Opinion
Docket Nos. 111764 112652.
1944-01-27
M. C. PARRISH & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
R. B. Cannon, Esq., and Claude Collard, C.P.A., for the petitioner. Samuel G. Winstead, Jr., Esq., for the respondent.
1. Petitioner's principal business was that of purchasing at a discount warrants issued by the State of Texas payable out of the general revenue fund. It did not purchase these warrants from the state, but purchased them from the original payees thereof and held them from six to nine months until they were called in by the state and paid. Held, for the taxable years 1937, 1939, and 1940, the difference between the cost to petitioner of the warrants purchased and the amount later collected from the state is includable in gross income under section 22(a) of the Revenue Act of 1936 and of the Internal Revenue Code as gains, profits, and income derived from dealings in property and is not exempt from taxation as interest upon obligations of a state under section 22(b)(4) of the same act and code.
2. Upon the record, held, petitioner is entitled to certain deductions for bad debts for the years 1939 and 1940, which became worthless in those years.
3. Upon the record, held, petitioner is entitled to a certain deduction for depreciation for the year 1939.
4. In its return for 1937 petitioner reported the receipt of a certain amount which it labeled ‘Interest collected on State of Texas obligations.‘ It did not return this amount under the heading of ‘Gross Income‘ in schedule A of the return but did include it in schedule B under the heading of ‘Nontaxable and partially exempt income.‘ Under issue (1) above this amount is held by us to be properly includable in petitioner's gross income. The amount is in excess of 25 percent of the amount reported under the heading of ‘Gross Income‘ in schedule A. Held, the amount so reported by petitioner in schedule B was omitted from ‘gross income stated in the return‘ as that phrase is used in section 275(c) of the Revenue Act of 1936, and that the period of limitation upon assessment and collection is therefore five instead of three years after the return was filed as provided under the general rule in section 275(a) of the same act. R. B. Cannon, Esq., and Claude Collard, C.P.A., for the petitioner. Samuel G. Winstead, Jr., Esq., for the respondent.
These proceedings, duly consolidated, involve deficiencies in income and excess profits taxes determined by the respondent against petitioner for the calendar years 1937, 1939, and 1940 in amounts as follows:
+---------------------------------------------+ ¦Docket No.¦Year¦Income tax¦Excess profits tax¦ +----------+----+----------+------------------¦ ¦112652 ¦1937¦$538.75 ¦$475.09 ¦ +----------+----+----------+------------------¦ ¦111764 ¦1939¦3,482.43 ¦1,468.07 ¦ +----------+----+----------+------------------¦ ¦112652 ¦1940¦547.94 ¦None ¦ +---------------------------------------------+
In Docket No. 112652 petitioner assigned the following errors:
(a) The determination of deficiency Income and Excess Profits Taxes for the year 1937 is erroneous because the Statute of Limitations against the assessment of such deficiencies has heretofore expired.
(b) In the alternative, the petitioner pleads that if the Statute of Limitations has not expired with reference to the year 1937 (as set forth above), the respondent erred in computing net income for the said year 1937 in that he failed and refused to determine that the petitioner realized exempt income arising from discount on state warrants aggregating the sum of $15,512.52.
(c) In his determination of net income for the year 1940, the respondent failed and refused to determine that the petitioner realized exempt income arising from discount on state warrants aggregating the sum of $22,966.21.
(d) Respondent erred in failing and refusing to allow as a deduction from 1940 income debts owing to Petitioner in the total amount of $497.25 which became worthless within the taxable year 1940.
The Commissioner made one adjustment for the year 1940 which petitioner does not contest.
Assignment (d) was raised by an amendment to petition. On brief the respondent ‘concedes the petitioner is entitled to bad debt deductions for 1940 in the amount of $497.25.‘
In Docket No. 111764 petitioner assigned the following errors:
(a) The Commissioner of Internal Revenue failed and refused to determine that, during the said year 1939, the petitioner realized exempt interest-income from obligations of the State of Texas aggregating the sum of $48,093.67.
(b) Respondent erred in failing and refusing to allow as a deduction from Petitioner's 1939 gross income debts totaling $741.54 which became worthless within the taxable year.
