Opinion
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. Joseph B. Morrell (hereinafter referred to as the "taxpayer") was, during all the times material hereto, a citizen of the United States, a resident of New York, New York, and a member of a partnership known as Baker, Carver & Morrell (hereinafter referred to as the "partnership"), engaged in the business of selling railroad, steamship, and marine supplies at Number 39-41 Water Street, New York, New York. That partnership was organized about 1894 and Mr. Baker died sometime prior to 1917. Thereafter, and particularly during the year 1917, the partnership was continued at the same location and under the same name by the taxpayers and Amos D. Carver as equal partners. The taxpayer died testate October 25, 1930. The plaintiffs, Robert W. Morrell and Frank W. Morrell, are the duly appointed, qualified, and acting executors of his estate.
2. The partnership filed its income and profits tax return for the calendar year 1917 on March 28, 1918, reporting thereon an invested capital of $1,121,365.12; a taxable net income of $499,387.91; a partnership excess-profits tax of $163,868.93; and a balance of $335,518.98 as net profit to be shared equally by the two partners. That return also reported salaries paid to the two partners in equal amounts of $87,500 each. The excess-profits tax of $163,868.93 was timely assessed and paid and is not in controversy herein.
Treasury Department Form 1065, on which the partnership reported its income and profits tax liability for the year 1917, contained the following marked spaces:
I. Total of Items G andH.........................
$499,387.91
J. Less excess profits tax, if any, for tax- ableyear....................................
163,868.93
__________
K. Net income to be shared by partners
335,518.98
3. After a field examination by a revenue agent and upon the basis of his report dated June 14, 1919, the Commissioner of Internal Revenue timely assessed on his August, 1919, list an additional excess-profits tax of $126,060.55 against the partnership. Notice and demand therefor was issued on November 10, 1919.
During the years 1917 to 1926, inclusive, Edward S. Greene was the duly appointed and acting attorney-in-fact for the partnership and for each of the two partners individually, in all their Federal tax matters pertaining to the calendar year 1917.
In a letter dated November 21, 1919, the partnership, acting through Greene as general manager and attorney-in-fact, acknowledged receipt of that notice and demand dated November 10, 1919, and asked for an extension of ten days in which to file a claim for abatement of the additional tax. On November 25, 1919, the partnership, acting through Greene as general manager and attorney-in-fact, filed a tentative claim for abatement and on December 4, 1919, Greene filed a supplemental claim for abatement on its behalf to which there was attached a six-page typewritten brief and protest against the revenue agent's report stating in substance that the additional assessment resulting therefrom was erroneous and excessive. In a letter dated January 7, 1921, the chief field deputy in the office of the collector of internal revenue, advised the partnership that he had been directed to take steps to satisfy the Government's claim for $126,060.55 tax for 1917.
In a letter dated March 11, 1921, the Commissioner of Internal Revenue advised the partnership that its claim for abatement had been considered and certain items allowed, resulting in an increase in taxable net income as reported upon its return from $499,387.91 to $544,488.87 and in a decrease of invested capital from $1,121,365.12 to $921,365.12; that a computation of tax liability upon the basis of these adjusted figures disclosed a tax of $214,929.49, resulting in an overassessment of $74,999.99. This letter concluded with a statement that the claim for abatement was therefore allowed for $74,999.99 and rejected as to $51,060.56. Since no part of the additional assessment of $126,060.55 had been paid the overassessment of $74,999.99 was abated.
4. On May 13, 1921, Greene, as attorney-in-fact for the partnership and the taxpayer, signed and mailed in a properly addressed and stamped envelope a letter acknowledging the receipt of the letter of the Commissioner of Internal Revenue dated March 11, 1921. The letter so mailed by Greene objected to the computation of tax liability made by the Commissioner for several reasons, asked to have the demand thereon deferred, and contained the following statement: "(6) A change in the excess profits' tax of the firm for 1917 affects the excess profits'-credit on the returns of the individual partners for that year. Would it be possible to have the credit due them, i.e., Mr. Joseph B. Morrell and Mr. Amos D. Carver, on their returns on this account taken care of at the same time?
Neither the original of this letter nor any copy thereof can now be found in the administrative files of the Bureau of Internal Revenue or in the office of the collector of internal revenue for the district in which the partnership and the taxpayer's returns were filed.
