Summary
In Electric Power and Light Corp. v. United States, 1 F. Supp. 773, 76 Ct.Cl. 379 (1932), a refund claim incorporated information in an agent's report which had recommended a refund.
Summary of this case from Union Pacific Railroad Co. v. United StatesOpinion
No. L-55.
November 14, 1932.
Claude M. Houchins, of Washington, D.C. (John E. Walker, of Washington, D.C., on the brief), for plaintiff.
James A. Cosgrove, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Suit by the Electric Power Light Corporation, successor to the Utah Corporation, against the United States.
Judgment of dismissal.
This suit was instituted to recover $16,554.22, with interest, alleged overpayment of tax for 1922. The amount sued for is the tax at 12 per cent. on $132,433.72, being the difference between the amount of a profit to the Utah Securities Corporation, predecessor of plaintiff, of $311,940.70 derived from the sale of certain shares of stock in 1922 reported in the consolidated return filed for 1922, but excluded from consolidated net income as an intercompany transaction, and the amount of $179,506.98, an alleged book profit, now claimed to be the correct amount upon which the tax should have been computed upon the holding that the Utah Securities Corporation and the Electric Power Light Company (Maine) were not affiliated.
The questions presented are: (1) Whether plaintiff filed a timely and legally sufficient claim for refund as a prerequisite to its right to maintain this action, and (2) whether the taxable income derived from the sale in 1922 of 18,380 shares of first preferred stock is susceptible of determination from the record, and, if so, whether such income was $179,506.78 or $311,940.70.
Special Findings of Fact.
1. Plaintiff, a Maine corporation, organized March 11, 1925, under the name of Electric Power Corporation, changed its name March 12, 1925, to Electric Power Light Corporation. March 13, 1925, it acquired all the assets and assumed all the liabilities of the Utah Securities Corporation, organized under the laws of Virginia in September, 1912, and on April 6, 1925, the Utah Securities Corporation was dissolved.
2. The Utah Corporation filed a tentative tax return March 15, 1923, and on June 15, 1923, filed a final income tax return for 1922, making certain payments on the basis thereof to the collector at New York on March 17, June 15, September 15, and December 15, 1923. Each of these payments exceeded $16,544.22, the amount sued for herein. The aforesaid return was a consolidated return which included the operations of the Utah Securities Corporation and also the operations of seven alleged subsidiary corporations, with which the Utah Corporation claimed to be affiliated, under section 240 of the Revenue Act of 1921 ( 42 Stat. 260). The total consolidated net income shown in the return was $1,049,089.99.
3. In arriving at the consolidated taxable net income so reported, upon the basis of which the total tax liability reported on the return was computed, certain intercompany eliminations from the combined net income were first made. In particular, an income item of $311,940.70 shown on the books of the Utah Corporation as a profit derived from the sale of a portion of the preferred stock of Utah Power Light Company (Maine), one of the alleged subsidiaries, was eliminated in arriving at the consolidated net income as reported.
4. During February and March, 1927, a revenue agent of the Bureau of Internal Revenue examined in New York the books of the Utah Securities Corporation, and the operating reports and records of its seven alleged subsidiaries, and rendered a report for 1922 on the basis of a consolidation of the eight corporations included in the aforementioned consolidated return. In this report the agent recommended the allowance of an overassessment for 1922 of $82,190.70. In arriving at this recommended overassessment the revenue agent reduced consolidated net income, as reported in the consolidated return, by the amount of $657,525.57 as a result of the allowance by him of additional depreciation to certain of the eight corporations included in the affiliated group and as a result of certain adjustments made by him in other miscellaneous items other than profit on the sale of the stock in question.