(c) Respondent erred in failing and refusing to allow as a deduction, in determining Petitioner's 1939 net taxable income and income tax liability, depreciation in the amount of $359.29 sustained in 1939 with respect to a building and furniture and fixtures used in the operation of Petitioner's trade and business.
The Commissioner made two adjustments for the year 1939 which petitioner does not contest.
FINDINGS OF FACT.
Petitioner is a corporation chartered about April 1935 under the laws of the State of Texas, with its office and principal place of business located at Austin, Texas. The returns for the taxable years here involved were filed with the collector of internal revenue for the first district of Texas at Austin, Texas.
1. Issue as to warrants.— During the depression the Legislature of the State of Texas voted several series of ‘Texas Relief Bonds.‘ The money for the interest and sinking fund on these bonds was taken out of the general revenue fund (see art. 842b, sec. 7, Vernon's Civil Statutes of the State of Texas Annotated). This created a large deficit in the general revenue fund. Thereafter, warrants drawn on the general revenue fund could not be paid when issued. The warrants were issued in numerical order and paid in that way as funds came in from the various departments segregated to the general revenue fund. When a sufficient sum of money accumulated in the general revenue fund the practice was early adopted, and has since been continued, by the state treasurer of making what is known as a ‘call.‘ This is done by the state treasurer wiring, or calling a number or all of the banks in Texas on the day the call is made and by publishing at Austin a list of the warrants for which he has funds available for payment.
It was possible for a person, by close study of the state's affairs and keeping himself informed, to forecast with reasonable accuracy when a warrant would be paid. There could be ascertained from the comptroller's department the various collections going into the general fund, the type of collections, and the time when they would come in, and in this way the period for the call could be gauged. In 1937 the length of time that elapsed between the issuance of a warrant on the general revenue fund and its payment was from five to six months. In 1939 this period was approximately eight or nine months.
In 1931 petitioner's organizers, M. C. Parrish and Maud Potts, operated a small bank in the neighborhood of the University of Texas. In 1931 they paid off all the depositors, discontinued the banking business, and proceeded for a while to operate a small insurance company. Gradually, as a side line, they embarked on the practice of purchasing at a discount warrants drawn on the general revenue fund of the State of Texas from holders thereof who had received such warrants from the state in payment for goods or services. By 1935 this dealing in state warrants had grown to such proportions that in that year petitioner was organized to take over this business.
In the course of their dealings in general revenue fund warrants of the State of Texas petitioner's organizers, prior to the incorporation of petitioner, developed an established clientele consisting principally of contractors engaged in construction work and dealers in supplies purchased by the State of Texas. This clientele was taken over by petitioner upon its organization. The procedure followed in acquiring state warrants was substantially as follows:
The contractors or suppliers would place with the state a bid for construction work or for supplies. Before such bid was made the bidder would contact petitioner and have it give them its firm commitment to purchase the warrants that would be received from the state for the construction work, or for the supplies, in the event the bid was successful. Petitioner would analyze the condition of the general revenue fund and determine the probable length of time before payment of the warrant could be expected. Based on this estimate, a rate of discount would be fixed at which petitioner agreed to purchase the warrant from the contractor or supplier when issued to him. The contractor would then add the amount of this discount to the cash price of the article sold, or the construction work to be done, and submit his bid in one lump sum for an amount so determined. Immediately upon receipt of the warrant it would be sold to petitioner for its face amount less the amount of discount which the parties had agreed upon. Petitioner would then hold the warrant until called by the state treasurer and paid by him in cash.
In addition to petitioner's purchases at a discount of state warrants from contractors as detailed above, it also during the taxable years in question dealt in many such warrants acquired from state employees. The manner in which the petitioner acquired these warrants from state employees is stated more in detail hereinafter under issue 2, relating to bad debts.
