Opinion
[Copyrighted Material Omitted] This case having been heard by the Court of Claims, the court, upon the evidence and the report of a Commissioner, makes the following special findings of fact:
1. Plaintiff now is, and at all times mentioned hereinafter was, a corporation duly organized and existing under the laws of the state of Washington.
2. During 1918 plaintiff was affiliated for income and profits tax purposes with Bolcom Mills, Inc., Dickie Manufacturing Company, and other corporations. The entire capital stock of the Dickie Manufacturing Company was owned by Bolcom Mills, Inc.
3. March 15, 1919, and June 12, 1919, respectively, plaintiff filed tentative and completed consolidated income and profits tax returns for 1918 for itself and the foregoing affiliated corporations, and showed a tax due of $23,567.15 upon the basis of the consolidated income of the group. The tax was paid as follows:
March 15, 1919 ...... $12,000.00 September 15, 1919 .... 5,675.37 December 16, 1919 ..... 5,891.78
At or about the same time the completed consolidated return was filed the subsidiary corporations also filed information returns (form 1122) showing that the entire amount of the tax was to be assessed against plaintiff. The information return filed by Dickie Manufacturing Company stated that the corporation was "disincorporated in May 1918."
The schedules attached to the consolidated return reported by the Dickie Manufacturing Company for 1918 of $4,290.37 and an operating deficit at the close of its operations of $31,213.14. The same schedules also reported an operating loss of Bolcom Mills, Inc., of $5,526.56 for 1918. Operating losses were likewise shown for the other members of the affiliated group, exclusive of the parent, plaintiff, and the operating losses of the several affiliated corporations for 1918 were deducted from the net income of the parent in arriving at a taxable consolidated net income for the group for 1918 of $89,899.73. No deduction was taken in the return of the determination of taxable consolidated net income on account of a loss sustained in 1918 by Bolcom Mills, Inc., in the liquidation of Dickie Manufacturing Company.
May 23, 1922, the Commissioner advised plaintiff of a proposed additional tax for 1918 of $70,693.53, based upon the consolidated net income of plaintiff and the affiliated corporations. October 12, 1922, plaintiff protested the proposed additional assessment on various grounds, and in addition filed a formal application for a determination of its profits tax for 1918 under the provisions of sections 327 and 328 of the Revenue Act of 1918, 40 Stat. 1093.
4. In March, 1924, the Commissioner determined an additional income and profits tax for the affiliated group of $96,968.05, and made a jeopardy adjustment of that amount against plaintiff on his March, 1924, assessment list. Plaintiff was advised of the above determination by letter dated April 2, 1924, in which plaintiff was informed that its application for a determination of its profits tax under the special assessment provision was denied and its profits tax determined on a statutory basis. March 25, 1924, plaintiff filed a claim for abatement of the foregoing additional assessment and on March 30, 1924, paid $30,000 on account of such assessment. October 12, 1924, assessment and collection waivers were filed for 1918 extending the time for assessment and collection to June 12, 1925.
5. The additional assessment of $96,968.05 was determined by the Commissioner after an examination by a revenue agent wherein the revenue agent computed the consolidated net income by arriving at a net income for plaintiff and net losses for each member of the affiliated group. The revenue agent computed losses for Bolcom Mills, Inc., and Dickie Manufacturing Company for 1918 in the respective amounts of $67,017.81 and $3,801.18. In arriving at taxable consolidated net income the revenue agent added back to consolidated net income theretofore determined $62,010.11, which was described as "Intercompany loss--Loss on account of liquidation of Dickie Manufacturing Co." The recommendation of the revenue agent with respect to the treatment of the foregoing intercompany loss was approved by the Commissioner in his determination and in all subsequent determination hereinafter referred to.
6. January 22, 1925, plaintiff filed a further application for a determination of its profits tax for 1918 under the provisions of sections 327 and 328, claiming abnormalities in both income and invested capital under subdivision (d) of section 327, supra, and pointing out the intercompany loss of $62,010.11, referred to above and theretofore disallowed by the Commissioner, as one factor of abnormality to be considered. That application for special assessment was denied by the Commissioner May 4, 1925, and plaintiff advised that the claim for abatement would be rejected in full. Thereafter, only plaintiff's request for reconsideration, a reaudit of the case was made on a statutory basis and an overassessment determined of $28,105.57, which was finally allowed by the Commissioner on a schedule of overassessments signed February 25, 1926. In that determination the Commissioner stated that the deduction heretofore referred to of $62,010.11 was not allowed "on the ground that said loss must be treated as an intercompany transaction." The overassessment was used to abate a portion of the additional assessment then outstanding, and the Commissioner refused to abate the balance of the additional assessment. February 18, 1926, plaintiff paid the balance of $38,862.48, and on the following day paid interest thereon of $4,462.71.