The revenue agent made no adjustment of the consolidated return as filed with respect to the intercompany item of $311,940.70 referred to in finding 3. The corrected income of the Utah Securities Corporation as a separate corporation before the elimination of any intercompany items as found by the revenue agent in 1922 amounted to $712,318. The Utah Securities Corporation was furnished with a copy of the revenue agent's report relating to the issue herein involved, as follows:
Schedule 1 Year ended Net income as corrected: December 31, 1922 Utah Securities Corporation ........ $ 712,318.00 Utah Power Light Company ......... 1,362,185.62 Utah Light Traction Company ...... (387,989.17) Western Colorado Power Company ..... (157,849.79) Utah Power Company ................. 288.72 Utah Securities Corporation, Inc. .. (40.00) Utah Power Light Company, Inc. ... (40.00) Utah Light Traction Company, Inc. (40.00) ______________ Total .......................... $1,528,833.38
Adjustments: Add: Interest intercompany paid ..... 408,545.46 Purchases intercompany ......... 259,380.00 _______________ Total ............................ $2,196,758.84
Deduct: Gross sales ....................... $259,380.00 Intercompany bonds retired ........ 744,101.11 Interest received intercompany .... 489,772.61 Sale of stock of a subsidiary ..... 311,940.70 __________ 1,805,194.42 _____________ Consolidated net income ........................ $ 391,564.42
January 12, 1927, the plaintiff, as successor to the Utah Securities Corporation, and each of the seven claimed subsidiary corporations, filed waivers extending the time for assessment and collection of additional taxes for 1922 until December 31, 1927.
6. May 6, 1927, the Commissioner of Internal Revenue, upon consideration of the revenue agent's report hereinbefore referred to, decided and advised the Utah Securities Corporation that for 1922 it was affiliated within the meaning of the statute with the Utah Securities Corporation, Inc. (N.Y.), the Utah Power Light Company, Inc. (N.Y.), and the Utah Light Traction Company, Inc. (N.Y.), and that the consolidated return filed by the Utah Securities Corporation should have included only the companies above named.
The commissioner further held and advised the Utah Securities Corporation that during 1922 the Utah Power Light Company (Maine) (whose stock had been sold by the Utah Securities Corporation), the Western Colorado Power Company, the Utah Light Traction Company (Utah), and the Utah Power Company (Maine), were affiliated with each other but were not affiliated with the Utah Securities Corporation within the purview of section 240 of the Revenue Act of 1921, and that a consolidated return should have been filed by the last-mentioned companies.
In the letter of May 6, 1927, setting forth this determination, the commissioner advised the Utah Securities Corporation, plaintiff's predecessor, that it was granted 15 days from that date within which to present a protest against the determination of affiliation.
Thereafter, on May 26, 1927, the commissioner wrote plaintiff's predecessor, the Utah Securities Corporation, a letter in which he stated that: "Reference is made to a revenue agent's report dated March 9, 1927, which discloses an apparent overassessment for the taxable year 1922 amounting to $82,190.70. The limitation imposed by law is about to expire as to the year 1922, after which a refund or credit can not be made of any amount ultimately found to have been over-paid unless a claim is filed before the expiration of such limitation. It is therefore suggested that you prepare a claim upon the enclosed Form 843, specifically setting forth in such claim the grounds or basis of the apparent overpayment as above indicated. The claim should be properly signed by a duly authorized person and sworn to before a notary public (or other officer authorized to administer oaths for general purposes) and should be filed immediately with the Collector of Internal Revenue for the district in which the tax was assessed or paid. The accompanying copy of this letter should be attached to the claim when filed."
7. June 3, 1927, the plaintiff, as successor to the Utah Securities Corporation, filed a claim for refund on Treasury Form 843 in the name of the Utah Securities Corporation for the refund of $82,190.70, a portion of the payments made of the tax for 1922 on the basis of the consolidated return as filed. This claim was under oath and stated as follows: "Deponent verily believes that this application should be allowed for the following reasons: The result of an examination by a revenue agent as shown in a report attached to a letter addressed to the taxpayer dated April 8, 1927, from the internal revenue agent in charge at the customhouse in New York City discloses overpayment of tax for the year 1922 in amount of $82,190.70. Claim for refund of this amount is hereby made, such claim being in accordance with the suggestion contained in the letter from C.R. Nash, assistant to the Commissioner of Internal Revenue, addressed to the taxpayer and dated May 26, 1927 (Reference IT: CR: Ad-2-AHM), a copy of which is attached hereto and made part hereof."