The warrants in question call for the payment of a fixed sum but do not have a fixed maturity. They do not provide for the payment of interest and were not issued at a discount. A typical warrant is as follows:
+----------------------------------------------------------------------------+ ¦STATE COMPTROLLER ¦ +----------------------------------------------------------------------------¦ ¦of ¦ +----------------------------------------------------------------------------¦ ¦Public Accounts ¦ +----------------------------------------------------------------------------¦ ¦General Revenue ¦ ¦ ¦ ¦ ¦No. 388304 ¦ +----------------------+---+-----+---------+--------------------+------------¦ ¦Fund ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------------------+---+-----+---------+--------------------+------------¦ ¦Treasury Warrant ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------+---------+--------------------+------------¦ ¦The Treasurer of the State of ¦ ¦ ¦ ¦ ¦Texas ¦ ¦ ¦ ¦ +--------------------------------+---------+--------------------+------------¦ ¦Will Pay to the Order of ¦ ¦ ¦ ¦ +--------------------------------+---------+---------------------------------¦ ¦ ¦ ¦ ¦ ¦ ¦Austin, Texas ¦ +------------+---------+---+-----+---------+---------------------------------¦ ¦Date ¦Dept. ¦ ¦ ¦Appr. No.¦ ¦ ¦ +------------+---------+---+-----+---------+--------------------+------------¦ ¦Feb. 25 ¦43 ¦PB ¦SAF ¦D-26-B ¦QUINCY J. LOWMAN ¦$18.80 ¦ +----------------------------------------------------------------------------¦ ¦Exactly 18 Dollars 80 Cents ¦ +----------------------------------------------------------------------------¦ ¦Out of any money appropriated by an act of the Texas State Legislature ¦ +----------------------------------------------------------------------------¦ ¦Com. ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------+---------+---------------------------------¦ ¦[Signed] JESSE JAMES ¦ ¦[Signed] GEO. H. SHEPPARD ¦ +--------------------------------+---------+---------------------------------¦ ¦State Treasurer ¦ ¦ ¦State Comptroller of Public ¦ ¦ ¦ ¦ ¦Accounts ¦ +----------------------------------------------------------------------------+
Petitioner purchased the state warrants which it acquired from its customers at a discount of from one to one and a half percent, but never less than one percent.
In its Federal income and excess profits tax returns for the calendar years 1937, 1939, and 1940 petitioner disclosed the respective amounts of $15,512.52, $48,093.67, and $22,966.21 as income from discounting state warrants. It did not treat these amounts as taxable income, but treated them as interest on an obligation of the State of Texas, exempt from Federal income and excess profits taxation.
In the notices of deficiency from which these appeals are taken the respondent increased petitioner's reported income (loss) for the calendar years 1937, 1939, and 1940 by the said sums of $15,512.52, $48,093.67, and $22,966.21, respectively.
At some time prior to October 28, 1938, petitioner placed some of the warrants with certain banks as collateral security for loans from the banks. The loans were for the face of the warrant less the discount charged by petitioner when purchased by petitioner from employees of the state or contractors. The banks would charge petitioner interest on the average daily balances. As the warrants were called the banks would collect from the state the face value of the warrant and credit petitioner's account with the amount collected. This practice ceased with the death of M. C. Parrish, Sr., who died October 28, 1938. During 1939 these banks paid petitioner $28,834.25 which amount represented the difference between the interest charged petitioner by the banks and the discount petitioner had charged its customers. The $28,834.25 thus received by petitioner in 1939 was a part of the above mentioned amount of $48,093.67. Petitioner kept its books upon the cash receipts and disbursements basis.
2. Issue as to bad debts.— During the years 1939 and 1940 petitioner, among its other activities, made extensive small loans to salaried employees of the State of Texas. These loans were made in the form of cash advances against the issuance of the salary warrants that such employees expected to receive for their services to the state. Petitioner adopted the practice of advancing the earned portion of the salary due from the state to the employee under an arrangement whereby the funds advanced were charged to the employee's account with petitioner and petitioner was secured by an assignment of the borrower's salary warrant made in anticipation of the receipt of the warrant. Upon receipt of the warrant, usually delivered over by the state treasurer to petitioner direct, under the assignment to it, the discounted value of the warrant, less the cash loan or purchase advance and the interest or service charge made in connection therewith, was paid over by petitioner to the borrower-assignor. Within the taxable years 1939 and 1940 loans of this description made by petitioner, totaling $741.54 for the year 1939 and $537.25 for the year 1940, for various reasons became worthless and uncollectible.
Of the debts so becoming worthless in 1939, $498.95 was claimed as a deduction in petitioner's Federal income tax return for 1939 as a part of a deduction for bad debts in the lump sum amount of $5,299.40 charged off in the return and was allowed as a deduction from 1939 income by the respondent in his determination of the deficiencies for that year. The remainder of the debts so becoming worthless in 1939, totaling $242.59, was not charged off in petitioner's 1939 return, nor was any allowance therefor made by the respondent in his determination of the deficiencies for that year.
