of plaintiff's certificate of reorganization on April 26, 1920, its authorized common stock was then increased from 20,000 shares to 40,000 shares without nominal or par value. During 1920 plaintiff issued 2,498.75 shares of this additional common stock, without par value, for cash of $237,381.25, and 5,000 shares of said additional common stock, without par value, as a stock dividend.
17. Plaintiff filed its tax returns for 1917 to 1921, inclusive, and for 1924, 1925, and 1926, under the respective revenue acts applicable thereto, as follows:
------------------------------------------------------------ | | Tax Year for which return | Date filed | shown on was filed | | return ------------------------|----------------------|------------ | | 1917 (original return) | March 30, 1918 ..... | $205,568.92 1918 (tentative return) | | ..................... | March 15, 1919 ..... | 300,000.00 1918 (original return) | June 17, 1919 ...... | 260,036.49 1919 (tentative return) | | ..................... | March 15, 1920 ..... | 235,000.00 1919 (original return) | August 19, 1920 .... | 517,632.68 1919 (amended return) | | ..................... | December 20, 1921 .. | 500,241.80 1920 (tentative return) | | ..................... | March 12, 1921 ..... | None. 1920 (original return) | April 11, 1921 ..... | 139,222.43 1920 (amended return) | On or about Dec. | ..................... | 20, 1921 .......... | 97,619.77 1921 (tentative return) | | ..................... | March 15, 1922 ..... | 48,000.00 1921 (original return) | June 15, 1922 ...... | 96,657.66 1924 (tentative return) | | ..................... | March 19, 1925 ..... | 50,000.00 1924 (original return) | May 15, 1925 ....... | 31,807.50 1925 (tentative return) | | ..................... | March 12, 1926 ..... | None. 1925 (original return) | May 3, 1926 ........ | 77,416.14 1926 (tentative return) | | ..................... | March 15, 1927 ..... | None. 1926 (original return) | May 14, 1927 ....... | 85,617.19 | | -------------------------------------------------------------
The Commissioner in accordance with the returns assessed the following amounts for the years mentioned:
Year: Amount
1917 ............. $205,568.92 1918 ............. 260,036.49 1919 ............. 517,632.69 1920 ............. 139,222.43 1921 ............. $96,657.66 1924 ............. 31,807.50 1925 ............. 77,416.14 1926 ............. 85,617.19
Plaintiff paid the taxes shown on the returns filed by it, to the then Collector at New York, as follows:
Date Payments for 1917: Amount June 12, 1918 ............................... $205,568.92
Payments for 1918: March 15, 1919 .............................. 75,000.00 June 17, 1919 ............................... 55,018.25 September 15, 1919 .......................... 65,009.12 December 15, 1919 ........................... 65,009.12 ___________ Total .................................. 260,036.49 ===========
Payments for 1919: March 17, 1920 .............................. 58,750.00 June 15, 1920 ............................... 58,750.00 September 15, 1920 .......................... 150,000.00 October 22, 1920 ............................ 120,724.51 January 21, 1921 ............................ 50,000.00 March 14, 1921 .............................. 79,408.18 __________ Total .................................... 517,632.69 ==========
Payments for 1920: April 8, 1921 ............................... 34,805.61 August 10, 1921 ............................. 34,805.61 October 28, 1921 ............................ 34,805.61 May 16, 1922 ................................ 13,760.35 Overpayment of 1925 income taxes credited March 24, 1927 ................... 17,218.42 Overpayment of 1924 income taxes credited March 24, 1927 ................... 3,826.83 __________ Total .................................. 139,222.43 ==========
Payments for 1921: March 15, 1922 .............................. 12,000.00 June 15, 1922 ............................... 36,328.83 January 25, 1923 ............................ 48,328.83 ___________ Total ................................. 96,657.66 ===========
Payments for 1924: March 19, 1925 ............................. 12,500.00 June 11, 1925 .............................. 3,403.75 September 14, 1925 ......................... 7,951.88 December 10, 1925 .......................... 7,951.87 __________ Total ................................. 31,807.50 ==========
Payments for 1925: March 12, 1926 .............................. 10,000.00 May 8, 1926 ................................. 9,354.04 June 15, 1926 ............................... 19,354.03 September 14, 1926 .......................... 19,354.03 December 15, 1926 ........................... 19,354.04 __________ Total .................................. 77,416.14 ==========
Payments for 1926: March 15, 1927 .............................. 15,000.00 May 14, 1927 ................................ 6,404.30 June 15, 1927 ............................... 21,404.30 Sept. 14, 1927 .............................. 21,404.30 Dec. 14, 1927 ............................... 21,404.29 ___________ Total .................................. 85,617.19
18. The Commissioner on his May, 1921, list made an additional assessment of $88,123.35 for 1917. Of this amount plaintiff paid on January 23, 1922, $50,000 to the then collector at New York and $175.07 was paid by a credit May 16, 1922, of an overpayment for 1916. The balance of $37,948.28 was abated August 9, 1927.
19. January 12, 1924, plaintiff filed a waiver for 1918 extending the statute of limitation to June 17, 1925. February 25, 1925, plaintiff filed another waiver for 1918 as follows: "This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with the said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board."
June 13, 1925, plaintiff filed a waiver for 1919, as follows: "This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board."
December 22, 1925, plaintiff filed a waiver for 1920 and 1921, as follows: "This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board."
20. May 10, 1923, plaintiff received from the Treasury Department a 30-day notice dated May 9, 1923, together with inclosures consisting of a statement and schedules 1 to 5, inclusive, which asserted an additional tax for 1918 aggregating $52,897.57. This notice was in part as follows:
"An examination of your income tax returns and of your books of account and records for the year discloses an additional tax liability for the year 1918 aggregating $52,897.57, as shown in detail in the attached statement.
"In accordance with the provisions of section 250(d) of the Revenue Act of 1921, you are granted thirty days within which to file an appeal and show cause or reason why this tax or deficiency should not be paid. * * *
"Full details of the adjustments producing the above stated results are contained in the attached schedules 1 to 4, inclusive."
21. October 15, 1923, plaintiff received a 30-day notice dated October 13, 1923, together with inclosures consisting of a statement and schedules 1 to 12, inclusive, which asserted an additional tax for 1918 and 1919 aggregating $569,148.33 and $57,871.96, respectively. This notice was in part as follows:
"An examination of your income tax returns and of your books of account and records for the years 1918 and 1919 discloses an additional tax liability for the years 1918 and 1919 aggregating $627,020.29.
"In accordance with the provisions of section 250(d) of the Revenue Act of 1921, you are granted thirty days within which to file an appeal and to show cause or reason why this tax or deficiency should not be paid.
"Full details of the adjustments producing the above-stated results are contained in the attached schedules 1 to 12, inclusive.
"The portion of this letter applicable to the year 1918, supersedes Bureau letter dated May 9, 1923."
22. August 25, 1924, plaintiff received a letter dated August 22, 1924, together with inclosures consisting of a statement and schedules 1 to 26 and A to D, which showed the Commissioner's determination of the net income and tax for 1917, 1918, and 1919. This letter was in part as follows:
"Reference is made to your request that your profits taxes for the years 1917, 1918, and 1919 be computed under the provisions of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918, respectively.
"Before consideration can be given your claims, there must be a final determination of your net income, therefore it will be necessary for you to advise this office within thirty days from the date of this letter, of your acquiescence in the following determination of your net income, or exceptions, if any, which you may take thereto.
------------------------------------------------------------------ | | Net Company | Year | | | income --------------------------------------------|--------|------------ | | The Foundation Co., New York | | 1917 | $570,611.67 (consolidated) ........................... | 1918 | 966,819.61 | | 1919 | 959,401.51 | | ------------------------------------------------------------------
"The adjustments producing the above-stated results are contained in the attached schedules 1 to 26, inclusive.
"The former action of the Bureau in allowing the expenses in connection with the International Nickel contract to be deducted from the gross income of the Foundation Company of New York has been reversed."
