Freeport Texas Co. v. United States

Full title: FREEPORT TEXAS CO. et al. v. UNITED STATES

Court: Court of Claims

Date published: May 2, 1932

58 F.2d 473 (Fed. Cir. 1932)

Opinion

No. K-452.

May 2, 1932.

Action by the Freeport Texas Company and others against the United States.

Petition dismissed.

This case having been heard by the Court of Claims, the court, upon the stipulation of the parties, makes the following special findings of fact:

1. The plaintiffs were at all times hereinafter mentioned, during their existence, domestic corporations; the Freeport Texas Company and Freeport Sulphur Transportation Company were organized under the laws of the state of Delaware; the Freeport Sulphur Company, Freeport Terminal Company, Freeport Town Site Company, and Freeport Light, Water Ice Company were organized under the laws of the state of Texas; the Freeport Terminal Company was dissolved May 27, 1924, and the Freeport Light, Water Ice Company was dissolved November 1, 1927. All of the other corporations named still exist, and all of the corporations are or were during the period of their existence engaged in the business of producing and marketing sulphur, and other allied interests, their principal office now being located at 52 Wall street, New York, N.Y. The plaintiffs have at all times borne true allegiance to the government of the United States, and have never given aid or encouragement to the enemies of the United States in rebellion, and are the sole owners of the claim presented in their petition, no interest therein or part thereof having been transferred or assigned to any person, firm, or corporation. The Freeport Texas Company was the parent company and owner of all of the capital stock of the Freeport Sulphur Company, Freeport Terminal Company, Freeport Town Site Company, Freeport Light, Water Ice Company, Freeport Sulphur Transportation Company, and there existed an affiliation in accordance with the provisions of the Revenue Act of 1917 ( 40 Stat. 300), and section 1331(b) of the Revenue Act of 1921 (26 USCA § 1067(b).

2. On or about April 1, 1918, the plaintiffs filed with the collector of internal revenue of the United States for the Second District of New York, their separate income (Form 1031) and excess profits tax (Form 1103) returns for the fiscal year ended November 30, 1917, except that the Freeport Town Site Company filed no separate excess profits tax return, and the Freeport Texas Company filed also a consolidated excess profits tax return for the affiliated group.

3. The separate income tax returns filed by the plaintiffs reported net income amounting in the aggregate to $3,085,052.40, including intercompany transactions, and the consolidated excess profits tax return filed by the Freeport Texas Company reported a consolidated net income subject to excess profits tax of $1,194,304.39. The plaintiffs paid to the said collector on May 16, 1918, income taxes reported on the aforementioned separate income-tax returns aggregating $108,471.23; the computation of excess profits tax on the consolidated excess profits tax return showed no excess profits tax due. The separate excess profits tax returns filed showed no computation of excess profits tax. The amount of $108,471.23 has been paid over by the collector of internal revenue to the Treasurer of the United States.

4. Thereafter, on or about November 7, 1918, demand was made upon the Freeport Texas Company by the collector of internal revenue for the Second district of New York for additional taxes above the amount computed by the plaintiffs on the returns, in the amount of $227,890, and on this date this amount of additional taxes was paid by the plaintiffs to the said collector of internal revenue.

The said collector of internal revenue has paid over to the Treasurer of the United States the said amount of additional taxes of $227,890.

5. In and during the month of May, 1919, the plaintiffs received from the collector of internal revenue for the Second district of New York notice of additional demand for income and profits taxes covering the fiscal year ended November 30, 1917, in the amount of $1,422,789.71, and on or about June 16, 1919, the plaintiffs paid to the said collector of internal revenue for the second district of New York the sum of $1,397,552.77. The sum of $25,236.94 was abated.

The said collector of internal revenue has paid over to the Treasurer of the United States the said additional taxes of $1,397,552.77, making a total amount of income and excess profits tax paid by the plaintiffs for the fiscal year ended November 30, 1917, of $1,733,914.

6. The consolidated excess profits tax return filed by the Freeport Texas Company, as parent company, for the fiscal year ended November 30, 1917, showed a consolidated invested capital of $36,217,521.26, including an addition of $32,477,824.84 to consolidated capital and surplus as shown by the books of the plaintiffs, representing a valuation of sulphur properties owned by Freeport Sulphur Company, which value was not reflected on the books of the plaintiffs. The percentage deduction of 7 per cent. of total consolidated invested capital claimed on the return, or $36,217,521.26, amounted to $2,535,226.48, which was in excess of the consolidated net income as reported, and no excess profits tax was shown due on the return.

7. During the year 1918 and the early part of 1919 the returns of the plaintiffs covering the fiscal year ended November 30, 1917, were examined by the agents of the Commissioner of Internal Revenue, and audited by the officials of the income tax unit in Washington. The net income as reported on the returns was accepted, with the exception of the net income claimed by the plaintiff Freeport Sulphur Company. The depletion claimed on its original return amounting to $4,745,836.35, based on a unit for depletion claimed of $9.39141 per ton on reported sales for the year of 505,338 tons, was reduced by the Commissioner of Internal Revenue and his agents to $1,414,946.40, based on a unit for depletion allowed of $2.80 per ton on the same sales. This unit for depletion of $2.80 was used for the purpose of determining the deduction from net income for depletion, in arriving at net income subject to tax under section 210 of the Revenue Act of 1917 ( 40 Stat. 307). This reduction of $3,330,889.95, representing depletion disallowed, increased the consolidated net income of the plaintiffs from $1,194,304.39 to $4,525,194.34.

