Opinion
No. J-253.
March 5, 1934.
Paul Armitage, of New York City, for plaintiff.
George H. Foster, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen. (E.H. Horton, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by W.H. Bradford Co., Inc., against the United States.
Judgment for the defendant.
Plaintiff instituted this suit to recover an alleged overpayment of income and profits tax of $15,615.05 for the calendar year 1920 with interest. This claimed overpayment is based on the tax liability determined by the Commissioner of Internal Revenue under section 328 of the Revenue Act of 1918 ( 40 Stat. 1093), in connection with which determination he refused to allow a deduction from gross income for 1920 of $38,341.72 excluded by plaintiff from its gross income in its return for 1920 and now claimed as a worthless debt or loss arising out of a shipment of coal to the Tidewater Coal Exchange, a pool formed by the government in 1917 to facilitate the handling of coal, which ceased to operate in 1920, became insolvent, and early in 1921 went into the hands of a receiver. This overpayment is computed on the basis of the profits tax rate of 64.162 per cent. determined by the Commissioner under section 328 of the Revenue Act of 1918.
Special Findings of Fact.
1. Plaintiff, a Pennsylvania corporation engaged in buying and selling coal, filed a consolidated income and profits tax return for the calendar year 1920 on March 15, 1921, showing a tax liability of $374,030.68, of which $361,783.32 was paid and a claim for abatement of the balance of $12,247.36 was filed. Thereafter, in June, 1922, plaintiff filed an amended consolidated return seeking certain adjustments not involved in this case and corrections of certain errors in its books of account, accompanied by a claim for refund of $13,492.81. Thereafter, on January 26, 1926, it filed a second claim for refund of $162,119.38.
2. In making its original and amended returns for 1920, plaintiff excluded from its gross sales shown therein and from its gross income for said year an item of $38,341.72, representing the value of coal shipped by it to the Tidewater Coal Exchange, New York, at the ports of New York, Philadelphia, and Baltimore. This item was not included in its inventory of coal on hand in these returns. The purpose and effect of the exclusion of this item from gross sales and gross income by plaintiff were to reduce its income in that amount for that year on the ground that this amount represented a loss or a worthless debt in the taxable year. In the examination and audit of the tax liability for 1920, the Commissioner denied this deduction and increased income accordingly in his final decision fixing net income for the purpose of the income and profits tax, and for the purpose of selection of comparatives and determination of the profits tax rate under section 328.
In its claim for refund of January 26, 1926, plaintiff requested special assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918 ( 40 Stat. 1093), and the Commissioner of Internal Revenue, in considering this claim and in determining the tax liability for the year involved, granted special assessment and computed plaintiff's tax liability for such year under the provisions of said sections, as requested. As a result of the allowance of special assessment and the computation of the tax under section 328, and certain other adjustments not in question here, the Commissioner, on August 4, 1927, notified plaintiff of the result of his decision in which he allowed the abatement claim for $12,247.36 and allowed in part the two round claims in the amount of $126,961.97 and rejected the balance of $48,650.23. This suit was instituted within two years after the disallowance of these claims.
3. The final decision of the Commissioner in respect to plaintiff's tax liability for 1920, as set forth in his letter of August 4, 1927, was as follows:
"Reference is made to your income and profits tax return for the calendar year 1920, and to that of your affiliated company, the Huey Supply Company.
"You are advised that after careful consideration and review, your application under the provisions of section 327 for assessment of your profits tax as prescribed by section 328 of the Revenue Act of 1918 has been allowed. Your profits tax is based upon a comparison with a group of representative concerns which in the aggregate may be said to be engaged in a like or similar trade or business to that of your company.
"The tax computation under the abovementioned provisions is shown as follows:
Profits tax (section 328) ............................ $209,239.12 Net income as shown in Bureau letter of May 12, 1926 ................ $612,493.50 Less:
Interest on U.S. obligations not exempt ............... $ 2,470.46 Profits tax ............ 209,230.12 Exemption .............. 2,000.00 _____________ 213,709.58 ___________ Taxable at 10 percent ............... $398,783.92 39,878.39 ___________ Total tax ........................................ $249,117.51 Less: Income tax paid Canadian Government ............ 14,296.16 ___________ Correct tax liability ............................ 234,821.35 Previously assessed account no. 423056 ............... 374,030.68 ___________ Overassessment ................................... $139,209.33
"In accordance with the above conclusions, your claim for the abatement of $12,247.36 will be allowed in full, and your claim for refund of $13,492.81 and $162,119.38 will be rejected for $48,650.22.
"The overassessment shown above will be scheduled at the expiration of thirty days from the date of this letter in the form of a certificate of overassessment which will reach you in due course through the Office of the Collector of Internal Revenue for your district, who thus will be officially notified of the rejection."
Had the Commissioner of Internal Revenue, instead of allowing plaintiff's request for special assessment and computing the profits tax under section 328, determined the tax liability for 1920 on the basis of plaintiff's statutory invested capital and net income and excluded from such income as a loss the amount of $38,341.72 claimed by plaintiff, the profits tax liability would have been $216,498.66 instead of $209,239.12, as determined under section 328, and the income tax liability would have been $35,318.27, instead of $39,878.39; and, after deduction from the total of these two amounts the credit for foreign taxes, the total income and profits tax would have been $237,520.77 instead of $234,821.35, as determined, or $2,699.42 in excess of the amount exacted by the Commissioner.
In this action plaintiff seeks to have the court reduce the net income of $612,493.50, as found by the Commissioner of Internal Revenue in granting special assessment, by the amount of $38,341.72, claimed as a loss or worthless debt deduction, and then apply to the changed net income the profits tax rate of 34.162 per cent. determined and employed by the Commissioner in his computation, and, upon such computation of plaintiff's income and profits tax, enter judgment for an overpayment of $15,615.05.
The defendant contends that the court is without jurisdiction to inquire into the merits of the claim presented by plaintiff for the reason that the Commissioner allowed plaintiff's request for special assessment and computed its profits tax liability under the provisions of section 328 of the Revenue Act of 1918 and that any change in the net income for the taxable year would alter the Commissioner's administrative discretionary findings. We think the defendant's position is well taken.
Inasmuch as the court is without authority to review the action of the Commissioner in determining the amount of the profits tax under section 328 or to revise, correct, or abrogate such determination, it necessarily follows that the Commissioner's action in determining the amount of plaintiff's net income is not subject to judicial review. Before the Commissioner can apply the provisions of section 328, he must determine the net income. If net income is reduced, one of the principal factors in computing the profits tax has been destroyed and the Commissioner's determination has been altered. Any change in the income requires a new computation of the tax. This is not permitted by the statute. Central Iron Steel Co. v. United States (Ct.Cl.) 6 F. Supp. 115, decided this date. If the net income is altered, the same corporations used as comparatives by the Commissioner may no longer be similarly circumstanced with respect to net income. It may also be that by reason of the reduced income, because of the deduction claimed, there would be no abnormality in income, which may have been the cause that prompted the Commissioner to allow special assessment, and the taxpayer would not be entitled to any relief under the special assessment section of the statute, or that the corporations used as comparatives would no longer be comparable. Moreover, the amount of the profits tax is a deduction, credited against income under section 236(b), Act of 1918 ( 40 Stat. 1080) from income in computing the income tax. If the profits tax should be rendered erroneous by reason of a change of factors upon which such tax was computed under section 328, the income tax, computed upon an income erroneously determined, by reason of the deduction of an erroneous profits tax, would also be erroneous.
The petition must be dismissed. It is so ordered.
BOOTH, Chief Justice, and WHALEY, WILLIAMS, and GREEN, Judges, concur.