Said schedules showed taxes for 1917, 1918, and 1919 theretofore determined and assessed; additional proposed to be assessed and overassessed as follows:
----------------------------------------------------------------------------- | | | | 1917 | 1918 | 1919 | | | ----------------------------------|--------------|--------------|------------ Total income and | | | profits tax determined | | | by Commissioner ................ | $169,189.66 | $707,659.58 | $455,010.00 Previously assessed ............. | 293,517.20 | 260,036.49 | 517,632.68 |--------------|--------------|------------ Overassessed ................. | 100,201.42 | ............ | 62,622.68 | | | Additional proposed | | | to be assessed ................. | ........... | 447,623.09 | .......... | | | ----------------------------------------------------------------------------- 23. November 21, 1924, plaintiff received from the supervising internal revenue agent in New York City a copy of a revenue agent's report dated October 21, 1924, covering plaintiff's tax liability for 1920 and 1921. This report showed an overassessment for 1920 and 1921 aggregating $177,449.56, arrived at as follows:
-------------------------------------------------------------------- | | | 1920 | 1921 | | -----------------------------------|------------------|------------- | | Total income and profits tax | | liability as determined by | | revenue agent ................ | None | $58,430.53 Previously assessed .......... | $139,222.43 | 96,657.66 |------------------|------------- Overassessment ............... | 139,222.43 | 38,227.13 | | --------------------------------------------------------------------
Plaintiff received no letters from the Commissioner relating to the issues in these cases before January 1, 1926, other than those hereinbefore mentioned.
24. In 1925, plaintiff was engaged in incorporating certain of its foreign business, and in connection therewith certain public financing was done. In connection with this financing it was important to plaintiff to have its liability for federal taxes cleared up before the end of 1925. Several months before December 31, 1925, plaintiff therefore made four or more requests of the Bureau of Internal Revenue to complete its fiscal audit and determination and close out the various tax years including 1918. December 8, 1925, plaintiff telegraphed to the Solicitor of Internal Revenue as follows: "Income tax unit advises that our nineteen seventeen to nineteen nineteen tax cases were sent to your office last July for review and that said cases have not been returned to them. We will greatly appreciate any action taken to expedite these cases in your office. Delayed adjudication of our cases by Bureau has caused severe hardship and complicated pending reorganizations. Kindly wire us collect if our cases can be closed before the close of this year."
December 9, 1925, the Solicitor telegraphed plaintiff as follows: "Your cases will be expedited as far as exigencies of the service will permit. No definite promise can be made that they will be closed before the end of the year."
25. December 22, 1925, the Commissioner made a jeopardy assessment of an additional tax of $447,623.09 for 1918 under and pursuant to the provisions of section 274(d) of the Revenue Act of 1924 ( 43 Stat. 297). Notice and demand for the payment of this assessment was made upon plaintiff by the Collector on December 28, 1925.
Plaintiff filed no claim for the abatement of any part of this assessment, and never filed or made a bond in connection therewith.
The following are the balance sheets of the plaintiff correctly showing its financial condition at December 31, 1923, 1924, and 1925.
------------------------------------------------------------------------------------------------------------- | | | | 1923 | 1924 | 1925 | | | ------------------------------------------------------|-----------------|------------------|----------------- | | | ASSETS | | | | | | Current: | | | | | | Cash ............................................. | $256,832.16 | $900,996.19 | $1,012,444.18 Short-term securities ............................ | ............... | ................ | 1,006,831.22 Accrued interest ................................. | ............... | ................ | 16,251.06 Accounts receivable .............................. | 958,842.86 | 1,100,118.03 | 2,503.404.61 Notes receivable ................................. | 103,359.74 | 134,244.79 | 77,778.14 Advances on contracts in operation ............... | 490,892.78 | 550,464.42 | 179,641.67 Materials on hand ................................ | 391,043.52 | 413,513.86 | 473,437.58 Prepaid, deferred, and accrued items ............. | 16,434.08 | 16,351.06 | 14,028.64 |-----------------|------------------|----------------- | 2,227,405.14 | 3,115,688.35 | 5,283,817.10 |=================|==================|================= Cash for liquidation of preferred stock ............. | 24,000.00 | 27,882.86 | ................ Stock of affiliated companies ....................... | 424,235.44 | 713,156.84 | 1,452,720.90 Other stocks and bonds .............................. | 172,490.50 | 170,121.50 | 197,518.50 Real estate and buildings ........................... | 973,013.30 | 863,719.38 | 863,719.38 Plant and equipment ................................. | 1,333,386.41 | 906,583.11 | 975,648.11 Stock issue expense ................................. | ............... | 225,000.00 | 125,000.00 Goodwill and patents ................................ | 1,605,000.00 | 1,012,394.63 | 1,012,394.63 |-----------------|------------------|----------------- | 6,759,530.79 | 7,034,546.67 | 9,910,818.62 |=================|==================|================= LIABILITIES | | | Current: | | | | | | Notes payable ...................................... | 770,000.00 | 450,000.00 | ................ Accounts payable .................................. | 367,248.01 | 252,937.65 | 911,788.34 Accrued accounts .................................. | 2,629.15 | 4,762.12 | 1,954.17 Reserve for taxes ................................. | 3,583.98 | 50,000.00 | 35,000.00 |-----------------|------------------|----------------- | 1,143,461.14 | 757,699.77 | 948,742.51 |=================|==================|================= Mortgage on foundation building ..................... | 422,900.00 | 409,000.00 | 402,000.00 Stated capital: | | | Preferred ........................................ | 905,000.00 | 331,700.00 | ................ Common ........................................... | 1,795,000.00 | 4,056,100.00 | 6,795,000.00 Surplus ............................................. | 2,493,169.65 | 1,480,046.90 | 1,765,076.11 |-----------------|------------------|----------------- | 6,759,530.79 | 7,034,546.67 | 9,910,818.62 ------------------------------------------------------------------------------------------------------------- 26. In December, 1925, plaintiff was able to pay the additional tax of $447,623.09 assessed for 1918. The only reason the additional tax for 1918 was assessed under section 274(d) on December 22, 1925, was because the period of limitation for assessment and collection as extended by waiver would expire on December 31, 1925.As a result of a telephone conversation with plaintiff's representative December 30, 1925, the Commissioner, on December 31, 1925, telegraphed to the Collector of Internal Revenue for the Second District of New York at New York, as follows: "Suggest you withhold collection four hundred forty-seven thousand six hundred twenty-three dollars nine cents assessed against Foundation Company Commissioner's December nineteen twenty-five list special fourteen for thirty days if interests of Government not jeopardized. Letter follows."
January 4, 1926, the Commissioner wrote to the Collector at New York, as follows:
"Reference is made to telegram of December 31, 1925, suggesting you withhold collection of an additional tax of $447,623.09, assessed for the taxable year 1918 against the Foundation Company, New York, New York, on the Commissioner's December 1925 list, special 14, page 0, line 0, for a period of thirty days if the interests of the Government are not jeopardized.
"This additional tax arises from the shifting of inventories from one taxable year to another. As a result of this adjustment, Certificates of Overassessment aggregating approximately $335,000.00 for the years 1917, 1919, and 1920 have been prepared and should be listed upon schedule within the next thirty days. A considerable amount of interest will, of course, be allowable upon these overassessments if there was an overpayment of taxes originally assessed. In addition, there appears to be an overassessment of a considerable amount for the taxable year 1921, which can probably be allowed soon after the allowance for 1917, 1919, and 1920 have been made.
"The additional tax for 1918 was assessed under section 274(d) on December 22, 1925, as the period of limitation extended by waiver was about to expire.
"On December 30, 1925, the taxpayer called this office by long-distance telephone and protested that it should not be required to pay this additional tax or to file a claim in abatement accompanied by bond, since the assessment was due to the type of adjustment above described, and since the allowances could be certified to your office in the near future.
"In view of these circumstances, this office requested that collection of the additional tax be postponed for a period of thirty days if the interests of the Government are not jeopardized. Instructions are being issued that the certificates of overassessment should be listed on schedule within the next thirty days."
