Opinion
No. H-133.
October 20, 1931.
Suit by the National Fire Insurance Company against the United States.
Petition dismissed.
This suit was brought to recover $15,057.94, income tax alleged to have been erroneously collected for 1916, with interest.
The first question is whether plaintiff filed a timely and sufficient claim for refund. On the merits plaintiff claims the Commissioner of Internal Revenue erred in refusing to allow as deductions from gross income policy loss claims, ordinary running expenses, contingent commissions, and taxes incurred and unpaid at the end of the year 1915 of $1,079,567.39, of which it paid during 1916 $770,526.97, and a state franchise tax of $35,500 paid during 1916.
1. During 1916, and for many years prior thereto, plaintiff was a stock fire and marine insurance company organized and existing under the laws of the state of Connecticut with principal office at Hartford. It was subject to the provisions of the Revenue Act of 1916, approved September 8, 1916, 39 Stat. 756, and February 21, 1919, filed its income tax return for the calendar year 1916 under said act of Congress and the regulations of the Treasury Department then in force and computed therein its net income on the paid and received basis as then required by the Commissioner of Internal Revenue. Upon said return the Commissioner of Internal Revenue assessed and demanded an income tax of $21,161.22 for 1916, which amount plaintiff paid June 11, 1917. Thereafter, on February 28, 1921, plaintiff prepared and filed with the Commissioner of Internal Revenue a claim for refund of $21,161.22, being the entire tax paid for 1916. The grounds of said claim for refund were set forth specifically in a statement thereto attached. This claim for refund and the statement thereto attached, setting forth the grounds thereof and the facts relied upon in support thereof, were in evidence as Exhibit B, and are made a part of this finding by reference. None of the grounds stated in this claim specifically mention or set forth the deductions upon which this suit is based. After setting forth five separate and distinct grounds, this claim contained the statement that: "Claimant further asks for the correction of all errors in the computation of its taxable income where caused by the inclusion or exclusion of items which should not have been so included or excluded in the computation of its taxable income. Claimant also asks for the refund of all taxes in any manner wrongfully or illegally collected from it together with all penalties and interest thereon collected for each of the years 1915 and 1916."
2. April 9, 1921, the Treasury Department ruled that inasmuch as stock fire insurance companies employed the accrual method of accounting, the tax would be computed on the accrual basis and returns should be rendered on that basis. This ruling was contained in "Bulletin H, Income Tax Rulings Peculiar to Insurance Companies." Paragraphs 15, 23, and 29 thereof provide as follows:
"15. Basis of return. — Returns of stock fire insurance companies will be rendered on an accrual basis, for the reason that such basis is in accordance with the method of accounting regularly employed by such companies, and clearly reflects their income."
"23. Policy payments. — The policy payments of a stock fire insurance company will consist of the gross amount accrued for losses, less salvage and reinsurance received or recoverable, but will not include any estimate for losses incurred but not reported during the taxable year."
"29. Net income and invested capital. — The net income and invested capital of stock marine insurance companies will be determined in the same manner as are the net income and invested capital of stock fire insurance companies."
Plaintiff had always employed the accrual method of accounting in keeping its books. Prior to filing the claim for refund on February 28, 1921, plaintiff amended its return for 1918, changing from the cash to the accrual basis. Prior to that time, under the then existing law and regulations, plaintiff's returns had been made and its taxes computed on the cash receipts and disbursement basis.
3. January 18, 1923, the Commissioner of Internal Revenue audited plaintiff's return for 1916 in connection with its claim for refund of February 28, 1921. He audited the return upon the accrual basis of accounting and computed the net income for 1916 on that basis. As a result he determined the correct tax liability for 1916 to be $16,240.15 and, by letter of that date, notified the plaintiff of the details of his audit and further notified it that its claim for refund for 1916 filed February 28, 1921, was allowed for $4,921.07 and rejected in the sum of $16,240.15. The audit disclosed by this letter of the commissioner was the first audit that he had made of plaintiff's return for 1916 and was the first notice to the plaintiff of the computation of its tax liability for that year on the accrual basis.
At the time of this audit and decision by the commissioner on plaintiff's claim for refund, the statute of limitation within which assessment could be made and claim for refund could be filed for 1916 had expired.
The commissioner duly issued a certificate of overassessment for $4,921.07, the amount for which the claim for refund had been allowed, and this amount was credited to an additional tax due by plaintiff for 1918.