Of the debts so becoming worthless in 1940, totaling $537.25, no portion thereof was deducted by petitioner on its return for the year 1940, and no allowance therefor was made by the respondent in his determination of the deficiency for that year.
3. Issue as to depreciation.— In 1935, petitioner built on leased land a small frame office building, the outside walls of which were of metal lath with stucco over it; it had a composition roof and a wooden floor. The cost of this building when completed in 1935 was $1,135.80. As petitioner's business grew the building was added to in 1938 and again in 1940, so that petitioner's investment in the building at the close of each of the taxable years, from 1935 to 1940, inclusive, was as follows:
+-----------------------------------------------+ ¦Dec. 31, 1935¦$1,135.80¦Dec. 31, 1938¦$3,305.87¦ +-------------+---------+-------------+---------¦ ¦Dec. 31, 1936¦1,135.80 ¦Dec. 31, 1939¦3,305.87 ¦ +-------------+---------+-------------+---------¦ ¦Dec. 31, 1937¦1,135.80 ¦Dec. 31, 1940¦3,954.43 ¦ +-----------------------------------------------+
Petitioner's lease on the premises upon which this building was constructed had a term of 15 years from 1935, and under its provisions petitioner was obligated to move the building off at the termination of the lease and restore the ground to its original condition. It was not renewable. The composition roof and the stucco exterior of the building can not be salvaged to advantage as petitioner would just about break even in selling the salvage from the building and putting the land back in the original shape. For 1939 no depreciation was claimed in the return and no depreciation was allowed in the notice of deficiency for that year.
Because petitioner's lease will expire by its terms in 1950, the remaining useful life to petitioner of the building from 1937, 1938, 1939, and 1940 is 13, 12, 11, and 10 years, respectively.
For the years ended December 31, 1935 to 1940, inclusive, petitioner invested in furniture and fixtures in amounts as follows:
+----------------------------+ ¦1935¦$456.85¦1938¦$1,525.30 ¦ +----+-------+----+----------¦ ¦1936¦456.85 ¦1939¦1,940.00 ¦ +----+-------+----+----------¦ ¦1937¦888.46 ¦1940¦1,975.00 ¦ +----------------------------+
The useful life in petitioner's business of these furniture and fixtures was 10 years from the date of acquisition. Respondent has not allowed depreciation on petitioner's furniture and fixtures for 1939 because none was claimed on the return.
4. Issue as to statute of limitations.— Petitioner's ‘corporation income and excess profits tax return‘ for the calendar year 1937 was filed with the collector of internal revenue for the first district of Texas on March 9, 1938. The last day prescribed by law for the filing of the return was March 15, 1938.
The deficiency notice covering petitioner's income and excess profits tax liability for the calendar year 1937 was mailed to petitioner on July 17, 1942, which was more than three years but within five years after the return for 1937 was filed.
Under ‘Schedule A— NET INCOME COMPUTATION‘ of petitioner's return for 1937 petitioner reported, under the heading ‘Gross Income‘ opposite item ‘14. Total income‘ the figure $11,426.94 (this figure did not include any of the $15,512.52 profit which petitioner had earned in 1937 in dealing in Texas State warrants), under the heading ‘Deductions‘ opposite item ‘27. Total deductions‘ the figure $21,782.49, opposited item ‘28. Net income for excess-profits tax computation (item 14 minus item 27)‘ the minus figure $10,355.55, and opposite item ‘31. Net income for income tax computation‘ the minus figure $10,355.55.
Under ‘Schedule B.— RECONCILIATION OF NET INCOME AND ANALYSIS OF EARNED SURPLUS AND UNDIVIDED PROFITS‘ petitioner reported opposite item ‘19. Nontaxable and partially exempt income: (a) Interest on: (1) Obligations of a State, Territory, or political subdivision thereof, or the District of Columbia, or United States possessions‘ the figure $15,512.52. This is the same figure which petitioner contends is exempt from taxation under issue (1) herein.