8. On June 21, 1927, plaintiff filed a protest to the determination of affiliation as contained in the commissioner's letter of May 6, 1927, and, thereafter, was granted an oral hearing on the matter of affiliation. In this protest plaintiff insisted that the eight corporations mentioned in the consolidated return and in the revenue agent's report were affiliated during the taxable year 1922. On August 31, 1927, plaintiff's counsel mailed a letter to the commissioner, requesting that the matter of affiliation be reviewed by the office of the general counsel of the bureau. In this letter plaintiff's counsel insisted that the Utah Securities Corporation and the Utah Power Light Company (Maine) were affiliated within the meaning of the revenue act and were entitled to file a consolidated return for 1922 for various reasons stated therein. In September, 1927, plaintiff's representative was advised that the ruling of the Income Tax Unit, as set forth in the commissioner's letter of May 6, 1927, would be sustained.
9. September 13, 1927, plaintiff filed a claim for refund on Form 843 in the name of "Electric Power Light Corporation, successor to Utah Securities Corporation" for the refund of $82,190.70, a portion of the tax paid for 1922, on the basis of the consolidated return as filed, and "for the reasons set forth in the revenue agent's report dated March 9, 1927."
10. December 20, 1927, the commissioner made a determination of the consolidated net income and the tax of the Utah Securities Corporation and the three corporations held to be affiliated with it, as set forth in the letter of May 6, 1927, and determined a corrected taxable net income of $712,198 upon which a tax liability of $89,024.75 at 12 per cent. was computed. The amount of $42,111.50, being the difference between the tax of $131,136.25 assessed on the consolidated return, as filed, and the above-mentioned tax of $89,024.75, was credited and applied by the commissioner to the nonaffiliated companies. The corrected taxable net income of $712,198 shown in this determination of the commissioner includes as taxable income the item of $311,940.70 mentioned in finding 3.
11. January 3, 1928, plaintiff filed with the commissioner a protest dated December 23, 1927, sworn to December 27, 1927, against the aforementioned determination on the ground that the eight corporations which had filed a consolidated return were affiliated within the meaning of the statute, and on the further ground that:
"The taxpayer contends that the amount of $311,940.70 is not taxable income, even if the return of Utah Securities Corporation is considered separate from that of its affiliated company, for the following reasons: * * *
"Taxpayer respectfully requests that the Treasury Department's letter be adjusted in accordance with the foregoing facts and that the determination of the tax liability of this corporation be considered jointly with the case of Utah Power Light Company and subsidiary companies for the year 1922, for which companies protest is now pending with the special advisory committee on the questions of affiliation and depreciation."
This protest did not purport to be and was not an amendment of the claim for refund previously filed. No reference was made to these refund claims. The language of the protest shows that rather than being a claim for refund or an amendment of the claim which had been filed on other grounds, its purpose was, first, to have the commissioner treat the eight corporations as affiliated, and, second, if this could not be done, to have the determination evidenced by the commissioner's letter of December 20, 1927, adjusted on the basis of excluding from the income of the Utah Securities Corporation, plaintiff's predecessor, the item of $311,940.70 and to have the resulting tax adjusted and applied between the plaintiff, as successor to the Utah Securities Corporation, and the other corporations which had been included in the consolidated return as to the income and tax for which companies protests were pending before the special advisory committee of the Bureau of Internal Revenue.
12. February 10, 1928, the commissioner advised plaintiff of the rejection of the two claims for refund hereinbefore referred to. The claims were disallowed on a schedule of February 28, 1928.
13. During the latter part of 1912 and the early part of 1913, the Utah Securities Corporation acquired at a cost of $15,012,904.95 certain securities issued by Utah Power Light Company, described as follows:
Notes .............................................. $ 5,000,000 First preferred stock (30,000 shares), par ......... 3,000,000 Second preferred stock (78,370 shares), par 7,837,000 Common stock (250,000 shares), par ................. 25,000,000
Utah Securities Corporation, on its books, allocated the said cost of $15,012,904.95 to the aforesaid securities as follows:
Notes, at par ...................................... $ 5,000,000.00 First preferred stock, at $87.50 ................... 2,625,000.00 Second preferred stock, at $80.23 (approximately) .. 6,287,904.95 Common stock, at $4.40 ............................. 1,100,000.00 ______________ $15,012,904.95
The aforesaid second preferred stock was convertible into first preferred stock.