4. March 31, 1925, plaintiff filed with the Commissioner of Internal Revenue a claim for refund of $16,240.15. This claim stated on its face as follows: "Original tax paid on return filed for 1916, $21,161.22; when commissioner made an audit of the 1916 returns, $4,921.07 was found to be overpaid and proper credit was given, leaving $16,240.15 as the tax liability for the year 1916. This claim for the refund of $16,240.15 is supplementary to the 1916 refunding claim filed February 28, 1921."
5. Attached to and made a part of this claim for refund was a written statement setting forth the grounds thereof. In this statement the plaintiff set forth a computation of income and deductions for 1916, showing deductions greatly in excess of its income for that year, and in this statement the grounds of this claim were stated as follows:
"It is believed that the adjustment items incurred in 1915 but paid in 1916 should be deducted in changing from the paid and received to the accrued and incurred basis of computing net taxable income for 1916.
"It is believed that claimant is entitled to deduct the net addition to loss claims reserve required to be made during the year under the provisions of the New York State insurance law, and this deduction should be used in determining its correct tax liability for the year 1916. See the decision of the Court of Claims in the case of Boston Insurance Company v. United States, 58 Ct. Cl. 603, dated Nov. 5, 1923.
"If the commissioner is not prepared to concede the correctness of the above computation, an oral hearing on this claim is respectfully requested.
"Claimant also asks for the refund of all taxes that may now, or hereafter, be properly refundable to it on account of having been illegally, erroneously, or in any manner wrongfully collected from it for the year 1916."
This claim for refund and the statement thereto attached are in evidence as Exhibit F and are made a part of this finding by reference.
July 17, 1925, plaintiff filed with the Commissioner of Internal Revenue an affidavit relating to the errors alleged in the computation contained in the statement attached to the claim for refund of March 31, 1925, which computation it alleged was based upon information contained in its annual statements filed with the State Insurance Department of Connecticut.
At the request of plaintiff, the Bureau of Internal Revenue granted it a conference, which was held August 12, 1925, at which plaintiff was notified through its attorneys that the claim for refund of March 31, 1925, could not be considered as supplementary to its original claim for refund of February 28, 1921, for the reason that the allegations of error contained therein were not directly made in the original claim and, further, that the claim of March 31, 1925, could not be considered upon its merits as an original claim for refund for the reason that it was not filed within the period of limitation prescribed by law for making claims.
August 2, 1925, plaintiff filed additional affidavits containing information concerning items set forth in the claim of March 31, 1925.
6. The Commissioner of Internal Revenue in his audit of plaintiff's return for 1916 on the accrual basis, as disclosed by his decision of January 18, 1923, refused to deduct any part of plaintiff's policy loss claims, ordinary running expenses, and taxes unpaid at December 31, 1915, on the ground that the same were incurred prior to 1916. Under the taxing act and the regulations applicable to plaintiff's return for 1915, it was allowed the deduction from gross income of only such policy loss claims, ordinary running expenses, and taxes as were paid during that year, as the return was made and the tax computed and paid thereon on the cash receipts and disbursements basis. For 1916 the commissioner allowed the deduction from gross income of only such policy loss claims, ordinary running expenses, and taxes as were incurred during that year, except the item of $35,500 franchise tax paid to the state of Connecticut during 1916, which item was not specifically claimed in either the original claim of February 28, 1921, or the claim of March 31, 1925, but which was included in the item of $97,571.70 set forth in the computation attached to the second claim and claimed as a deduction from gross income for 1916.
Plaintiff's policy loss claims, ordinary running expenses, and taxes unpaid at the end of the calendar year 1915 amounted to $1,079,567.39, as follows:
Policy loss claims, $804,567.39.
Ordinary running expenses, $27,739.34.
Contingent commissions, etc., $22,260.66.
Taxes, $225,000.
During 1916 and subsequent years plaintiff paid or otherwise canceled policy loss claims, ordinary running expenses, and taxes incurred prior to 1916 in the amount of $1,079,567.39. The commissioner allowed no deductions from gross income for 1915 or 1916 on account of these items.
During 1916 plaintiff paid a total of $770,526.97 on account of the aforementioned items unpaid at the end of 1915 as follows:
Policy loss claims, $495,526.97.
Ordinary running expenses, $27,739.34.
Contingent commissions, etc., $22,260.66.
Taxes, $225,000.
At December 31, 1908, plaintiff's policy loss claims amounted to $498,399.19 and unpaid taxes to $85,000.