A typewritten schedule attached to petitioner's return for 1937 contains the following statement:
+----------------------------------------------------------------+ ¦M C PARRISH & Co., 1937. ¦ +----------------------------------------------------------------¦ ¦Receipts: ¦ ¦ +------------------------------------------------+---------------¦ ¦Losses Recovered ¦100.00 ¦ +------------------------------------------------+---------------¦ ¦Services charges collected ¦3,566.08 ¦ +------------------------------------------------+---------------¦ ¦Commission on sale of Def. Warrants ¦3,357.66 ¦ +------------------------------------------------+---------------¦ ¦Suspense account (Cash overage) ¦4,403.30 ¦ +------------------------------------------------+---------------¦ ¦Total ¦[sic] 11,426.94¦ +------------------------------------------------+---------------¦ ¦Interest collected on State of Texas obligations¦15,512.52 ¦ +------------------------------------------------+---------------¦ ¦Total receipts ¦26,939.46 ¦ +----------------------------------------------------------------+
The above amount of $15,512.52 should have been included as a part of petitioner's gross income under schedule A of the corporation income and excess profits tax return which it filed for the year 1937. The ‘amount of gross income stated in the return‘ as that term is used in section 275(c) of the Revenue Act of 1936 did not include the said amount of $15,512.52. This $15,512.52 is in excess of 25 percent of the amount of gross income stated in petitioner's return for the calendar year 1937.
OPINION.
BLACK, Judge:
As indicated in our opening statement, the questions presented by the assignments of error are: (1) Did the respondent err in failing and refusing to hold that the profits earned and collected by petitioner in each of the years 1937, 1939, and 1940, with respect to warrants drawn by the treasurer of the State of Texas on the general revenue fund of the state, constituted interest on an obligation of the state specifically excluded from taxable income by section 22(b)(4) of the Revenue Act of 1936 and of the Internal Revenue Code? (2) Did the respondent err in failing and refusing to allow certain deductions for bad debts for the years 1939 and 1940? (3) Did the respondent err in failing and refusing to allow certain deductions for depreciation for the year 1939? (4) Is the assertion by the respondent of any deficiency in either income or excess profits taxes for the year 1937 barred by the statute of limitations? These questions will be considered in the order stated.
1. Petitioner contends that the amounts in question of $15,512.52, $48,093.67, and $22,966.21 represent interest upon the obligations of a state and as such are exempt from taxation under section 22(b)(4) of the Revenue Act of 1936 and of the Internal Revenue Code. The respondent contends that the amounts in question represent gains, profits, and income derived from dealings in warrants and as such are to be included in gross income under section 22(a) of the Revenue Act of 1936 and of the Internal Revenue Code. The material provisions of this section are substantially the same in both the act and the Code, and those of the Code are set out in the margin.
SEC. 22. GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income‘ includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *(b) EXCLUSIONS FROM GROSS INCOME.— The following items shall not be included in gross income and shall be exempt from taxation under this chapter;(4) TAX-FREE INTEREST.— Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, * * *
Petitioner argues that G. C. M. 10452, C. B. XI-1, p. 18, tends to support its contention, but has cited no court decision or other authority in its favor. The notes involved in G. C. M. 10452 were issued at a discount, which at once distinguishes that ruling from the situation here. The warrants involved in these proceedings were not issued at a discount, notwithstanding petitioner's contention to the contrary. Petitioner contends that since prior to the submission of their bids to the state some of the payees of the warrants secured petitioner's commitment as to the rate of discount at which it would purchase the warrants and since this discount was included as a part of the bid price, namely, the market price plus the discount, the practice of the state ‘in issuing its general revenue fund warrants, under the circumstances described, constituted nothing more nor less than the borrowing of money on its noninterest-bearing obligations issued at a discount.‘ We do not agree with that contention. It is our opinion that the entire amount of the warrant is the purchase price which the state agreed to pay for the particular commodity in question or the cost of the services in those cased where warrants were issued for services rendered the state. Cf. Daniel Bros. Co. v. Commissioner, 28 Fed.(2d) 761; Henrietta Mills, Inc. v. Commissioner, 52 Fed.(2d) 931. During the taxable years in question the person or firm making the bid would submit the bid in one lump sum without breaking it down to show any element of discount.