14. In 1916 Utah Securities Corporation converted $2,900,000 par value of the second preferred stock into a like amount of first preferred stock, and thereafter, in 1916, sold the aforesaid $2,900,000 first preferred stock at $92.50 per share. The entire proceeds of the sale, amounting to $2,682,500, including a book profit of $355,726.47 (about $12.27 per share), was then credited on the books of Utah Securities Corporation to its investment account in second preferred stock of Utah Power Light Company, leaving in said investment account a figure of $3,605,404.95, represented by 49,370 shares of second preferred stock at about $73.03 per share. The aforesaid profit of $355,726.47 was not reported as taxable income by the Utah Securities Corporation.
15. In 1921 Utah Securities Corporation converted $1,838,000 par of the second preferred stock into a like amount of the first preferred stock, and in 1922 Utah Securities Corporation sold the aforesaid $1,838,000 first preferred stock, converted as aforesaid, for $90 per share. The resulting book profit of $311,940.70 (18,380 shares, at approximately $16.97 per share) was reported as a nontaxable intercompany item in the consolidated return for 1922, as shown in finding 3 above.
16. The profit of $179,506.98, which plaintiff admits was realized by Utah Securities Corporation in 1922 from the sale of the aforesaid $1,838,000 par value first preferred stock, at $90 per share, is computed by the plaintiff as a profit of approximately $9.77 per share on 18,380 shares as sold, based on the original allocation of book value shown in finding 13, above. If it should be held that this amount of $179,506.98 is the correct taxable profit realized from the sale in 1922 of the aforesaid securities, and if it should be further held that the plaintiff has filed a legally sufficient claim for refund within the time required by law, based upon the same contentions raised in this cause of action, then plaintiff is entitled to a judgment for $16,554.22 with interest.
Two questions are presented in this case. They are (1) whether the claim for refund filed by plaintiff was sufficient to entitle it to maintain this suit, and (2) whether the taxable income derived from the sale in 1922 of 18,380 shares of first preferred stock is susceptible of definite determination, and, if so, whether such profit was $179,506.78 or $311,940.70.
Plaintiff filed two claims for refund, both being on the same ground, namely, for an alleged overpayment of $82,190.70 on the basis of a revenue agent's report made a part of the said claim. These claims were timely, inasmuch as each of the four installments of tax paid for the year 1922 was in excess of the amount of $16,554.22 herein sought to be recovered.
In the return for 1922 plaintiff claimed to be affiliated with certain other corporations which were included in a consolidated return for that year, which return showed a consolidated net income of $1,049,089.99, upon which the total tax liability of $218,765.54 paid upon said return was computed. In making that return plaintiff eliminated certain intercompany transactions between the claimed affiliated corporations, including the elimination of an item of profit stated therein of $311,940.70 derived from the sale of a portion of the preferred stock of Utah Power Light Company (Maine), one of its alleged subsidiaries, as mentioned in finding 3.
In February and March, 1927, a revenue agent made an investigation and examination of the consolidated return and of the books and records of the plaintiff and the seven claimed subsidiary corporations. He reported a total reduction in the consolidated taxable net income in the amount of $657,525.57 and recommended to the commissioner an allowance of an overassessment for 1922 of $82,190.70. The adjustments in net income forming the basis of the allowance recommended by the agent related principally and substantially to depreciation adjustment. No adjustments were made by the agent with respect to the intercompany items, including the item of profit of $311,940.70. The consolidated gross income of plaintiff as a separate corporation as determined by the revenue agent before the elimination of any of the intercompany items was $712,318. After eliminating the intercompany items, including the item of $311,940.70, the agent thereby reduced the consolidated net income to $391,564.42. The agent's report was dated March 9, 1927, and a copy thereof was furnished to plaintiff April 8, 1927. After the receipt of the report of the revenue agent, the commissioner, on May 6, 1927, advised plaintiff that for the year 1922 one group of the eight companies was affiliated with each other and that the other group of four, including Utah Power Light Company (Maine), while affiliated with each other, was not affiliated with the plaintiff.