7. February 12, 1930, plaintiff duly filed a claim for refund of $51,096.34 for 1918 on the following grounds:
(1) Bolcom Mills, Inc., sustained a loss of $61,010.11 upon the dissolution of the Dickie Manufacturing Company, representing an uncollectible amount due from Dickie Manufacturing Company which was deductible in the computation of the consolidated net income. (2) The profits tax should be computed under section 328 of the Revenue Act of 1918.
April 16, 1930, the Commissioner advised plaintiff of a proposed rejection of its claim on the ground that the loss referred to represented an intercompany transaction and therefore could not be deducted in computing consolidate net income, and that the evidence presented failed to establish the existence of abnormalities as affecting income or invested capital.
July 3, 1930, plaintiff filed a second claim for refund for 1918 which was entitled, "In amendment of and supplemental to claim filed on or about Feb. 10, 1930," and in which the grounds asserted in the first claim were renewed, and in addition a basis was assigned that the tax was collected after the statute of limitations for collection had expired.
8. Subsequently, the Commissioner reconsidered the first claim referred to above, allowing special assessment and determining an overassessment of $25,548.96. The overassessment was listed on a schedule of overassessments which was signed by the Commissioner on January 12, 1931, and such overassessment having been found to be an overpayment it was duly refunded to plaintiff with interest in the amount of $2,933.87. The claim, to the extent not allowed by this determination, was disallowed on the same date.
The second claim for refund was rejected by the Commissioner on a schedule dated May 22, 1931.
9. In his final computation of plaintiff's tax liability wherein the overassessment of $25,548.96 was determined as set out in the preceding finding and plaintiff's profits tax computed under section 328 of the Revenue Act of 1918, the Commissioner made such determinations as follows:
Net income as previouslydetermined.....................
$153,655.07
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Profits tax (section328).................................
55,320.52
Net income .................................
$153,655.07
Deduct:
Profits tax ..................
$55,320.52
Exemption ....................
2,000.00
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57,320.52
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Balance taxable at 12% ...............
96,334.55
Income tax at 12%......................................
11,560.15
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Total tax liability................................
66,880.67
Tax previously assessed:
Original tax, account #442306
$ 23,567.15
Additional tax, March 1924,
page 2, line 4 ............................
96,968.05
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Total assessment .......................
120,535.20
Less:
Amount previously allowed,
schedule I. T. 19382 ......................
28,105.57
-----------
Net assessment............................................
92,429.63
-----------
Overassessment .....................................
$ 25,548.96
10. In the foregoing computation of the tax as finally determined the Commissioner first determined the income or losses of each of the affiliated corporations and then combined such income or losses to determine the consolidated net income. To the consolidated net income as thus determined the Commissioner added the loss of $62,010.11 on liquidation of Dickie Manufacturing Company, heretofore referred to, on the ground that such loss was an intercompany transaction and not allowable as a deduction in the computation of taxable consolidated net income. Throughout all computations by the Commissioner the loss of $62,010.11 has been allowed as a loss in determining the income of Bolcom Mills, Inc., but thereafter has been added back to consolidated net income by the Commissioner to determine the taxable consolidated net income of the affiliated group. The net result has been to disallow the loss.
11. For 1917, in computing consolidated net income for excess profits tax purposes of the same affiliated group that is included in the 1918 return, an operating loss of Dickie Manufacturing Company of $23,162.09 was allowed as a deduction by the Commissioner. For 1918, in computing consolidated net income for income and profits tax purposes, an operating loss of the Dickie Manufacturing Company of $3,801.18 was allowed as a deduction by the Commissioner.
Ivins, Phillips, Graves & Barker, of Washington, D.C., for plaintiff.
John A. Rees, of Washington, D.C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
WHALEY, Judge.
