Opinion
No. J-580.
June 1, 1931.
Suit by Lewis A. Crossett Company against the United States.
Petition dismissed.
Donald Horne, of Washington, D.C., for plaintiff.
G.H. Foster, of Washington, D.C., with whom was Chas. B. Rugg, Asst. Atty. Gen., for defendant.
This is a suit to recover an alleged overpayment of income and excess profits taxes for the fiscal year ended March 31, 1920. The plaintiff claims the Commissioner of Internal Revenue erred in the computation of its invested capital for the year, in refusing to include therein certain sums for good will.
Two issues are presented for determination: (1) The correctness of the Commissioner's action in excluding from plaintiff's invested capital the amount claimed for good will, and, (2) whether the plaintiff has filed a claim for refund within the requirements of the statutes and regulations upon which its suit may be maintained.
This case having been heard by the Court of Claims, the court, upon the report of a Commissioner and the evidence, makes the following special findings of fact:
1. At all times herein mentioned the plaintiff has been and now is a corporation duly organized and existing under and by virtue of the laws of the state of Massachusetts, with its principal place of business at North Abington, Mass.
2. Lewis A. Crossett, Inc., of Maine, was organized on August 15, 1902, and was the predecessor of the plaintiff corporation. The plaintiff corporation, Lewis A. Crossett Co., was organized as Lewis A. Crossett, Inc., of Massachusetts, on March 28, 1912. The name of the said corporation was changed in 1919 from Lewis A. Crossett, Inc., to Lewis A. Crossett Co. The business of the plaintiff and its predecessor has been that of manufacturing and distributing men's and women's shoes.
3. On the organization of the plaintiff corporation, it acquired all the assets of every name, kind, and character, including good will, trade-marks, trade-names, both tangible and intangible personal property, and assets of Lewis A. Crossett, Inc., of Maine, and issued and paid therefor $749,000 par value in its stock. Said transfer was made upon an agreed balance sheet as of October 1, 1911, as follows:
Assets:
Stock on hand ........... $116,239 98 Real estate and machinery 205,168 56 Accounts receivable ..... 847,726 65 Investments ............. 10,882 00 Cash .................... 111,129 44 Advances ................ 3,503 57 ___________ $1,294,650 20 Liabilities:
Bills payable ........... 389 09 Notes payable ........... 525,000 00 ___________ $ 525,389 09
It was agreed that of said property acquired, sufficient was to be taken at book value to pay at par for said stock, and the balance was to constitute a surplus at the organization of the corporation.
4. Plaintiff duly filed with the collector of internal revenue for its district its corporation income and profits tax return for the fiscal year ended March 31, 1920, and duly paid the sum of $288,118.94 therein shown to be due, said payments having been made in the years 1920 and 1921.
5. Thereafter, within five years from the time said return was filed, to wit, on March 24, 1925, plaintiff filed its claim for refund for $144,000, or such greater amount as was legally refundable, for said fiscal year ended March 31, 1920, stating as grounds therefor:
"In view of the fact that there appear to be adjustments of capital and income and tax, including the redetermination of the tax under special relief sections of the law, which will affect the tax liability of this corporation for the above period and in view of the approaching effective date of the statute of limitations, this claim is filed so that when the matters referred to are finally passed upon, if the result is an overassessment such overassessment can be refunded. Such data as has not already been filed in support of this claim for refund will be filed at a later date, including possible data covering grounds not mentioned herein but which it may be necessary to rely upon, in connection with which it is requested that we be granted an oral conference prior to final action upon this claim. The enumeration of the specific grounds upon which this claim is made shall not be construed to prevent the subsequent assertion of additional grounds as it is specifically stated that additional data in support of this claim and additional grounds for the claim will be filed at a subsequent date."
On June 13, 1925, plaintiff filed its claim for refund of "$1.00 or more" or such greater amount as was legally refundable for the same fiscal year ended March 31, 1920, stating as reasons why said claim should be allowed the following:
"Based upon the following data submitted in its brief to the Commissioner of Internal Revenue:
"(1) Accrual of State taxes fiscal year ending March 31, 1920.
"(2) Minor adjustments to invested capital.
"(3) Consideration of assessment under sections 327 and 328."