Plaintiff did not request or agree to any postponement of the collection of said additional assessment for 1918, and did not request or agree to the application of any overpayments which might be scheduled for any other year as credits or otherwise against said additional assessment for 1918.
27. March 3, 1926, plaintiff received from the Commissioner a 30-day notice dated March 2, 1926, together with inclosures consisting of a statement and schedules, which showed the determination of the net income and tax liability of plaintiff for 1917, 1918, and 1919.
In schedule 14 the sum of $707,659.58 was shown as the tax previously assessed for 1918, and $38,593.17 as additional tax to be assessed for 1918.
July 13, 1926, plaintiff received from the Commissioner a notice dated July 13, 1926, in which the Commissioner's determination for 1917 and 1918, set out in his letter of March 2, 1926, was sustained.
28. February 25, 1927, plaintiff received from the Commissioner a 30-day notice dated February 23, 1927, showing a total tax for 1918 of $622,945.92 and an overassessment for 1918 of $84,713.66.
April 11, 1927, plaintiff received from the Commissioner a letter dated April 9, 1927, which showed overassessments for 1917, 1918, and 1919 of $70,469.29, $84,713.66, and $89,260.26, respectively.
29. June 6, 1927, plaintiff appealed to the United States Board of Tax Appeals from the Commissioner's determination for 1918 as set forth in his notice of April 9, 1927. April 12, 1928, the Board of Tax Appeals dismissed the case for lack of jurisdiction. April 19, 1928, plaintiff waived the right under section 1001 of the Revenue Act of 1926 ( 44 Stat. 109) to file a petition to the Circuit Court of Appeals or the Court of Appeals of the District of Columbia from the decision of the Board of Tax Appeals dismissing the above proceeding for lack of jurisdiction.
30. The Commissioner in December, 1926, assessed an additional tax of $5,391.12 for 1921, which was paid by credit of an overpayment of $5,391.12 for 1924.
31. June 7, 1928, plaintiff received from the Commissioner a certificate of overassessment showing an overassessment of $84,713.66 for 1918. This certificate was in part as follows:
Tax assessed:
Original no. 402782 ................................ $260,036.49 Additional, December 1925, page O, line O, special 14 ..................................... 447,623.09 ___________ Total ........................................... 707,659.58 Tax liability ......................................... 622,945.92 ___________ Overassessment .................................. 84,713.66
"In a Bureau letter of recent date you were advised of the amount and manner of establishing your correct tax liability which resulted in the above computation.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Abated: $84,713.66."
32. July 5, 1929, plaintiff received from the Commissioner a certificate of overassessment showing an overassessment and overpayment of $103,529.52 for 1920. This certificate was in part as follows:
Tax assessed April 1921 ..................... $139,222.43 Tax liability ............................... 35,692.91 ___________ Overassessment ........................... 103,529.52
"The adjustment of your tax liability as indicated above is in accordance with the recomputation made by the special advisory committee in connection with your appeal (Docket No. 20028) covering the year 1921.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Credited: $103,529.52 to 1918."
33. In addition to the foregoing certificates of overassessment plaintiff received from the Commissioner certificates of overassessment for 1917, 1919, and 1921 on July 5, 1929; for 1924 and 1925 on May 3, 1927; and for 1926 between March 6 and June 7, 1928.
34. The Commissioner signed schedules of overassessment for 1917, 1919, 1920, and 1921, inclusive, on May 31, 1929; for 1918 on May 7, 1928; for 1924 on March 24, 1927; for 1925 on March 24, 1927; and for 1926 on March 6, 1928.
The certificate for 1917 was in part as follows:
Tax assessed: Original, March 1918, page 1239, line 13 $205,568.92 Net additional, May 1921, page 12, line 36 .......... $87,948.28 Add: Credit applied, 1916 ..... 175.07 _________ 88,123.35 __________ Total .................................. 293,692.27 Tax liability ............................... 223,222.98 __________ Overassessment .......................... 70,469.29 Previously allowed .......................... 37,948.28 __________ Net overassessment ...................... 32,521.01
"In Bureau letter of recent date you were advised of the amount and manner of establishing your correct tax liability which resulted in the above computation.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Credited: $32,521.01 to 1918."
The certificate for 1919 was in part as follows:
Tax assessed: Original ................................. $517,632.68 Tax liability ............................ 430,438.26 __________ Overassessment ......................... 87,194.42
"In the determination of this overassessment, the statements made in your claims for the refund of $625,245.36 have been given careful consideration and to the extent not herein allowed were 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.
"Credited: $87,194.42 to 1918."
The certificate for 1921 was in part as follows:
Tax assessed: June 1922 ................................. $96,657.66 December 1926 ............................. 5,391.12 __________ Total ................................... 102,048.78 Tax liability ................................ 76,788.09 __________ Overassessment .......................... 25,260.69
"The adjustment of your tax liability as indicated above is in accordance with the order of redetermination issued by the United States Board of Tax Appeals June 29, 1928, Docket No. 20028.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Credited: $25,260.69 to 1918."
The certificate for 1924 was in part as follows:
Original tax assessed ......................... $31,807.50 Total tax liability ........................... None __________ Overassessment ............................. 31,807.50
"The report of the internal revenue agent dated October 9, 1926, has been accepted by this office, with the change in this office of the disallowance of $4,700, donations to families of deceased employees.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Credited: $3,826.83 to 12/8/20 "Credited: $5,391.12 to tax. year 1921 "Credited: $5,992.89 to tax. year 1918 "Refunded: $16,596.66 "Interest: $2,271.02."
The certificate for 1925 was in part as follows:
Original tax assessed ........................ $77,416.14 Total tax liability .......................... 60,197.72 __________ Overassessment ............................ 17,218.42
"The report of the internal revenue agent in charge dated October 9, 1926, has been adjusted in each year for the disallowance of $4,700.00, donations to families of deceased employees.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Credited: $17,218.42 to tax year 12/8/20."
The certificate for 1926 was in part as follows:
Tax assessed, 1927 ........................... $85,617.19 Tax liability ................................ 82,705.52 _________ Overassessment ............................ 2,911.67
"The basis of this overassessment is a revenue agent's report dated January 12, 1928, which has been approved in this office and accepted by you.
"The amount of the overassessment will be abated, credited, or refunded as indicated below.
"Credited: $2,911.67 to tax year 1918."
The overassessments and overpayments shown by the certificates above mentioned for 1917 to 1921, inclusive, and for 1924, 1925, and 1926 were abated or credited as follows:
Interest.
The certificate of overassessment for 1924 stated that of the overpayment of $31,807.50 for 1924, the amount of $16,596.66, together with interest thereon of $2,271.02, or a total of $18,867.68, was refunded to plaintiff by check dated April 29, 1927. Such check was never received by plaintiff, but was applied by the Collector as a part of the credit of $22,589.55 to 1918, as shown in the above schedule.
The Commissioner never allowed and plaintiff never received any interest on any of the overpayments mentioned.
35. Of the sum of $447,623.09 for 1918 assessed by the Commissioner December 22, 1925, referred to in finding 25, the amount of $84,713.66 was abated, the amount of $274,348.05 was accounted for by credits of overpayments for other years, as aforesaid, and the balance of $88,561.38 was paid by the plaintiff in cash on September 14, 1929.
The government made demand on plaintiff for interest on the balance of $88,561.38 at the rate of 12 per cent. per annum from date of assessment in December, 1925, but such interest has not been paid, and the question of the right of the government to collect interest on said balance of $88,561.38 is not in issue in these proceedings.
36. In arriving at the amount of $35,692.91 as the total tax liability of plaintiff for 1920, the Commissioner based his computation of tax upon a net income and an invested capital for 1920, as finally determined by him, of $295,440.55 and $1,262,345.60, respectively.
In determining this invested capital, the Commissioner allowed only the amount of $360,000 for the property paid in for the 16,000 shares of common stock of plaintiff issued prior to 1918 and $440,000 for the cash and property paid in for the 4,000 shares of the common stock of plaintiff issued in 1919, or a total of $800,000 for the cash and other property paid in for the 20,000 shares common stock of plaintiff authorized and issued prior to and outstanding on January 1, 1920. Also, in determining invested capital in the amount mentioned, the Commissioner reduced the earned surplus for 1920 by the amount of $447,623.09, representing the additional tax assessed December 22, 1925, referred to in finding 25 herein.