The plaintiff is suing for a refund of taxes paid for the year 1918. Plaintiff, during that year, was affiliated for income and profits tax purposes with the Dickie Manufacturing Company and other corporations. The entire capital stock of the Dickie Manufacturing Company was owned by the Bolcom Mills, Inc. Tentative and, subsequently, completed consolidated income and profits tax returns were filed by plaintiff for itself and affiliated corporations and information returns were filed by the subsidiary corporations showing that the entire tax was to be assessed against the plaintiff. The information return of the Dickie Manufacturing Company showed that the company had surrendered its charter and gone out of business. The schedules attached to the consolidated return showed an operating loss by the Dickie Manufacturing Company,an also a deficit at the close of its operations and an operating loss was also shown for the Bolcom Mills, Inc. Operating losses were also shown for other members of the affiliated group but not for the parent corporation (plaintiff) and these losses were taken as deductions on the net income of the parent corporation in arriving at the consolidated taxable net income of the group. No deduction was taken for the loss in the liquidation of the Dickie Manufacturing Company by the Bolcom Mills, Inc.
May, 1922, the Commissioner proposed an additional tax upon the consolidated net income of the plaintiff and the affiliated corporations. In October, 1922, the plaintiff protested the additional assessment on various grounds and made a formal application for a determination of its profits tax for 1918 under the provisions of sections 327 and 328 of the Revenue Act of 1918, 40 Stat. 1093. Subsequently, the Commissioner increased the income and profits tax for the affiliated group and made a jeopardy assessment and advised plaintiff that its application for special assessment was denied. Thereafter, claims in abatement were filed and waivers executed. Again in 1925 plaintiff made an application for a determination of its profits tax for 1918 under the special assessment sections claiming abnormalities in both income and invested capital under subdivision (d) of section 327. The Commissioner again denied this request for special assessment. A reaudit of the case upon the request of plaintiff was made on a statutory basis and an overassessment determined in the amount of $28,105.57, which was finally allowed by the Commissioner on a schedule of overassessment signed February 25, 1926. In arriving at this determination, the Commissioner refused to permit the loss sustained from the liquidation of the Dickie Manufacturing Company and treated it as an intercompany transaction. The overassessment was used to abate a portion of the additional assessment then outstanding, but the Commissioner refused to abate the balance of the additional assessment, whereupon the plaintiff paid the balance with interest.
On February 12, 1930, the plaintiff filed a claim for refund of $51,096.34 for the year 1918, setting out specifically two grounds:
(1) Bolcom Mills, Inc., sustained a loss of $61,010.11 upon the dissolution of the Dickie Manufacturing Company which was deductible in the computation of the consolidated net income. (2) The profits tax should be computed under section 328 of the Revenue Act of 1918.
The plaintiff was advised by the Commissioner of the proposed rejection of this claim on the ground that the loss referred to represented an intercompany transaction and was not therefore deductible in computing consolidated net income, and that the case presented no abnormalities affecting income or invested capital.
In July, 1930, the plaintiff again renewed its request. The Commissioner reconsidered his decision and allowed special assessment and determined an overassessment of $25,548.96. This assessment was duly scheduled on January 12, 1931, and refunded to and accepted by the plaintiff with interest in the amount of $2,933.87.
In its brief the plaintiff states that this suit is brought for the purpose of recovery of income and profits taxes paid for the year 1918. But the real question presented is, When the profits tax has been determined under the special assessment provisions upon application of the corporation, can a court entertain an action for refund of income tax on the ground that the income was erroneously determined by the failure of the Commissioner to allow a certain allowable deduction? It is apparent that the contention necessarily involves the action of the Commissioner in granting special assessment. The plaintiff having requested special assessment repeatedly and the Commissioner having finally granted special assessment, and an overassessment having been determined and refunded to and accepted by plaintiff, it is now proposed that the court go into the allowance of the losses sustained by the Dickie Manufacturing Company, plaintiff's affiliate, which the plaintiff claims should have been allowed in the consolidated return under the decision of Burnet v. Aluminum Goods Manufacturing Company, 287 U.S. 544, 53 S.Ct. 227, 77 L.Ed. 484.