6. In Treasury Department letter of August 7, 1926, said claims for refund were denied.
7. On February 15, 1927, plaintiff filed its brief as additional data in support of its original claims for refund. Said brief requested that the original claims be reopened under TD-3240 on the ground of newly discovered evidence. The specific relief sought therein was that of special assessment under sections 327 and 328 ( 40 Stat. 1093). The brief further set out in detail the trade-marks of the corporation; the fact of the company's defense of the same, both by letters of protest against infringement, and in litigation; the cost of advertising the trade-marks and of circularizing the retail trade and the public as to the same; also, that large expenditures had been made therefor, which were shown in yearly amounts from 1902, the date of incorporation of the plaintiff's predecessor, up to the time of incorporation of the plaintiff and thereafter. The brief also claimed that a bona fide and responsible offer had been made to the corporation and refused in 1919 to purchase its assets on the basis of the valuation of its trade-marks of $1,000,000.
8. In Treasury Department letter of April 14, 1927, plaintiff's request for reconsideration of its application for assessment of its income and profits tax return under section 328 was denied; plaintiff was subsequently advised in Treasury Department letter of May 14, 1927, that the letter of April 14, 1927, was revoked and that the application for reconsideration had been granted, but that the evidence submitted failed to justify a computation of the tax under section 328, and the claims for refund were subsequently finally and officially rejected.
9. Lewis A. Crossett, Inc., of Maine, acquired and held the following trade-marks, all of which were acquired by the plaintiff corporation:
Name Date acquired
"Long Life" ......................... Apr. 22, 1902 "Makes Life's Walk Easy" ............ Oct. 21, 1902 "Long Life" ......................... Aug. 22, 1905 "The Crossett Shoe" ................. Aug. 29, 1905 "Makes Life's Walk Easy" ............ Sept. 26, 1905 "The Perfect Model Shoe" ............ Oct. 31, 1905 "Abbot" ............................. Nov. 14, 1905
The corporation charged one of its officers with the duty of protecting said trade-marks by watching the trade papers to discover any infringements, and by warning infringers, and in one instance by bringing and maintaining an expensive and successful litigation for that purpose.
10. To advertise its trade-marks and to build up a good will thereon, and to create among retailers the demand for its manufactured product, the Crossett Shoe, the Maine corporation expended between 1902 and 1909 large amounts in institutional advertising, namely by advertising the trade-marks in the trade magazines, and in McClure's, Munseys, Harpers, Scribners, and Success magazines, which advertisements were recorded and shown in a voluminous current scrapbook maintained by the Maine corporation, and by general newspaper advertising throughout the United States. Also copies and plates of advertisements were furnished retailers for use in advertising and creating a demand for the product. Trade-marks and the Crossett stamp were affixed to all shoes sold. Expenses and salaries were paid to salesmen who were employed to travel over the United States to introduce and to create popular acquaintance with the company's trade-marks and its shoes. Similar advertising was made through retailers in the United States and foreign countries between 1907 and 1908, which advertisements are shown also in a voluminous scrapbook placed in evidence by the plaintiff corporation.
11. Amounts were expended for advertising by the Maine corporation as follows:
Oct., 1902-Apr., 1903 ................. $ 8,534 85 Apr., 1903-Oct., 1903 ................. 16,285 62 Nov., 1903-Mar., 1904 ................. 16,263 69 Apr., 1904-Oct., 1904 ................. 16,765 89 Oct., 1904-Apr., 1905 ................. 19,994 71 Apr., 1905-Oct., 1905 ................. 22,984 58 Oct., 1905-Apr., 1906 ................. 31,594 83 Apr., 1906-Oct., 1906 ................. 27,551 56 Oct., 1906-Apr., 1907 ................. 33,440 78 Apr., 1907-Oct., 1907 ................. 37,974 44 Oct., 1907-Mar., 1908 ................. 20,706 29 Apr., 1908-Oct., 1908 ................. 20,513 39 Oct., 1908-Apr., 1909 ................. 21,730 65 Apr., 1909-Oct., 1909 ................. 13,086 30 Oct., 1909-Apr., 1910 ................. 23,086 81 Apr., 1910-Oct., 1910 ................. 25,754 49 Oct., 1910-Mar., 1911 ................. 17,520 51 Apr., 1911-Oct., 1911 ................. 20,327 03 Oct., 1911-Mar., 1912 ................. 21,071 77
All the above amounts were charged on the books of the company as current expenses of doing business, and no part thereof was capitalized.