A simple illustration, we think, will show the error of petitioner's contention that the State of Texas was selling its warrants at a discount. Suppose that a contractor who sold the State of Texas certain grocery items for its penitentiary system received a state warrant for the amount of the goods which he sold and, instead of selling the warrant at a discount, kept it until there was money in the general fund to pay it and collected it is full. Would such contractor have to return in his gross income any interest or discount earned on his state warrant? We think not. The State of Texas had not issued the warrant to him at a discount. It had simply paid him the agreed purchase price for his goods. He may have added something to the price of his goods to take care of the delay which would transpire before he got his money, but that certainly would not be interest or discount. This illustration is equally applicable to the salary warrants of state employees, in which the evidence shows petitioner had many dealings. The state added nothing to the face amount of the warrants to take care of the lapse of time before they would be paid. If an employee kept his warrant until there was money in the general fund to pay it, he collected his salary in full. If he did not keep it until there was money in the general fund to pay it but sold it at a discount to a dealer such as was petitioner, he of course suffered a loss, but such loss does not represent any interest or discount on state warrants so far as the state is concerned. The loss came out of the employee's pocket and not out of the state's.
We hold that the amounts in question are not exempt from taxation as interest upon obligations of a state under section 22(b)(4), but should be included in gross income within the specific provisions of section 22(a) and the rationale of Willcuts v. Bunn, 282 U.S. 216.
Petitioner offered some evidence with the intention of contending that in any event $28,834.25 of the $48,093.67 included in its gross income for 1939 should be excluded on the ground that, if income, it was income in prior years. There was no assignment of error to this effect. But, aside from that objection, the evidence shows that petitioner received the $28,834.25 in 1939 from banks with which it had been dealing and had not reported it as income in any prior year, and, since it reported on the cash receipts and disbursements basis, the amount was properly included in petitioner's 1939 income.
2. Petitioner, by amendments to the respective petitions filed in these proceedings at the hearing, assigned error on the part of the respondent in failing and refusing to allow as deductions for bad debts $741.54 in 1939 and $497.25 in 1940. The reason for these amendments was due to the change in the law
relating to bad debts as enacted in section 124 of the Revenue Act of 1942, the material provisions of which are in the margin.
At the hearing petitioner proved that certain debts totaling $741.54 had become worthless within the taxable year 1939, and that certain debts totaling $537.25 had become worthless within the taxable year 1940. The returns offered in evidence disclosed that petitioner had deducted as bad debts the amount of $5,299.40 in 1939 and no amount as bad debts in 1940. In his determination of the deficiencies the respondent made no adjustments regarding bad debts for either year. In his brief the respondent contended that in the absence of evidence showing that no part of the debts totaling $741.54 was contained in the larger amount of $5,299.40, no additional allowance should be made for the year 1939; and that for the year 1940 petitioner should be limited to $497.25, the amount claimed in the amendment to the petition. Subsequent to the filing of briefs petitioner filed a motion, which was granted, ‘To Reopen Record and for Leave to Take and File Deposition,‘ and the parties thereafter stipulated that, of the $741.54 of debts which became worthless within the year 1939, $498.95 was included in the larger amount of $5,299.40 and $242.59 has never been deducted by petitioner or allowed by respondent.
SEC. 124. DEDUCTION FOR BAD DEBTS, ETC.(a) GENERAL RULE.— Section 23(k) (relating to bad debts and securities becoming worthless) is amended to read as follows:‘(k) BAD DEBTS.—‘(L) GENERAL RULE.— Debts which become worthless within the taxable year; * * *(d) EFFECTIVE DATE OF AMENDMENTS * * * and the other amendments made by this section shall be effective with respect to taxable years beginning after December 31, 1938.
We hold that for the year 1939 petitioner is entitled to an additional allowance for bad debts in the amount of $242.59, and that for the year 1940 petitioner is entitled to an allowance for bad debts in the amount of $497.25. The proof showed that debts owed petitioner to the amount of $537.25 became worthless in 1940. However, petitioner in assignment of error (d) for 1940 alleged error only as to bad debts of $497.25.
After the hearing petitioner filed ‘Motion to Amend Pleadings to Conform to Proof.‘ The grounds of this motion were ‘That at the hearing had in these proceedings the right of Petitioner to deductions for depreciation and bad debts in excess of the amounts formally plead was clearly established.‘ This motion was granted. However, petitioner has not filed any amendments to its petition since the granting of said motion. After the granting of this motion petitioner should have filed amendments which pointed out the increased deductions for which it was contending. See Rule 17, our Rules of Practice. Petitioner having filed no amended assignments of error to conform to the proof, our decision is limited to the assignments of error in the original petition and in amendments to the petition which were properly filed at the hearing.