The Commissioner reduced invested capital for 1920 by the amount of $205,053.55 on account of the income and profits tax liability for 1919.
37. The invested capital of plaintiff for 1920, as reported in its return for 1920 and as finally determined by the Commissioner, follows:
------------------------------------------------------------------------------------- | Return | Commissioner -------------------------------------------------------|--------------|-------------- Capital stock outstanding 12/31/19 | | (1,000 shares issued before | | 1/1/05 were retired in 1917): | | 16,000 shares issued in 1917 ....................... | $360,000.00 | $360,000.00 4,000 shares issued in 1919 ....................... | 440,000.00 | 440,000.00 |--------------|-------------- ______ | | 20,000 shares outstanding 12/31/19 .................. | 800,000.00 | 800,000.00 Earned surplus on 12/31/19 ........................... | 2,168,405.84 | 2,256,100.85 Capital stock sold in 1920 (2,498¾ | | shares) ............................................. | 79,491.43 | 80,140.02 |--------------|-------------- Total ............................................. | 3,047,897.27 | 3,136,240.87 |==============|============= Deduct: | | Adjustment for intangibles ......................... | 1,105,000.00 | 1,158,965.75 Additional income and profits | | tax for 1918 ....................................... | ............ | 447,623.09 Income and profits tax for 1919 | 217,785.31 | 205,053.55 Inadmissible assets ................................ | 157,502.72 | 62,252.88 |--------------|-------------- Total ............................................ | 1,480,288.03 | 1,873,895.27 |==============|============= Invested capital for 1920 ............................ | 1,567,609.24 | 1,262,345.60 | | ------------------------------------------------------------------------------------- The balance sheet of the plaintiff at December 31, 1919, as reported in the return for 1920 and as finally determined by the Commissioner follows: ------------------------------------------------------------------------------------ | Return | Commissioner -------------------------------------------------------|--------------|------------- Patents .............................................. | $5,000.00 | $611,059.63 Less exhaustion ...................................... | ............ | 441,034.25 |--------------|-------------- Net value of patents .............................. | 5,000.00 | 170,025.38 Good will ............................................ | 1,600,000.00 | 996,989.29 |--------------|-------------- Total intangibles ................................. | 1,605,000.00 | 1,167,014.67 Investment in uncompleted contracts .................. | ............ | 469,542.44 Organization expense ................................. | ............ | 5,131.55 Excessive reserve for depreciation | | in return ........................................... | ............ | 25,761.50 Other adjustments of assets .......................... | ............ | 25,244.85 Other tangible assets after depreciation ............. | 2,362,803.91 | 2,362,803.91 |--------------|-------------- Total assets ....................................... | 3,967,803.91 | 4,055,498.92 |==============|============== Liabilities .......................................... | 999,398.07 | 999,398.07 Capital stock ........................................ | 800,000.00 | 800,000.00 Surplus .............................................. | 2,168,405.84 | 2,256,100.85 |--------------|-------------- Total ............................................. | 3,967,803.91 | 4,055,498.92 | | ------------------------------------------------------------------------------------ Of the aforesaid intangible property of plaintiff of the value of $1,005,017.85 on May 19, 1911, the patents had a value May 19, 1911, of $603,010.71.These patents suffered depreciation during the period from May 19, 1911, to May 31, 1917, of $308,966.17, and during the period from May 31, 1917, to January 1, 1920, of $128,119.36, or an aggregate amount of $437,085.53 for the period from May 19, 1911, to January 1, 1920.
38. The Foundation Company of British Columbia, Limited, hereinafter called British Columbia Company, was incorporated under the laws of the Dominion of Canada to engage in business as a construction company; its charter or certificate of incorporation having been filed in the office of the secretary of state of Canada May 31, 1917. From organization until after December 31, 1920, plaintiff held and owned all of the issued and outstanding stock of the British Columbia Company of $3,500 par value.
August 31, 1918, the British Columbia Company entered into an agreement with the government of the Republic of France, by which the former agreed to build for the French government 20 wooden ships in accordance with certain specifications and for a price stated in said contract. This contract was negotiated by plaintiff and plaintiff supervised the construction of the ships. In connection with this service, plaintiff and the British Columbia Company entered into an agreement on April 29, 1919, which was in part as follows:
"Whereas, the Foundation Company of British Columbia, Limited (hereinafter called the "Contractor"), entered into an agreement with the Government of the Republic of France, acting through Mr. L. Nicol, Director of Transportation of the French High Commission in U.S. (hereinafter called the "French Government"), dated August 31, 1918, by which the contractor agreed to build for the French Government twenty wooden ships in accordance with certain plans and specifications attached to said contract, the French Government agreeing in said contract to pay the cost of the ships as defined in said agreement; and
"Whereas, said contract with the French Government was negotiated by the Foundation Company, a corporation organized and existing under the laws of the State of New York, and after negotiating the same arranged with the French Government and the contractor that the agreement should be executed by the contractor and not by the Foundation Company; and
"Whereas, the Foundation Company has supervised and is supervising the construction of the ships agreed to be built by said agreement; and
"Whereas, the officers of the Foundation Company and of the contractor orally agreed that the contractor would pay or cause to be paid to the Foundation Company 75 percent of the net profits derived from said agreement between the contractor and the French Government.
"Now, therefore, the contractor and the Foundation Company hereby agree that the contractor will pay the Foundation Company 75 percent of the net profits derived from the building of said ships and that the net profits derived therefrom shall be arrived at by deducting from the total sum received for the building of said ships all the `Cost of the ships' as defined in said agreement of August 31, 1918, between the French Government and the contractor, and in addition thereto, the cost of a yard or yards, including shops, buildings, and other permanent equipment, and also after deducting all general expense and any and all other costs or expenses in connection with the said agreement which has been deemed necessary or expedient.
"The contractor agrees to pay the said 75 percent of the net profit arrived at in the manner hereinabove set forth so soon as it is in funds permitting it so to do."
The agreement with the Republic of France was performed and the ships therein called for were built without the United States.
June 23, 1920, plaintiff and the British Columbia Company entered into an agreement with respect to the profit derived by the latter from the contract with the French government and the amount thereof to which plaintiff was entitled. This agreement was in part as follows:
"Whereas, the Foundation Company of British Columbia, Limited, and the Foundation Company, a corporation organized under the laws of the State of New York, entered into a certain agreement bearing date April 29, 1919, by which said agreement the Foundation Company of British Columbia, Limited, agreed to pay to the Foundation Company 75 percent of the profits derived from a certain contract for the building of twenty wooden ships for the French Government; and
"Whereas, the parties hereto have differed as to the amount of the profits, but desire to reach an amicable agreement,
"Now, therefore, the parties hereto agree that the gross profits from the contract hereinabove referred to amounted to $1,000,000 and that the amount to be paid by the Foundation Company of British Columbia, Limited, to the Foundation Company is the sum of $750,000, and the Foundation Company has agreed to accept said sum in full settlement of the aforesaid contract dated April 29, 1919, as full compensation for all services rendered by it to the Foundation Company of British Columbia, Limited."
July 5, 1920, the British Columbia Company filed with the Minister of National Revenue of the Dominion of Canada an income and profits tax return on the form prescribed for 1919. In this return the British Columbia Company reported its accounting period as from December 31, 1918, to December 31, 1919; that it had no inventory on hand; that its paid-up capital stock at the commencement of said accounting period consisted of common stock of the amount of $3,500; and that the amount of $550 interest on Dominion of Canada war loan bonds was credited to profit and loss account during the period. There was also reported in this return a net profit of $298,860.02 and surplus of $23,261.73, the surplus being arrived at as follows:
Surplus at December 31, 1918, per last return ................. $27,478.91 Less adjustment on surplus in 1919 representing expenses applicable to 1918 .................................. 4,217.18 __________ Surplus per this return ...................................... 23,261.73
October 6, 1921, the British Columbia Company received from the Dominion of Canada a notice of assessment for the calendar year 1919. This notice was in part as follows:
"Notice of assessment. — Take notice that under the provisions of the above act you have been assessed as follows:
"Accounting period, 1st January 1919 to 31st December 1919.