By letter dated June 6, 1921, the Commissioner replied to the partnership's previous inquiry bearing upon its claim for abatement of additional taxes for 1917. 5. In a letter dated May 22, 1923, addressed to the Commissioner by Greene, reference was made to the then outstanding and unpaid balance of $51,060.56, the remaining portion of the additional tax assessed on the August, 1919, list referred to in Finding 3. This letter for the first time requested that the profits-tax liability of the partnership for the calendar year 1917 be redetermined upon the basis of special assessment under the provisions of Section 210 of the Revenue Act of 1917, 40 Stat. 307.
By letter dated February 5, 1924, the Commissioner advised that the request for special assessment could not be entertained for the reason that it was not timely filed. In response to a brief and protest filed on or about February 11, 1925, the Commissioner reconsidered that action with the result that the partnership's claim for special assessment was allowed, and its tax liability for 1917 was redetermined under the provisions of Section 210 of the Revenue Act of 1917. By letter dated August 14, 1925, the Commissioner advised that the reaudit under special assessment disclosed the following:
Netincome........................................
$544,488.87
___________
___________
Excess-profits tax, Section 210 Tax assessed, Originalreturn, .............
161,005.37
Account #2800540..................
$163,868.93
Additional assessment, August 1919, page 1, line2..............
126,060.55
__________
Total Assessments...............
289,929.48
Less: Amount abated................
74,999.99
__________
214,929.49
__________
Overassessment.................................
53,924.12
Such letter also included the following statement:
"Inasmuch as your informal claim for assessment under the provisions of Section 210 was filed on May 22, 1923, that portion of the overassessment in the amount of $2,863.56 which applies against the tax assessed under the restrictions of Section 281(e) of the Revenue Act of 1924, 43 Stat. 302, cannot be refunded."
Thereafter and on or about January 16, 1926, a certificate of overassessment was delivered to the partnership showing a net overassessment for 1917 of $51,060.56 to have been abated. This disposed of the remaining unpaid balance of $51,060.56 of the additional partnership profits tax assessed as aforesaid on the August, 1919, list.
The allowance of special assessment and the resulting reduction in the profits-tax liability of the partnership, as aforesaid, also resulted in a change in the distributive shares of the two partners which were recomputed as follows:
Taxable netincome................................
$544,488.87
Less: Excess-profitstax..........................
161,005.37
__________
Amount to bedistributed.......................
383,483.50
Joseph B. Morrell (50.27%).........
$192,777.16
Amos D. Carver (49.73%)............
190,706.34
__________
383,483.50
Although these two men were, as hereinbefore stated, equal partners and entitled to share equally in the partnership profits, certain adjustments by way of interest were made to compensate each for the use by the partnership of prior years' profits not withdrawn and for withdrawals in excess of salary and accumulated earnings.
6. The taxpayer filed his individual income-tax return for the calendar year 19178 on March 28, 1818, reporting thereon a total gross income of $285,429.37; a total taxable net income of $248,914.74; and a tax thereon of $75,755.43, which was paid on June 5, 1918. A portion of this sum is sought to be recovered in the instant suit.
The taxpayer's gross income of $285,429.37, reported as aforesaid, included the sum of $168,779.14 as his distributive share of the net profits of the partnership of Baker, Carver & Morrell. As shown in finding 2, that partnership had reported taxable net income of $499,387.91, a partnership profits tax of $163,868.93, and the balance of $335,518.98 as distributable net income to be shared equally by the two partners. The taxpayer's share was one-half and would have been $167,759.49. He actually reported $168,779.14, as aforesaid, and the apparent explanation for his inclusion of the difference of $1,019.65, although not considered material to any controverted issue, is that it probably represented an interest adjustment as explained in the last paragraph of finding 5.
Treasury Department Form 1040, on which the taxpayer reported his income and profits tax liability for the calendar year 1917, did not contain any marked space or instructions for the credit provided for by section 29 of the Revenue Act of 1916 as amended by the Act of Oct. 3, 1917, 40 Stat. 337.
In determining and reporting his taxable net income and the tax due thereon, the taxpayer did not take as a credit against his net income his proportionate share of the partnership's excess-profits tax although, as shown in finding 5, the partnership's taxable net income had been reduced by that tax in determining the partnership profits distributable and taxable to him.