3. Petitioner, by an amendment to petition in Docket No. 111764 filed at the hearing, alleged that the respondent erred in not allowing a deduction of $359.29 for depreciation of its building and furniture and fixtures for the year 1939. Based upon the proof offered at the hearing, the respondent concedes that petitioner is entitled to depreciation for the year 1939 of $256.56 on the building and $194 on the furniture and fixtures. These amounts exceed by $91.27 the amount asserted by petitioner in its assignment of error for 1939. However, since the Commissioner concedes the larger total and the evidence sustains it, the amounts conceded by respondent will be allowed in the computation under Rule 50.
4. Are the deficiencies for 1937 barred? The applicable statute is section 275 of the Revenue Act of 1936, the material provisions of which are in the margin.
SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.Except as provided in section 276—(a) GENERAL RULE.— The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.(c) OMISSION FROM GROSS INCOME.— If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.(d) For the purposes of subsections (a), (b), and (c), a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
The return for the calendar year 1937 was filed on March 9, 1938, but under section 275(d) it shall be considered as if it was filed on March 15, 1938. See section 53(a), Revenue Act of 1936. The deficiency notice was mailed on July 17, 1942. Therefore, if the three-year period provided for under section 275(a) is applicable, the deficiencies are barred; and if the five-year period provided for under section 275(c) is applicable, the deficiencies are not barred.
In Emma B. Maloy, 45 B.T.A. 1104, we had occasion to construe the term ‘gross income‘ as used in section 275(c) of the Revenue Act of 1934, which section is identical with section 275(c) of the Revenue Act of 1936. In the course of our opinion we said:
* * * We think it evident that the term ‘gross income‘ as used in section 275(c), supra, refers to the statutory gross income required to be reported on the return. The heading, ‘Gross Income‘, on the form of the return calls for the inclusion there only of gross taxable income. That amount does not include that portion of capital gain which is not to be taken into account in computing taxable income, nor does it include nontaxable interest on Government securities. Section 275(c) refers to the omission from gross income of an amount ‘properly includible therein‘ * * * .
Did petitioner omit the amount of $15,512.52 in question for the year 1937 from its gross income as stated in the return? We held under the first issue that this amount was properly includable in petitioner's gross income for 1937 under section 22(a) of the Revenue Act of 1936. Petitioner twice reported the amount in its return, once under schedule B as nontaxable income and again in the typewritten schedule as a part of the ‘total receipts,‘ but at neither place was the amount reported as ‘gross income.‘ The term ‘gross income‘ is defined in section 22(a), supra. See footnote 1; see also Emma B. Maloy, supra. Petitioner did not report the amount of $15,512.52 as gross income under section 22(a); it reported the amount as an exclusion from gross income under section 22(b)(4). Although an amount may be disclosed fully on the return, if it is not reported as a part of the gross taxable income, it is not a part of the ‘gross income stated in the return‘ as that phrase is used in section 275(c), supra. Emma B. Maloy, supra; Estate of C. P. Hale, 1 T.C. 121; American Liberty Oil Co., 1 T.C. 386; Katharine C. Ketcham, 2 T.C. 159; American Foundation Co., 2 T.C. 502. In the typewritten schedule of ‘Receipts‘ attached to the return the amount was labeled ‘Interest collected on State of Texas obligations.‘ If this had been the proper label, such ‘receipts‘ would not have been includable in petitioner's gross income under section 22(a), but would have been specifically excludable from gross income and exempt from taxation under section 22(b)(4). The latter way is the way in which petitioner reported the receipts of $15,512.52, and it still contends under issue (1) that this amount should be excluded from gross income. We hold that petitioner omitted from its ‘gross income stated in the return‘ the amount of $15,512.52. The amount of ‘gross income stated in the return‘ was $11,426.94. Since the amount omitted from gross income was properly includable therein, and since this amount is in excess of 25 percent of the amount of gross income stated in the return, it follows that the deficiencies for the year 1937 are not barred by the statute of limitations.
Decisions will be entered under Rule 50.