---------------------------------------------------------------- | | | Net profits | Assessment Capital | Net profits | Exemption | liable to | (amount | | | assessment | payable) -----------|-------------|-----------|-------------|------------ $26,761.73 | $483,095.26 | $2,676.17 | $480,419.09 | $120,104.77 | | | | ----------------------------------------------------------------Assessment
Period: 1st January 1919 to 31st December 1919. Capital: As at 31st December 1918. Capital stock ............................... $3,500.00 Surplus .......................... $27,478.91 Less adjustments ................. 4,217.18 __________ 23,261.73 _________ Capital (total) employed ................. 26,761.73 ========= Net profits: Profit as per statement after deducting 1918 income tax ........................ 298,860.02 Add commission for obtaining contract and fee for supervising the carrying out thereof ................. $750,000.00 Less proportion of overhead and supervision ............. 514,025.84 ___________ 235,974.16 __________ 534,834.18 Less: Interest on Victory bonds 550.00 Loss on realization over and above amount set aside ...................... 51,188.92 _________ 51,738.92 __________ Net profit ............................... 483,095.26 Exemption 10% of capital employed ........ 2,676.17 __________ Taxable profit ........................... 480,419.09 Assessment 25% ........................... 120,104.77"
39. October 24, 1921, the British Columbia Company issued its certified check for $60,000, payable to the Receiver General of Canada in part payment of its income and profits tax liability to the Dominion of Canada for 1919, and on October 26, 1921, the Commissioner of Taxation of Canada acknowledged receipt thereof.
The British Columbia Company issued its checks for the balance of the income and profits tax assessed for 1919, as follows:
May 16, 1922 ........................... $30,000.00 October 21, 1922 ....................... 10,000.00 January 30, 1923 ....................... 20,104.77
The Commissioner of Taxation of Canada thereafter acknowledged receipt of said amounts.
40. The accumulated profits of the British Columbia Company amounted to $23,261.73 on December 31, 1918, and $272,121.75 on December 31, 1919. The entire accumulated profit as of December 31, 1919, was derived by it from sources without the United States. All of the income of this company for 1919 was derived by it from its contract with the government of the Republic of France. The amount of $298,860.02 reported by the Foundation Company of British Columbia, Limited, in the return filed in the Dominion of Canada was arrived at without deducting any amount for income and profits taxes for 1919. Of the total assessment of $120,104.77 referred to above, the amount of $61,111.25 was paid by the Foundation Company of British Columbia, Limited, on taxable net income of $244,444.93 realized by it in 1919, and $58,993.54 was paid by plaintiff on taxable net income of $235,974.16 realized by plaintiff in 1919. All amounts hereinbefore mentioned in this paragraph are stated in Canadian dollars. On December 31, 1919 and 1920, Canadian dollars were convertible into dollars of the United States of America at the prevailing exchange rates of $0.9175 and $0.86, respectively.
The books and records of plaintiff and Foundation Company of British Columbia, Limited, respectively, have since before January 1, 1919, been consistently kept on the accrual basis.
41. During 1920, plaintiff received dividends of $150,000 from the British Columbia Company from profits realized by that company prior to 1920.
The entire net income of $295,440.55 of plaintiff for 1920 as finally determined by the Commissioner included said dividends of $150,000.
Plaintiff filed with the Commissioner form 1118 "Claim for credit on income and profits tax return of domestic corporation for taxes paid or accrued to foreign countries or to possessions of the United States" required by the revenue acts with respect to taxes paid by it and the British Columbia Company, respectively, to the Dominion of Canada for 1919.
42. In determining the amount of $35,692.91 as the tax liability of plaintiff for 1920, the Commissioner credited the taxes imposed upon the plaintiff for 1920 by the Revenue Act of 1918 with $35,778.29 on account of taxes paid by plaintiff to the Dominion of Canada for 1919. The foreign tax credit in issue in this case is for $34,406.25 on account of taxes paid by the British Columbia Company, plaintiff's subsidiary, to the Dominion of Canada in addition to the foreign tax credit allowed plaintiff by the Commissioner for foreign taxes accrued on plaintiff's income for 1920.
All tax laws and statutes of the Dominion of Canada, including the business profits war tax act, 1916, of the Dominion of Canada, together with all amendments thereto, and the income war tax act, 1917, of the Dominion of Canada, together with all amendments thereto, have been stipulated.
43. Plaintiff filed claims for refund for 1917, 1919, 1920, and 1921, together with interest, as follows:
--------------------------------------------------------- | | Refund Claim filed | Year | claimed --------------------------------|-----------|------------ February 28, 1923 ............. | 1917 | $293,692.24 October 29, 1923 .............. | 1917 | 88,123.32 February 10, 1925 ............. | 1919 | 262,622.68 March 12, 1926 ................ | 1919 | 362,622.68 March 12, 1926 ................ | 1920 | 139,222.43 March 24, 1927 ................ | 1920 | 139,222.43 March 12, 1926 ................ | 1921 | 96,657.66 March 24, 1927 ................ | 1921 | 100,000.00 | | ---------------------------------------------------------
Original taxes.
Additional taxes.
The overassessments and overpayments shown by certificates of overassessment hereinbefore mentioned for 1917, 1919, 1920, and 1921 were allowed by the Commissioner upon claims made and grounds set out in the respective refund claims filed for said years.
The refund claims for 1920 set forth among other grounds, that invested capital for 1920 should be increased to include the cost and actual cash value of tangible property bona fide paid in for stock or shares of plaintiff disallowed by the Commissioner in the amount of $1,600,000; that invested capital for 1920 should be increased to include the amount of $447,623.09, by which the Commissioner reduced invested capital by reason of the alleged additional tax for 1918 assessed by him against plaintiff; that invested capital for 1920 should be reduced on account of the tax liability of plaintiff for 1919 by an amount based only upon the actual amount of such tax liability as finally determined and that invested capital should be increased to include the amount of reduction made by the Commissioner in excess of the correct reduction; and that the tax imposed upon plaintiff for 1920 should be credited with the amount of $33,686.59, omitted in the return but now claimed, by reason of income and war profits taxes of $61,111.23 paid by Foundation Company of British Columbia, Limited, as aforesaid.
44. April 30, 1932, plaintiff filed claim for refund of $362,909.43 paid for 1918, together with interest due thereon, for reasons in part as follows: "Because (1) the alleged jeopardy assessment of additional income and profits taxes against the Foundation Co., the taxpayer herein, for the taxable year 1918 is void, and the collection from the taxpayer of any income and profits taxes for 1918 was therefore barred after December 31, 1925, by the statute of limitations properly applicable thereto, * * * the taxpayer is entitled to the refund of the amount of $362,909.43, with interest which it paid, under protest and duress, on or about May 31, 1929, as alleged additional income and profits taxes for 1918."
45. After September 10, 1932, the Commissioner rejected the refund claim for 1918, and stated his reasons therefor in part as follows:
"Your claim for the refund of $362,909.43, income and profits taxes for the year 1918, has been examined and will be rejected for the following reasons.
"The claim is based upon the following contentions:
"(a) The collection of the deficiency in tax of $362,909.43 was barred by the statute of limitations.
"(b) Additional relief should be allowed under the provisions of section 328.
"(c) Net income should be reduced by $76,666.66, representing commissions applicable to the year 1918 but not paid until 1928.
"In connection with your contention that the collection of the above deficiency was barred by the statute of limitation you are advised that records of the Bureau disclose the following facts:
"In January 1924 a waiver was filed extending the statute of limitation for assessment of any deficiency to one year after the statute of limitations ran or until June 17, 1923. In February 1925 a second waiver was filed extending the statute until December 31, 1925.