Thereafter, on May 26, 1927, the commissioner suggested to the plaintiff that it file a claim for refund for 1922, and on June 3, 1927, plaintiff filed a claim for refund of $82,190.70, and on September 13, 1927, filed a similar claim for the same amount. In both instances the grounds specified were "the reasons set forth in the internal revenue agent's report dated March 9, 1927, which shows an overassessment of the above amount for 1922." It will thus be seen that the nature of the claims for refund and the facts relied upon, which were those stated in the revenue agent's report, had no reference to the matter which forms the basis of this suit. The item giving rise to the controversy here was not made the basis of any portion of the refund for the claims filed. The claims were, therefore, insufficient under section 3226, Revised Statutes, as amended (26 USCA § 156), to form the basis of this suit. United States v. Felt Tarrant Manufacturing Company, 283 U.S. 269, 51 S. Ct. 376, 75 L. Ed. 1025. The fact that the revenue agent's report may have embraced statements with reference to the item of $311,940.70, which constituted the facts with reference to the nature of that item, which statements were made by the agent in connection with his audit of the case and the elimination of the item from consolidated net income, is not, in itself, sufficient. Mutual Life Insurance Company of New York v. United States, 49 F.2d 662, 72 Ct. Cl. 204. The claims for refund were not amended so as specifically to claim a refund on the grounds now urged.
Plaintiff cites the decision of this court in Memphis Cotton Oil Co. v. United States, 59 F.2d 276, decided May 31, 1932, to support its contention that the claims filed in this case were sufficient. That case is not in point. There the taxpayer filed a claim setting forth the income which had been returned, and upon which the tax had been paid, the claimed correct net income or loss as per its books for the years involved, and claimed the refund of the resulting overpayments. Upon receipt of these claims the commissioner, for the purpose of deciding upon the merits thereof, instructed his agent to make an investigation and obtain the facts with reference thereto from the taxpayer by an audit and examination of its books and records. This the agent did, and the taxpayer furnished him with information as to the nature of each item and all the facts in reference to the matter, and the agent thereupon made a detailed report of the facts and the nature of the various items to the commissioner, showing overpayments for the years involved, together with an explanation of the nature of each item as furnished by the taxpayer. These overpayments were somewhat in excess of the amounts claimed in the refund claims theretofore filed. The commissioner found the overpayments to be as stated in the agent's report. These detailed facts and the nature of each item were furnished to the commissioner by the taxpayer through the commissioner's agent before the commissioner had taken any action upon the claims. In these circumstances the court held that the statements of the taxpayer in the claims filed, taken in connection with the facts and reasons furnished to the commissioner by the taxpayer through the commissioner's agent, were sufficient to form the basis of plaintiff's suit to recover the admitted overpayments. Had the commissioner not called for a statement of the nature of the claim and the facts with reference thereto, but had acted upon the claim and rejected it, no suit could have been maintained thereon. But having called for the facts in order to decide upon the claim, which facts were furnished by the taxpayer through the commissioner's agent, we fail to see wherein the situation was any different from what it would have been if the commissioner had asked the taxpayer direct to furnish the same.
This court has in no case decided, and the Memphis Cotton Oil Company Case is not authority for the proposition that if the commissioner has in his possession facts upon which he might allow a refund on a ground that is not made a basis of the claim for refund filed a suit may be maintained to recover a claimed or admitted overpayment, the nature of which had not been included in a claim which had been rejected. On the contrary, this court has consistently held that such a suit may not be maintained. Mutual Life Insurance Company of New York v. United States, supra. We have held that an informal or an insufficient claim for refund timely filed which would not be sufficient to constitute the basis of a suit if rejected, may, nevertheless, be allowed by the commissioner for any reason that convinces him from any facts or information in his possession that there has been an overpayment; that he has authority to make a refund thereon after the expiration of time within which he could make a refund without a claim. This was the situation in Lancaster Cotton Mills v. United States, 59 F.2d 270, decided by this court May 31, 1932. But this is quite different from saying that if such an insufficient claim is denied by the commissioner a suit may be maintained thereon because the commissioner could have allowed an overpayment. See Factors' Finance Co., Inc., v. United States, 56 F.2d 902, 73 Ct. Cl. 707.
The conditions prescribed by section 3226, Revised Statutes, as amended, must be met before suit can be maintained.
The petition is dismissed. It is so ordered.