12. The net earnings of the Maine corporation were as follows:
From incorporation until Apr. 1, 1903 (about one-half year), net earnings were $ 60,339 44 From April 1, 1903, to Oct., 1903 ........ 75,982 23 From Oct., 1903, to Apr. 1, 1904 ......... 50,652 30 From Apr. 1, 1904, to Oct., 1904 ......... 70,889 02 From Oct., 1904, to Mar. 31, 1905 ........ 111,565 62 From Apr., 1905, to Oct., 1905 ........... 84,564 10 From Oct., 1905, to Apr. 1, 1906 ......... 104,414 24 From April, 1906, to Oct., 1906 .......... 116,598 14 From Oct., 1906, to April, 1907 .......... 105,486 03 From April, 1907, to Oct., 1907 .......... 54,543 09 From Oct., 1907, to April, 1908 .......... 65,062 43 From April, 1908, to Oct., 1908 .......... 61,141 18 From Oct., 1908, to March 31, 1909 ....... 11,064 53 From April, 1909, to Oct., 1909 .......... 63,881 92 From Oct., 1909, to April, 1910 .......... 129,564 97 From April, 1910, to Oct. 1910 ........... 59,245 33 From Oct., 1911, to April, 1911 .......... 185,865 56 From April, 1911, to Oct., 1911 .......... 75,830 98 From Oct., 1911, to March 31, 1912 ....... 113,068 22
13. The capital of Lewis A. Crossett, Inc., of Maine was $300,000 in 1902. It was increased in April, 1906, to $500,000, and in April, 1911, to $750,000.
The outstanding capital stock of the plaintiff corporation on March 3, 1917, was $750,000.
The return of the plaintiff for the fiscal year ended March 31, 1920, showed the invested capital to be $1,664,181.41. The excess profits tax for that fiscal year were computed by the Commissioner of Internal Revenue on the basis of invested capital of $1,663,983.90.
14. The undivided profits and capital of Lewis A. Crossett, Inc., of Maine, at the end of the several periods during its existence, were as follows:
Undivided profits Capital
April, 1903 ........................ $ 9,339 44 $300,000 March, 1904 ........................ 54,573 97 300,000 April, 1905 ........................ 43,028 61 300,000 April, 1906 ........................ 7,006 95 300,000 April, 1907 ........................ 49,091 12 500,000 March, 1908 ........................ 108,666 64 500,000 March, 1909 ........................ 119,872 35 500,000 March, 1910 ........................ 178,319 24 500,000 March, 1911 ........................ 18,430 13 500,000
15. Plaintiff has at all times borne true allegiance to the government of the United States and has not in any way aided, abetted, or given encouragement to its enemies, or aided in rebellion against the government; plaintiff is the sole owner of the claim set forth in the petition herein, and has not assigned the same or any part thereof.
Donald Horne, of Washington, D.C., for plaintiff.
G.H. Foster, of Washington, D.C., and Chas. B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and WHALEY, LITTLETON, GREEN, and WILLIAMS, Judges.
The plaintiff sues to recover the sum of $100,000, with interest thereon, an alleged overpayment of its income and excess profits taxes for the fiscal year ended March 31, 1920.
The basis of the suit is that the Commissioner of Internal Revenue, in computing plaintiff's invested capital for the year in question, erroneously failed to include therein certain sums representing good will.
The plaintiff corporation upon its organization in 1912 acquired all the assets of every name, kind, and character, including good will, trade-marks, trade-names, both tangible and intangible personal property and assets of its predecessor corporation, Lewis A. Crossett, Inc., for which it issued and paid therefor, $749,000 par value of its stock.
The said transfer was made upon an agreed balance sheet which showed assets amounting to $1,294,650.20, and liabilities amounting to $525,389.09. There was no issue of stock for good will, and no good will appeared on the books of the predecessor corporation, no good will was listed on the balance sheet showing the assets of such corporation, which was the basis of the transfer, and, so far as shown, no good will was set up on the books of the plaintiff corporation. The expenditures for advertising trade-marks, etc., which had been made by the predecessor corporation, were by that corporation charged to current expense of doing business and were not capitalized.