"In December 1925 the Commissioner assessed a deficiency of $447,623.09 under the provisions of section 274(d) of the Revenue Act of 1924 ( 43 Stat. 297) due to the fact that the statute as extended by the above-mentioned waivers was about to expire. After the consideration of additional facts submitted the above deficiency was reduced to $362,909.43 and the difference of $84,713.66 was abated on schedule IT 29907, May 25, 1928.
"Under date of April 9, 1927, the Commissioner mailed to the taxpayer a formal notice of deficiency in the amount of $362,909.43. An appeal was filed with the United States Board of Tax Appeals within the prescribed time and under date of April 12, 1928, the Board issued an order dismissing the petition for lack of jurisdiction.
"On May 31, 1929, the above deficiency was paid to the Collector of Internal Revenue.
"You are advised that section 278(d) of the Revenue Act of 1924 ( 43 Stat. 298) reads as follows:
"`Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax.'
"Inasmuch as the tax in question was assessed in December 1925 and paid in May 1929 the Bureau holds that the collection was timely and made within the time as prescribed by section 278(d) of the Revenue Act of 1924."
Conclusion of Law.
Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court decides, as a conclusion of law, that plaintiff is not entitled to recover in case No. 42394, and its petition is dismissed; that in case M-155 plaintiff is entitled to recover $4,356.76, with interest as provided by law.
It is therefore ordered and adjudged that plaintiff recover of and from the United States $4,356.76, with interest at 6 per cent. per annum on $887.30 from August 10, 1921, and on $3,469.46 from April 8, 1921, to such date as the Commissioner of Internal Revenue may determine in accordance with section 177(b) of the Judicial Code, as amended by the Revenue Act of 1928, § 615(a), 28 U.S.C.A. § 284(b).
The sole question relating to the year 1918 involved in case No. 42394 is whether a jeopardy assessment of an additional tax made by the Commissioner on December 22, 1925, under section 274(d) of the Revenue Act of 1924, was illegal and void under the facts and circumstances disclosed by the record. While the tax liability of plaintiff for this year was under consideration by the Commissioner, plaintiff executed waivers of the statute of limitation, in the last of which the time within which the Commissioner might assess any additional tax found due was extended to December 31, 1925, and for an additional period of 60 days thereafter if a deficiency notice was mailed under section 274(a) of the Revenue Act of 1924 and no appeal was taken to the Board of Tax Appeals, and by the number of days between the mailing of a deficiency notice and the final decision by the Board if a deficiency notice should be mailed under section 274(a) and an appeal taken to the Board.
In December, 1925, the Commissioner was engaged in auditing plaintiff's tax liability for 1918 and had not reached a final decision with respect thereto for the reason that at the same time he was considering the tax liability of plaintiff for other years, and the questions involved in all of these years related to inventory and invested capital adjustments. As a result of this situation the Commissioner, because of the approaching expiration of the statute of limitation on assessment as extended by the waivers, made a jeopardy assessment on December 22, 1925, of an additional tax of $447,623.09 for 1918 under section 274(d) of the Revenue Act of 1924. After notice and demand for payment had been served by the Collector, a telephone conversation took place between plaintiff and the Commissioner, as a result of which immediate collection of the assessment was postponed by the Collector at the suggestion of the Commissioner, and plaintiff did not file any claim for abatement or bond. Plaintiff was fully able to pay any tax found to be due and the Commissioner did not make the jeopardy assessment because of any apprehension or belief on his part that collection of the tax would be jeopardized by the inability of the plaintiff to pay the amount which appeared at that time to be due. The Commissioner made the jeopardy assessment because he had not been able to reach a final decision as to the exact amount due and could not do so before December 31, 1925, when the statute of limitation would bar assessment and collection of any amount for 1918, unless a jeopardy 60-day deficiency notice was mailed under section 274(a) or a jeopardy assessment was made under section 274(d) of the Revenue Act of 1924. The matter of the correct tax liability for 1918 and also the tax liability for the years 1917 to 1926, inclusive, was thereafter considered by the Commissioner until he reached his final decision with respect thereto. The final decision of the Commissioner was that plaintiff owed an additional tax of $362,909.43 for 1918, all of which, except $88,561.38, was collected by credits of overpayments determined and allowed for the years 1917 and 1919 to 1921, inclusive, and for 1924 and 1926.
We are unable to concur in plaintiff's contention that the court may review the Commissioner's determination that a jeopardy assessment for 1918 should be made. The decisions of the United States Board of Tax Appeals and of the courts are uniform that the matter of whether he should make an additional assessment before he has reached a final decision with respect to the correct tax liability for any year is by the statute left wholly to the Commissioner, and that his belief, evidenced by such an assessment, cannot be inquired into by the court for the purpose of determining whether he was justified in believing that assessment or collection of the tax would be jeopardized if the assessment were delayed, or whether he should have pursued a different course that may also have been authorized by the statute. Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 48 S.Ct. 587, 72 L.Ed. 985; Appeal of California Associated Raisin Co., 1 B.T.A. 1251; Appeal of Oakdale Coal Co., 1 B.T.A. 773; Appeal of Estate of W.S. Tyler, 9 B.T.A. 255; James Couzens v. Commissioner, 11 B.T.A. 1040; Veeder v. Commissioner, 10 B.T.A. 884; Id. (C.C.A.) 36 F.2d 342; and Manz Corporation v. United States, 54 F.2d 177, 74 Ct.Cl. 5, 13. Counsel for the plaintiff makes a very thorough and interesting argument with reference to jeopardy assessments and the mailing of deficiency notices which is based upon the provisions and history of the Revenue Acts of 1921 and 1924 concerning determinations, assessments, and appeals with respect to taxes in excess of amounts shown upon returns filed. However, we are unable to find anything in this argument to convince us that a court may inquire into the matter of whether the Commissioner during his consideration and audit was justified in believing that an additional assessment should be made in order that collection of any additional tax finally determined to be due for the year or years under consideration might not be jeopardized. Section 274(a) and (d) provide as follows:
"(a) If, in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the taxpayer, except as provided in subdivision (d), shall be notified of such deficiency by registered mail, but such deficiency shall be assessed only as hereinafter provided. Within 60 days after such notice is mailed the taxpayer may file an appeal with the Board of Tax Appeals established by section 900. * * *
"(d) If the Commissioner believes that the assessment or collection of a deficiency will be jeopardized by delay such deficiency shall be assessed immediately and notice and demand shall be made by the collector for the payment thereof. In such case the assessment may be made (1) without giving the notice provided in subdivision (a) of this section, or (2) before the expiration of the 60-day period provided in subdivision (a) of this section even though such notice has been given, or (3) at any time prior to the final decision by the Board upon such deficiency even though the taxpayer has filed an appeal. If the taxpayer does not file a claim in abatement as provided in section 279 the deficiency so assessed (or, if the claim so filed covers only a part of the deficiency, then the amount not covered by the claim) shall be paid upon notice and demand from the collector."
The quoted section contemplates that when the Commissioner has reached a final decision as to the tax liability for any year he shall, if the tax determined is greater than that shown on the return and he concludes that there is no reason to believe that assessment or collection of the tax will be jeopardized by delay, mail a deficiency notice from which the taxpayer may, within 60 days thereafter, take the case to the Board of Tax Appeals for hearing and decision by that tribunal before payment. The section also contemplates that if, for any reason, the Commissioner believes that assessment or collection of any additional tax will be jeopardized by delay in making an assessment, he shall make an immediate assessment without mailing a 60-day deficiency notice if he has not completed his consideration and reached a final decision, and that such 60-day notice shall be given when he has completed his audit and made a final determination of the amount due. From this final notice the taxpayer may, if he has otherwise complied with the statute, take the case before the Board of Tax Appeals. Appeal of Joseph Garneau Co., Inc., 1 B.T.A. 75; Appeal of Terminal Wine Co., 1 B.T.A. 697. In addition, section 274 expressly provides that although the 60-day deficiency notice has been mailed, the Commissioner shall make an immediate assessment before an appeal is filed with the Board if he believes that the assessment or collection of the tax will be jeopardized by delay of assessment, and if no abatement claim is filed the amount so assessed shall be collected. The Commissioner is also authorized by this section to make such jeopardy assessment after an appeal has been taken to the Board of Tax Appeals and before that tribunal has decided the case. In the case at bar the Commissioner was clearly authorized to pursue any or all of the courses specified, but the fact that he followed one rather than another did not render his action illegal or arbitrary and subject to review by the court. It is admitted that assessment and collection of any tax for 1918 would have been barred within nine days if the Commissioner had not made the jeopardy assessment when he did, or if he had not ended his audit and consideration of the case by preparing and mailing to the plaintiff a 60-day deficiency notice of his final determination in respect of the tax liability for 1918.