The plaintiff is not seeking a change in the computation of its profit tax as determined under special assessment, but it desires the court to compute the consolidated income after the deduction of the losses sustained by the Dickie Manufacturing Company. In order to arrive at the profits tax it is necessary and compulsory to ascertain what is the net income of the consolidated group, because from this net income the profits tax is computed, and after this tax is taken off the net income the balance is the amount on which the corporate income tax at the statutory rate is computed. When special assessment is granted under sections 327 and 328 of the Revenue Act of 1918 the Commissioner has sole discretion as to the comparatives which will be used in arriving at the percentage to be applied to the class in which the taxpayer falls. It would be impossible where special assessment has been granted to recompute the net income without affecting the amount of the profits tax. In other words, if the consolidated income is reduced by the losses claimed, necessarily this would affect the amount of the profits tax and, the amount of the profits tax having been changed, the net income would necessarily be changed for the application of the corporate income tax. We can see no merit in the claim. The plaintiff continuously applied for the granting of special assessment and finally the Commissioner granted the application. An overassessment was found and refunded to the plaintiff and accepted by it.
It has been repeatedly held by the Supreme Court and by this court that no court has the power to review the grant or denial of special assessment or the correctness of the computation made thereon. Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 48 S.Ct. 587, 72 L.Ed. 985.
In Welch v. Obispo Oil Company, 301 U.S. 190, 194, 57 S.Ct. 684, 685, 81 L.Ed. 1033, it is held: "In Heiner v. Diamond Alkali Co., 288 U.S. 502, 503, 53 S.Ct. 413, 77 L.Ed. 921, where a special assessment had been made of profits taxes under sections 327 and 328, the taxpayer sued to recover a part of the profits tax, alleging error in the determination of the net income on which it was based. The Circuit Court of Appeals allowed recovery. 60 F.2d 505, 513, 514. We reversed its judgment, holding that the court may not, in an action for a refund of profits tax, recalculate the taxpayer's net income and recompute the profits tax by applying to the corrected net income the ratio fixed by the Commissioner for the computation of the tax. We did not pass upon the question whether the same rule should be applied if the taxpayer seeks a refund of the income tax because of an alleged error in the computation of the net income. But the reasoning of the opinion leads to that conclusion."
See, also, United States v. Henry Prentiss & Co., 288 U.S. 73, 53 S.Ct. 182, 77 L.Ed. 626; Curran Printing Co. v. United States, 14 F.Supp. 638, 83 Ct.Cl. 254, certiorari denied 301 U.S. 686, 57 S.Ct. 788, 81 L.Ed. 1343; Michigan Iron & Land Co. v. United States, 10 F.Supp. 563, 81 Ct.Cl. 330; Bradford & Co. v. United States, 6 F.Supp. 117, 79 Ct.Cl. 89, certiorari denied 293 U.S. 564, 55 S.Ct. 101, 79 L.Ed. 664; Central Iron & Steel Co. v. United States, 4 F.Supp. 113, 6 F.Supp. 115, 79 Ct.Cl. 56, certiorari denied 293 U.S. 563, 55 S.Ct. 75, 79 L.Ed. 663; Oak Worsted Mills v. United States, 36 F.2d 529, 68 Ct.Cl. 539, certiorari granted limited to another question 281 U.S. 717, 50 S.Ct. 465, 74 L.Ed. 1136, and affirmed Graham v. Goodcell, 282 U.S. 409, 51 S.Ct. 186, 75 L.Ed. 415; Chicago Frog & Switch Co. v. United States, 67 Ct.Cl. 662, certiorari denied 280 U.S. 579, 50 S.Ct. 32, 74 L.Ed. 629; Cleveland Automobile Co. v. United States, 6 Cir., 70 F.2d 365, certiorari denied 293 U.S. 563, 564, 55 S.Ct. 88, 79 L.Ed. 663.
Our attention has been called to the recent case of the American Chemical Paint Co. v. McCaughn, Collector, 24 F.Supp. 258, 1937, C.C.H.Fed. Tax Service, par. 9477, decided by the District Court for the Eastern District of Pennsylvania. We can see no similarity in the two cases. The district judge, in American Chemical Paint Co. v. McCaughn, supra, based his decision entirely on the fact that no application was made by the corporation for special assessment, but that special assessment was forced upon it by the Commissioner. In the instant case the corporation repeatedly applied for special assessment and its request was finally granted.
The determination of the taxpayer's true net income was an essential factor in arriving at its liability under the special assessment section. The application for special assessment by plaintiff and the granting of its request by the Commissioner preclude a review by this court of the income tax determined.
The petition is dismissed. It is so ordered.