7. Pursuant to a waiver executed by the taxpayer and dated March 12, 1925, which was received by the Commissioner of Internal Revenue on March 14, 1925, and accepted in writing, a so-called 30-day letter was addressed by him to the taxpayer on March 28, 1925, proposing a deficiency of $24,091.93 in the taxpayer's tax liability for 1917. This letter was superseded by a further 30-day letter addressed to the taxpayer on August 17, 1925, proposing a deficiency of $19,490.09 in his tax liability for that year. On October 14, 1925, a so-called 60-day letter was addressed to the taxpayer showing, for the year 1917, "the determination of a deficiency in tax of $19,490.09, as shown in Bureau letter dated August 17, 1925." That amount was assessed upon the Commissioner's January, 1926, list. Thereafter and on December 8, 1926, the Commissioner sent to the taxpayer, by registered mail, another 60-day letter also showing a determination of the deficiency of $19,490.09 "as shown in Bureau letter dated August 17, 1925, and attached statement." The statement advised the taxpayer in detail of the computation of his tax liability and showed, among other things, that it was based upon a determined net income of $291,232.32 which included $192,777.16 as his share of the net profits of the partnership of Baker, Carver & Morrell, computed as shown in finding 5.
8. From the Commissioner's determination of deficiency, set forth in his letter of December 8, 1926, the taxpayer filed a timely appeal with the United States Board of Tax Appeals on February 7, 1927. On June 11, 1928, and before the Commissioner had taken any action with reference to the taxpayer's request, set out in paragraph 6 of the letter of May 13, 1921, the taxpayer's duly appointed and acting attorney-in-fact addressed a letter to the General Counsel, Bureau of Internal Revenue, wherein he proposed that the pending appeal be settled upon the basis of a recalculation of the taxpayer's tax under a ruling promulgated February 4, 1927, known as Treasury Decision 3971, C.B. VI-1, 246 (1927).
The taxpayer's attorney-in-fact wrote a further letter to the General Counsel, dated July 30, 1928. His offer was accepted and approved by the General Counsel and a redetermination of the taxpayer's tax liability was made upon the basis of the net income, as shown in the 60-day letter, reduced by $80,502.69, being one-half of the partnership profits tax of $161,005.37, determined as shown in finding 5. That computation showed the taxpayer's corrected tax liability of $60,177.82, a net payment of $75,755.43 on June 5, 1918, as shown in finding 6, and an outstanding and unpaid assessment of $19,490.09. On August 22, 1928, counsel for the respective parties filed a stipulation with the Board agreeing that a correct determination of the taxpayer's tax for the year 1917 disclosed an overpayment in the amount of $15,577.61. Pursuant to that stipulation the Board, on August 25, 1928, entered the following order in the taxpayer's case from which no appeal was taken:
"Ordered and decided: That, upon redetermination, there is an overpayment for 1917 of $15,577.61."
9. From and after the date on which the taxpayer's return for the year 1917 was filed, and continuing until February 4, 1927, the Commissioner had held that the distributive income of every partnership for the year 1917, a proportionate part of which was taxable to each of its partners, should be determined by reducing the partnership's taxable net income by the excess-profits tax imposed thereon and that the balance remaining (distributive income) should then be allocated to the partners upon their individual returns. However, he further held, at that time, that after thus allocating the partnership's distributive income to the partners, no credit should be allowed them upon their individual returns for their proportionate shares of the excess profits tax imposed upon and paid by the partnership.
On February 4, 1927, such practice of the Commissioner was changed with the promulgation of Treasury Decision 3971, C.B. VI-1, 246 (1927), containing a ruling that, in accordance with the decision of the Court of Appeals, Second Circuit, in Reid v. Rafferty, 15 F.2d 264, not only should the partnership's taxable net income be reduced by the excess-profits tax thereon, in determining the balance available for distribution to the partners, but in addition each partner should receive as a credit against the net income upon his individual return his proportionate share of such excess-profits tax.
The recomputation of the taxpayer's tax liability made in connection with the settlement of his appeal to the Board,l as shown in finding 8, was in accordance with the practice under Treasury Decision 3971, supra.
10. The additional tax and deficiency of $19,490.09, assessed against the taxpayer on the January, 1926, list, as shown in finding 7, was abated in full upon a schedule of overassessments signed November 12, 1928, and on November 27, 1928, a certificate of overassessment was delivered to the taxpayer.
11. No part of the overpayment of $15,577.61, found by the Board of Tax Appeals, has been repaid to the taxpayer or to the plaintiffs. Francis R. Lash, of Washington, D.C. (C. Leo De Orsey, of Washington, D.C., on the brief), for plaintiffs.
John A. Rees, of Washington, D.C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, Sp. Assts. to Atty. Gen., on the brief), for the United States.
Before WHALEY, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHITAKER, Judges.
PER CURIAM.
All the questions of law involved in this action and the facts that are material in determining them are identical to those presented in the companion case of Amos D. Carver v. United States, Ct.Cl., 27 F.Supp. 608, which was decided adversely to the plaintiff on May 29, 1939, and a motion for new trial has been overruled. Following the decision in that case, the petition must be dismissed and it is so ordered.