The circumstances disclosed by the record indicate that the Commissioner, in making the jeopardy assessment, was endeavoring to comply with plaintiff's urgent request that the questions involved in the several years under consideration be expedited and finally determined as soon as possible (finding 24). By simply making a jeopardy assessment for 1918 under section 274(d) in order to protect the tax against the bar of the statute of limitation by reason of plaintiff's failure to offer an additional waiver — instead of mailing a jeopardy 60-day deficiency notice under section 274(a) — the Commissioner kept the year 1918, as well as other years, before him so that he could proceed therewith to a complete and final adjudication of all the matters in controversy, including special assessment, and close the cases by finally determining the tax liability for 1918 and scheduling the overpayments for other years. Both the Commissioner and the plaintiff were aware at that time that plaintiff had the right to have the final decision as to any year in which a deficiency, as defined by the statute, was determined, review by the Board of Tax Appeals even though a jeopardy assessment had been made. However, it was obvious that there would be great delay if the year 1918 was forced into the Board of Tax Appeals in the condition in which it was on December 22, 1925. Time would have been required to prepare and file a petition and the answer of the Commissioner, and to prepare for trial and to try the case before the Board. In the meantime, the overpayments for the years 1917 to 1926 would have been held up pending a decision of the Board as to the amount of additional tax due for 1918. If it be said that the Commissioner could have mailed a jeopardy 60-day deficiency notice and continued with his consideration of the case, the answer is that he was not required to do so, and the legislative history of the Revenue Act of 1926 ( 44 Stat. 9) discloses that this practice was not adopted to any extent until about 1927 when the special advisory committee was organized pursuant to the Revenue Act of 1926. Cf. Laurence R. Connor et al., Trustees, v. United States, 13 F. Supp. 455, 82 Ct.Cl. ___.
The making of the jeopardy assessment did not deprive plaintiff of any legal rights with respect to the tax for 1918 or any of the other years under consideration, and the only reason plaintiff's appeal to the United States Board of Tax Appeals from the Commissioner's final determination on April 9, 1927, for 1918 was not considered and decided by the Board on its merits was because plaintiff had not filed a claim for abatement and bond for the tax theretofore assessed by the Commissioner. But the fact that a bond was necessary in order that plaintiff might have the merits of the Commissioner's final determination reviewed by the Board cannot affect the legality of the assessment made under section 274(d) of the Revenue Act of 1924. The procedure followed by the Commissioner was expressly authorized by law and the statute expressly provided for both the assessment and the bond. The Commissioner was not bound to select one course of procedure in preference to another merely because the course which he did not pursue might have better pleased the taxpayer. Moreover, at the time the jeopardy assessment was made the Commissioner, as it appears under the facts and circumstances, was not in a position to mail a 60-day deficiency notice under section 274(a) disclosing a considered and accurate determination with respect to the tax liability for 1918, for the reason, as disclosed in his letters to plaintiff, that income and invested capital for 1918 were affected by inventory adjustments involved for a prior year and the tax for subsequent years under consideration was affected by inventory and invested capital adjustments for 1918. Although the Commissioner might have done so, it seems clear from the provisions of section 274(a) that it was not contemplated that the Commissioner should mail 60-day jeopardy deficiency notices in cases where he had not completed his audit and made a considered determination as to the tax liability for the year involved, thereby clogging the docket of the U.S. Board of Tax Appeals with ill-considered cases.
For the foregoing reasons, plaintiff is not entitled to recover any portion of the additional tax assessed and collected for 1918 or the overpayments allowed for other years involved in case No. 42394.
The remaining questions arise in case M-155, in which plaintiff seeks to recover an additional overpayment of $35,692.91 for 1920 and interest of $1,929.83 on an overpayment allowed for 1924. Plaintiff paid $139,529.52 by cash and credit for 1920. The Commissioner determined an overpayment of $103,529.52 which was applied as a credit against the additional tax assessed for 1918. In this determination the Commissioner fixed the correct tax of plaintiff for 1920 at $35,692.91 and plaintiff seeks to recover this amount with interest. The foregoing decision that the additional tax for 1918 was timely assessed disposes of plaintiff's claim that it is entitled to recover the 1920 overpayment allowed by the Commissioner on the ground that the 1918 tax against which it was credited was barred. Plaintiff contends, however, that the tax for 1920 was overpaid in the amount of $35,692.91 in excess of the overpayment allowed by the Commissioner. The alleged additional overpayment for 1920 is based upon the claims (1) that invested capital for 1920 should be increased in the amount of $341,562 in excess of that allowed by the Commissioner by reason of the acquisition by plaintiff in May 1917 of stock of the Foundation Company, a Delaware corporation, as disclosed in findings 2 to 16, inclusive; (2) that an additional credit of $34,406.25 should have been allowed against the 1920 tax by reason of certain income and profits taxes paid by a wholly-owned subsidiary of plaintiff to the Dominion of Canada; and (3) that invested capital for 1920 was erroneous and excessively reduced on account of 1918 and 1919 taxes.
In addition to the above, plaintiff seeks to recover an item of interest of $1,929.83 alleged to have been allowed but not refunded.
With reference to the invested capital, item (1) above, the issue is the amount which plaintiff is entitled to include in its invested capital for 1920 on account of certain transactions between itself and another corporation of the same name but incorporated under the laws of another state, and the stockholders of the two corporations. Plaintiff was incorporated under the laws of New York and the other corporation under the laws of Delaware.
Plaintiff was organized in 1902 at which time common stock was issued of a par value of $50,000. In 1903 it issued additional stock of the same par value, thus making its stock outstanding $100,000. All of the stock was issued for cash and tangible property of an aggregate cash value equal to the par value of such stock. The same stock was outstanding in 1911 when the first transactions took place between plaintiff and the Delaware company and the stockholders of the two corporations, as hereinafter shown.
The Delaware company was organized May 18, 1911, with an authorized capital stock of $2,100,000, consisting of 5,000 shares of preferred stock of a par value of $100 a share and 16,000 shares of common stock of a par value of $100 a share. May 19, 1911, the Delaware company issued all of its preferred stock (par value, $500,000) for $500,000 in cash, to certain individuals, six of whom owned all the stock of plaintiff and received one-half of the preferred stock of the Delaware company. On the same day the Delaware company issued all of its common stock to the stockholders of plaintiff for all the stock of plaintiff, par value of $100,000, and, in addition, paid to such stockholders $500,000 in cash. It will thus be seen that after this transaction was completed the Delaware company was the sole stockholder of plaintiff and that condition continued until May, 1917, when the situation was reversed and plaintiff acquired the stock of the Delaware company, as will be shown below.
May 17, 1917, plaintiff secured an authorization to issue 5,000 shares of preferred stock of a par value of $100 a share and 16,000 shares of common stock without par value in lieu of its existing stock of 1,000 shares of common stock of a par value of $100 a share. Then, or shortly thereafter, in May, 1917, plaintiff issued its preferred stock of $500,000 to the stockholders of the Delaware company for like stock of a like par value, and, in addition paid $50,000 to the preferred stockholders of the Delaware company. At or about the same time in May, 1917, plaintiff issued all of its common stock of 16,000 shares to the common stockholders of the Delaware company for the latter company's common stock of a par value of $1,600,000. Likewise at or about the same time plaintiff canceled the stock of the Delaware company and its original stock of a par value of $100,000, and shortly thereafter dissolved the Delaware company.
