Opinion
Docket No. 17036.
1949-05-5
FRANK W. KEELER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Laurence Graves, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.
Petitioner deducted from his gross income for 1942 a war loss in accordance with the provisions of section 127, Internal Revenue Code. In a ‘third amended return‘ filed almost three and one-half years after the due date of the return for 1942, petitioner eliminated the war loss deduction taken for that year. If respondent had permitted petitioner to withdraw the war loss deduction involved he would not be required to include in his gross income the amount of the recovery of the war loss for the year of recovery to the extent required by section 127(c), Internal Revenue Code. Held, to protect the system of the annual accounting period and the orderly administration of the tax laws, petitioner's election to take the war loss deduction from his income for 1942 is treated as binding. Laurence Graves, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.
The respondent determined a deficiency in petitioner's income tax for the year 1943 in the amount of $3,910.34. The deficiency relates to both 1942 and 1943 because of the forgiveness feature of the Current Tax Payment Act of 1942. The pleadings raised four issues concerning adjustments by respondent to petitioner's 1942 and 1943 income, three of which have either been abandoned or stipulated. We are, therefore, confronted with only one issue: May petitioner, who deducted a war loss from his gross income for 1942, withdraw his claimed deduction for such loss by an amended return filed almost three and a half years after the due date of the return for the taxable year 1942?
The tax returns for the years involved were filed with the collector of internal revenue for the district of Colorado. Part of the facts have been stipulated and they are so found.
FINDINGS OF FACT.
Prior to 1942 petitioner purchased 141 4 per cent $1,000 par value bonds of the Philippine Railway Co. for $30,676.25. That company is a corporation, organized under the laws of the State of Connecticut, and it operates railway properties on the Islands of Cebu and Panay in the Philippine Islands.
In 1942 the Philippine Railway Co. had outstanding $8,549,000 of 4 per cent bonds. These bonds were listed on the New York, London, and Amsterdam stock exchanges. The volume of trading in these bonds on the New York Stock Exchange for the years 1942 to 1945, inclusive, was as follows:
+---------------+ ¦1942¦$836,000 ¦ +----+----------¦ ¦1943¦974,000 ¦ +----+----------¦ ¦1944¦1,971,000 ¦ +----+----------¦ ¦1945¦2,928,000 ¦ +---------------+
The price range for the bonds for the years 1942 to 1945, inclusive, with dates of high and low, was the following:
+----+ ¦¦¦¦¦¦ +----+
High Date Low Date 1942 * 4 1/2 Nov. 12 1 3/4 Feb. 13 1943 9 May 20 3 1/4 Jan. 6 1944 19 5/8 July 12 7 3/8 Jan. 7 1945 30 June 7 15 3/4 Jan. 3 FN* 4 1/2 per $100 par value of bonds.
The Islands of Cebu and Panay were seized by the Imperial Japanese Government on April 8 and 9, 1942, respectively.
At the time petitioner was required to file his income tax return for 1942 he did not know whether he was entitled to take a war loss deduction for the cost of the bonds of the Philippine Railway Co. He therefore requested an interpretation with respect to this from the respondent and, awaiting such interpretation, was granted an extension of time for filing his return for 1942. The respondent advised him that he was entitled to the deduction claimed, and in his 1942 return petitioner deducted approximately one-half of the war loss involved, or $14,701.25. He claimed only this amount through an oversight.
On April 19, 1943, petitioner filed a ‘first amended return‘ for the year 1942. In this return petitioner claimed deductions for the full amount of his war loss of $30,676.25. On April 30, 1945, petitioner filed a ‘second amended return‘ for the year 1942, which reflected no change in the war loss deduction.
On April 25, 1946, the revenue agent's report in the present proceeding was completed. This was delivered to petitioner in July 1946. On August 15, 1946, petitioner filed a ‘third amended return‘ for the year 1942. In that return he eliminated entirely his previously claimed deduction for the war loss involved. At the time of filing that return the Philippine Islands had been liberated from the Japanese.
Petitioner mailed checks to the collector of internal revenue for the district of Colorado in payment of income taxes for the calendar year 1943, which were deposited by the collector with the Denver branch of the Federal Reserve Bank as follows: April 22, 1944, $3.04, and September 4, 1946, $3,765.86. The check deposited April 22, 1944, in the amount of $3,04, was for taxes in the amount of $3.02 and interest in the amount of 2 cents.
In addition, the petitioner mailed to the collector a check in the amount of $554.84, covering interest on the above payment of September 4, 1946, amounting to $3,765.86, which was also deposited by the collector with the Denver branch of the Federal Reserve Bank on September 4, 1946.
OPINION.
HILL, Judge:
Petitioner here seeks by a designated ‘third amended return,‘ filed almost three and a half years after the due date of the return for the taxable year 1942, to withdraw his deduction of a war loss and recompute his tax for that year. Such war loss, which arose through the capture by the Japanese in 1942 of the property of the Philippine Railway Co., in which petitioner held bonds, was deducted by him from his gross income for 1942 after he had requested a ruling from the respondent as to whether he was entitled to do so under the provisions of section 127, Internal Revenue Code. He adhered to such deductions in two amended returns filed subsequent to his original one. Petitioner raises this issue because if he is allowed to withdraw his election to take the war loss involved he will not be required to report the amount of the recovery of such loss in the year of recovery to the extent required by section 127(c) of the Internal Revenue Code.
It is our opinion that petitioner's contention is untenable. We believe that, in accordance with section 127 of the Internal Revenue Code, the war loss involved was properly deductible by petitioner in the year 1942. The question he raises is an attempt not merely to arrive at a different computation of his tax for 1942, but also an effort to change the basis on which his computation of tax for a subsequent year will be made. If he is permitted to reopen his taxable year 1942 for the purpose of affecting his tax liability for other years, the result will be a departure from the rule of strict annual accounting and will place an unnecessary obstacle in the orderly administration of our tax laws. We think that, in the interest of the regular and ascertainable flow of revenue, petitioner's election to take the war loss deduction in 1942 must be treated as binding. We so hold. To conclude otherwise, we believe, would be a departure from the principle of Security Flour Mills Co. v. Commissioner, 321 U.S. 281, in which the Court stated as follows with respect to the scheme of the annual accounting period:
The rationale of the system is this: It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment and collection capable of practical operation.
The case at bar is also not distinguishable in principle from those involving a question of whether a husband and wife who filed a joint return could, after the due date of the return, recompute their tax on the basis of separate returns. In refusing to allow the taxpayer so to do, the United States Court of Appeals for the Tenth Circuit, in Champlin v. Commissioner, 78 Fed.(2d) 905, stated that:
To permit taxpayers to change their minds ad libitum for fifteen years would throw the department into inextricable confusion. The general rule is that where a taxpayer has exercised an option conferred by statute he cannot retroactively and ex parte rescind his action.
See also Rose v. Grant, 39 Fed.(2d) 340; certiorari denied, 283 U.S. 867; Bartlett v. Delaney, 75 Fed.Supp. 490; affd., 173 Fed.(2d) 535; Burke & Herbert Bank & Trust Co., 10 T.C. 1007.
It follows that respondent did not err in his determination.
Reviewed by the Court.
Decision will be entered under Rule 50.