7. May 5, 1926, the commissioner found that plaintiff's invested capital for years subsequent to 1916 had been decreased due to the fact that the taxpayer had failed to take adequate deductions in previous years, with the result that there had been an overpayment of tax for 1916 and, in accordance with the provisions of section 281(c) of the Revenue Act of 1924 (26 USCA § 1065 note), and solely because thereof, the Commissioner of Internal Revenue determined that there was a further overpayment of $1,182.21 for 1916. He accordingly issued a certificate of overassessment and on May 5, 1926, refunded this amount of $1,182.21 to the plaintiff.
Thereafter, on July 30, 1926, plaintiff wrote the commissioner further protesting his refusal to allow the items set forth in its claim of March 31, 1925. On September 28, 1926, the commissioner's office refused to reconsider the decision on the first claim and informed the plaintiff that in accordance with his present holding in such matters a recomputation of the tax for 1916 would show a deficiency instead of a further overassessment. This letter is in evidence as Exhibit 6 and is made a part of this finding by reference. Thereafter, on October 2, 1926, plaintiff further protested the commissioner's action and contended for the deductions claimed for 1916. November 1, 1926, the commissioner advised the plaintiff by letter that he had made a recomputation of the tax liability for 1916, and notwithstanding the claimed deduction of franchise tax of $35,500 paid to the state of Connecticut in 1916, such recomputation showed an additional tax of $1,813.23, but that inasmuch as the statutory period for assessment had expired the case would not be reopened for the assessment of any tax that might be due. This letter is in evidence as Exhibit 8 and is made a part of this finding by reference.
Guy Patten, of Washington, D.C. (A.R. Serven, John W. Smith, and John G. Carter, all of Washington, D.C., on the brief), for plaintiff.
Lisle A. Smith and Edward H. Horton, both of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (C.M. Charest, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The claim for refund of February 28, 1921, was filed in time, and on January 18, 1923, after the time allowed by law for the filing of a claim for refund and for the assessment of any tax for 1916 had expired, the commissioner upon consideration of this claim allowed it for $1,182.21 and rejected it for $15,057.94. No suit was instituted within two years after the rejection of this claim, and this suit, which was instituted December 18, 1928, is not based upon any of the grounds set forth in this claim.
The claim for refund filed March 31, 1925, was not supplementary to the first inasmuch as it was not filed until after the first claim had been decided and rejected in part, and for the further reason that the grounds thereof were different from the grounds stated in the first claim and were asserted for the first time nearly three years after the time for filing claim for refund for 1916 had expired. United States v. Felt Tarrant Mfg. Co., 283 U.S. 269, 51 S. Ct. 376, 75 L. Ed. 1025; Sugar Land Railway Co. v. United States, 48 F.2d 973, decided by this court April 6, 1931; Wausau Sulphate Fibre Co. v. United States, 49 F.2d 665, decided by this court May 4, 1931; and Wright Graham Co. v. United States, 50 F.2d 274, decided by this court May 11, 1931. The blanket claim contained in the claim of February 28, 1921, "for the correction of all errors in the computation of its taxable income where caused by the inclusion or exclusion of items which should not have been so included or excluded in the computation of its taxable income," is not sufficiently specific to warrant the institution of a suit or to authorize an amendment after the expiration of the statutory period for filing claims, and, particularly, after the commissioner has rejected the claim. United States v. Felt Tarrant Mfg. Co., supra. The fact that the Commissioner of Internal Revenue in his decision upon the claim of February 28, 1921, computed the plaintiff's tax liability for 1916 on the accrual basis, instead of the cash receipts and disbursements basis, does not give the second claim for refund of March 31, 1925, any greater validity than it would have otherwise.
The action of the commissioner on May 5, 1926, in allowing and paying a further overpayment of $1,182.21, was required by the specific provision in section 281(c) of the Revenue Act of 1924 (26 USCA § 1065 note), notwithstanding the expiration of the period of limitation for filing a claim, and this action was taken solely because of the provisions of that section and not because the plaintiff had filed a timely claim.
The claim of March 31, 1925, was not timely filed, and the action of the commissioner in refusing to allow it, as disclosed by his last letter of November 1, 1926, did not give the plaintiff a right to institute suit upon the grounds set forth in such claim under section 3226 of the Revised Statutes as amended (26 USCA § 156).
The petition is dismissed. It is so ordered.