Plaintiff's contention is that the transaction in 1917 gave rise to a situation where, pursuant to section 326(a)(2) of the Revenue Act of 1918 and subject to the limitation of section 331 of the same act ( 40 Stat. 1092, 1095) it is entitled to have included in invested capital the actual cash value of the stock of the Delaware company at the time paid in for stock of plaintiff in 1917, but not in excess of the cost of such stock to the previous owners. The Commissioner has admittedly given proper recognition to all costs for things paid in to plaintiff other than on account of the 1917 stock transaction and has made proper adjustment on account of preferred stock. The question here presented is whether that which occurred in 1917 gave rise to an increase in plaintiff's invested capital on account of the market value attaching to the Delaware stock at the time plaintiff's new stock was issued therefor.
"(a) That as used in this title the term `invested capital' for any year means (except as provided in subdivisions (b) and (c) of this section); * * *
"(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus. * * *"
"In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 percentum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation."
We are of opinion that the claim for additional invested capital on this account is without merit. Nothing occurred in 1911 which gave rise to an increase in plaintiff's invested capital since in that year the Delaware company was formed and in a circuitous transaction became the holding company of plaintiff, having at its conclusion $500,000 of preferred stock and $1,600,000 of common stock outstanding and having as the asset back of this stock the entire stock of plaintiff, par value $100,000. Obviously, there was not thereby anything paid in to plaintiff.
The Delaware company continued to hold plaintiff's stock until May, 1917, when the situation was reversed. At that time plaintiff secured an authorization by which it issued $500,000 of preferred stock to the preferred stockholders of the Delaware company for preferred stock of the same par value and at the same time issued 16,000 shares of common stock without par value to the common-stock holders of the Delaware company for common stock of a par value of $1,600,000. Plaintiff then canceled all of the Delaware company stock, its own original stock of $100,000, and shortly thereafter dissolved the Delaware company. From this we find nothing being paid in or coming to plaintiff in the form of statutory invested capital. It would be legalistic fiction to say that anything was thereby paid to plaintiff. Nothing came to it but stock of the Delaware company which had back of it the original stock of plaintiff and both were immediately erased from the picture, leaving plaintiff where it started, in so far as anything being paid in is concerned, except for the fact it had increased its stock from common stock of $100,000 to preferred stock of $500,000 and common stock of 16,000 shares, without par value. Recognition of an increase in invested capital in such circumstances would thwart the purpose of sections 326 and 331 and would be contrary to the principles laid down in La Belle Iron Works v. United States, 256 U.S. 377, 41 S.Ct. 528, 65 L.Ed. 998, and subsequently followed. Appeal of Regal Shoe Co., 1 B.T.A. 896, and United Cigar Stores of America v. United States, 62 Ct.Cl. 134, and other cases based thereon, cited by plaintiff, did not involve comparable facts and cannot be considered controlling in the situation here presented. Plaintiff cannot therefore recover on this point.
With reference to the claimed additional credit of $34,406.25 in excess of the amount of $35,778.29 allowed by the Commissioner, the facts show that during 1920 and prior thereto plaintiff owned all the stock of the Foundation Company of British Columbia, Limited, a corporation of the Dominion of Canada. The Canadian corporation paid to the Dominion of Canada during 1921 and 1922 income and profits taxes of $61,111.25 on a net taxable income of $244,444.93 derived from sources without the United States. This amount was income of the Canadian corporation in 1919 and the aforesaid tax was paid by the Canadian Company on such income. The net income of plaintiff for 1920 as finally determined was $295,440.55, which included dividends of $150,000 received by it from the Canadian Corporation, which were not deductible under section 234 of the Revenue Act of 1918. These dividends were paid by the Canadian Company from profits realized by it prior to 1920. Both the Canadian Company and plaintiff employed the accrual method of accounting in keeping their books.
Plaintiff contends that inasmuch as the accrual method of accounting was used, it is entitled to a foreign tax credit of $34,406.25 against its tax for 1920 on account of the above-mentioned tax of $61,111.25 paid by the Canadian Corporation to the Dominion of Canada and this claimed credit it is based upon the provisions of sections 238 and 240 of the Revenue Act of 1918, 40 Stat. 1080, 1081 and section 238 of the Revenue Act of 1921, 42 Stat. 258. The Commissioner allowed plaintiff a foreign tax credit of $35,778.29 for 1920 on account of a tax of $58,993.54, which it paid to the Dominion of Canada, in respect of its income for 1919 but disallowed the claimed credit of $34,406.25 due the Dominion of Canada from the British Columbia Company, plaintiff's subsidiary, for the reason that the tax of the Canadian corporation upon which the claimed credit was based was not paid to the Dominion of Canada until subsequent to 1920. In this we think the Commissioner was correct. Section 238(a) of the Revenue Act of 1918 provided for a credit of the amount of any tax paid during the taxable year to any foreign country upon income derived from sources therein, and section 240(c), in providing how the credit to be allowed to a domestic corporation affiliated with a foreign corporation should be determined, provided that: "For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any * * * taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country * * * upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid."
The provisions of section 238(a) relate to credits for taxes paid to a foreign country by a domestic corporation. In that section the word "paid" means paid or accrued. The Commissioner allowed plaintiff the credit provided for in that section on account of that portion of the foreign tax accrued or which was paid by plaintiff. However, section 240(c) provided a different rule with respect to taxes "paid" by a foreign subsidiary of a domestic corporation. In such a case taxes accrued but not paid are specifically excluded as a credit by the statute. The actual payment to the foreign country is made the test of the credit. The Revenue Act of 1921 provided a different rule with respect to such credits, but that act was not retroactive and had no application to the year 1920.
With reference to the claimed interest of $1,929.83 for 1924 which is sought to be recovered on the ground that it was shown on the certificate of overassessment for 1924 and neither credited nor refunded, it appears that the Commissioner determined an overpayment of $31,807.50 for 1924, of which $22,589.55 was credited to 1918 and the balance to the tax of plaintiff as then determined for 1920 and 1921. The overpayment and the credit were allowed after the enactment of section 1116 of the Revenue Act of 1926 (26 U.S.C.A. § 1671 note). Inasmuch as the entire overpayment for 1924 was credited to taxes for prior years, no interest whatever was allowable under the statute on such overpayment. The Commissioner allowed no interest on the 1920 overpayment; however, by an entry made by the Collector the certificate of overassessment delivered to the plaintiff showed interest of $2,271.02 on that part of the 1924 overpayment credited against the 1918 additional assessment, $241.19 of which was applied by the Collector in connection with various credits which he made. The balance of $1,929.83, which is sought to be here recovered, was neither credited nor refunded. The entry by the Collector on the certificate of overassessment of the interest in question was clearly a mistake and was illegal and erroneous, and plaintiff is therefore not entitled to recover on this item.
The last item relates to adjustment of invested capital for 1920 on account of income and profits taxes for 1918 and 1919. In determining invested capital for 1920, the Commissioner reduced earned surplus by $447,623.09 representing the amount of the jeopardy assessment made in 1925 for 1918. He likewise reduced 1920 invested capital by an amount of tax determined for 1919, which was subsequently reduced without any change being made in 1920 invested capital on account of such reduction. In his final determination for 1920, the Commissioner erroneously reduced plaintiff's earned surplus in the amount of $108,359.83 on account of the 1918 and 1919 taxes. The correction of this error produces an overpayment for 1920 of $4,356.76 in excess of the overpayment determined and allowed by the Commissioner. This amount plaintiff is entitled to recover with interest in case M-155, and judgment in its favor will accordingly be entered.
Plaintiff is not entitled to recover in case No. 42394 relating to 1918 and the petition is dismissed. In case M-155 plaintiff is entitled to recover $4,356.76 with interest on $887.30 from August 10, 1921, and on $3,469.46 from April 8, 1921, to such date as the Commissioner may determine in accordance with section 177(b) of the Judicial Code as amended by the Revenue Act of 1928 (28 U.S.C.A. § 284(b), and judgment will accordingly be entered. It is so ordered.
GREEN, Judge, did not hear this case and took no part in its decision.