Section 326(a)(4) of the Revenue Act of 1918 ( 40 Stat. 1092), which specifies the conditions under which intangible property may be included in invested capital, reads: "Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest. * * *"
The findings disclose that of the property transferred, sufficient was to be taken at book value to pay at par for the stock issued, and the balance was to constitute paid-in surplus. The net worth of the tangibles transferred, at their book value as shown by the balance sheet, was $769,261.11, for which stock in the plaintiff corporation at the par value of $749,000 was issued and paid, which makes a paid-in surplus of $20,261.11, as of the date of the transfer.
The good will which the statute authorizes to be included in invested capital is that for which payment has been made bona fide, "specifically as such," or good will bona fide purchased prior to named dates. Stewart Electric Co. v. United States, 65 Ct. Cl. 21.
Intangible property bona fide was not paid in for stock or shares on the transfer of the assets of the predecessor corporation to the plaintiff, and there can be no inclusion of good will in plaintiff's invested capital. A paid-in surplus may not be allowed in respect of an intangible asset. Colorado Continental Lumber Co. v. United States, 42 F.2d 327, 70 Ct. Cl. 413; Daily Pantagraph, Inc., v. United States, 37 F.2d 783, 68 Ct. Cl. 251.
The plaintiff, however, if otherwise entitled to recover, is barred from bringing this suit because of a failure to file a sufficient claim for refund of the taxes involved. The claim for refund filed March 24, 1925, stated the following grounds:
"In view of the fact that there appear to be adjustments of capital and income and tax, including the redetermination of the tax under special relief sections of the law, which will effect the tax liability of this corporation for the above period and in view of the approaching effective date of the statute of limitations, this claim is filed so that when the matters referred to are finally passed upon, if the result is an overassessment such overassessment can be refunded. Such data as has not already been filed in support of this claim for refund will be filed at a later date, including possible data covering grounds not mentioned herein but which it may be necessary to rely upon, in connection with which it is requested that we be granted an oral conference prior to final action upon this claim. The enumeration of the specific grounds upon which this claim is made shall not be construed to prevent the subsequent assertion of additional grounds as it is specifically stated that additional data in support of this claim and additional grounds for the claim will be filed at a subsequent date."
The second claim for refund filed June 13, 1925, stated as grounds for the allowance of such claim:
"Based upon the following data submitted in its brief to the Commissioner of Internal Revenue:
"(1) Accrual of State taxes fiscal year ending March 31, 1920.
"(2) Minor adjustments to invested capital.
"(3) Consideration of assessment under sections 327 and 328."
In neither claim did the plaintiff set out as a ground for the refund its right to an increase of its invested capital for the year by an inclusion of an amount for good will. The second claim stated three specific grounds: (1) Deduction for accrued state taxes; (2) minor adjustments to invested capital; and (3) special assessment.
The first ground, deduction for accrued state taxes, is not being urged in this suit, and whether or not it was allowed by the Commissioner is immaterial. The second ground, minor adjustments to invested capital, was allowed by the Commissioner. The third ground was based on the right of plaintiff to have special assessment. The plaintiff neither in this, nor the former claim for refund filed March 24, 1925, makes any mention of its right for a refund on the ground urged in this suit, that it is entitled to have included in invested capital an amount for good will. Colorado Continental Lumber Co. v. United States, supra.
Section 3226 of the Revised Statutes (section 1318 of the Revenue Act of 1921 [26 USCA § 156 and note]), provides that "no suit * * * shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been * * * illegally * * * collected * * * until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury. * * *" Article 1036, Treasury Regulations 62, provides that claim for refund shall be made on form 843 and that "all facts relied upon in support of the claim shall be clearly set forth. * * *"
The precise grounds upon which refund is demanded must be stated in the application to the Commissioner, and a taxpayer cannot base a recovery in court on an entirely different and distinct ground from that presented to the Commissioner. Red Wing Malting Co. v. Willcuts (C.C.A.) 15 F.2d 626, 49 A.L.R. 459; Feather River Lumber Co. v. United States, 66 Ct. Cl. 54; United States v. Felt Tarrant Mfg. Co., 51 S. Ct. 376, 75 L. Ed. ___, decided by the Supreme Court, April 13, 1931.
The plaintiff not having filed with the Commissioner of Internal Revenue within the time provided by law, a claim for refund setting forth the grounds relied upon in this action, cannot maintain suit in this court.
The petition will be dismissed. It is so ordered.