8. The excess profits tax on the revised consolidated net income was computed under section 210 of the Revenue Act of 1917 by the Commissioner of Internal Revenue upon application of the plaintiffs. The plaintiffs' revised consolidated net income was determined to be $4,525,194.34. The consolidated excess profits tax for the eleven-month period falling within the calendar year 1917 was determined to be $1,506,169.87. The income taxes for the taxable year 1917 were determined to be $227,744.13, making the total amount of tax due from the plaintiffs for the taxable year 1917, $1,733,914.

On February 13, 1919, the plaintiffs' representative wrote the Commissioner of Internal Revenue a letter, a photostat copy of which is attached to the stipulation of the parties filed in the case, marked "Exhibit A," and made a part hereof by reference.

On April 25, 1919, the plaintiffs' representative wrote the Commissioner of Internal Revenue a letter, a photostat copy of which is attached to the stipulation of the parties filed in the case, marked "Exhibit B," and made a part hereof by reference.

9. The original value placed on the sulphur deposit by the plaintiffs and from which the figures were taken in making their returns was based upon an original deposit of 3,459,000 tons at $9.39141 per ton, and the number of estimated units of recoverable sulphur for the purpose of computing 1917 tax liability is 3,459,000 tons.

10. On or about June 14, 1919, the plaintiffs filed a consolidated income and profits tax return for the fiscal year ended November 30, 1918, and reported thereon a consolidated invested capital of $37,285,083.98, including an addition of $31,050,415.86 to consolidated invested capital and surplus as shown by plaintiffs' books. This amount of $31,050,415.86 represented the original value of sulphur deposit as claimed by the plaintiffs in the amount of $32,477,824.84, reduced by the depletion allowed the plaintiffs for the year 1917 in the sum of $1,414,946.40, as shown in finding 7, and also reduced by depletion taken by the Freeport Sulphur Company on its income tax return for the year 1915. The Commissioner of Internal Revenue on June 23, 1925, sent the plaintiffs a letter adjusting their 1918 tax liability. The tax for 1918 shown to be due by this letter was later assessed against and paid by the plaintiffs. A claim for refund of the entire amount so assessed and paid was filed on January 29, 1930. A photostat copy of this claim for refund is attached to the stipulation of the parties filed in the case, marked "Exhibit C," and made a part hereof by reference. On February 17, 1930, a supplemental claim for refund was filed. A photostat copy of this claim for refund is attached to the stipulation of the parties filed in the case, marked "Exhibit D," and made a part hereof by reference. The aforesaid claims for refund of 1918 additional taxes filed January 29, 1930, and February 17, 1930, were rejected by the Commissioner on a schedule dated July 7, 1930. On or about October 2, 1930, plaintiff Freeport Texas Company filed a suit against the collector of internal revenue for the Second district of New York for the recovery of 1918 additional taxes, based on the aforesaid claims, which suit is now pending in the United States District Court for the Southern District of New York.

11. In adjusting the plaintiffs' tax liability for the fiscal year ended November 30, 1918, the Commissioner's engineers accepted the plaintiffs' estimated tonnage for total units in the sulphur deposit in the amount of 3,459,000 tons, and on this basis determined in November, 1924, the value of the sulphur deposit as of the date of acquisition, to be $13,375,857 for the purpose of determining invested capital and depletion. The Commissioner divided the total value of $13,375,857 by the total tonnage, and arrived at a unit for depletion of $3.867 per ton. The valuation of $13,375,857 was used by the Commissioner for purposes of determining the invested capital and the depletion deductions, in lieu of the valuation of $32,477,824.84 as originally claimed by the plaintiffs in their returns. The value of $13,375,857 of the sulphur deposit at the date of acquisition, and allowed as a basis for computing 1918 invested capital, was adjusted by the Commissioner for accrued depletion during the years 1913 to 1917, inclusive, in the amount of $3,703,135.88, of which amount $2,106,753.20 represents depletion computed on 544,803 tons produced for the fiscal year ended November 30, 1917. The value of the sulphur deposit at December 1, 1917, included in 1918 invested capital and allowed by the Commissioner as paid-in surplus, was $9,672,721.12. In computing invested capital for the fiscal year 1918 the Commissioner corrected the depreciation deducted by the Freeport Sulphur Company in the year 1917, and determined that the depreciation actually sustained in 1917 was $236,907.49. Certain other adjustments of 1918 invested capital were also made. The consolidated invested capital of the plaintiffs for the fiscal year 1918, as adjusted by the Commissioner, was shown in letter dated June 23, 1925, and was computed as follows:

================================================================================================================ | Computed under 1917 law | Computed under 1918 law ---------------------------------------------------|------------------------------|----------------------------- Capital stock outstanding (including intercompany) | $3,759,325.00 | $3,759,325.00 Surplus shown by balance sheet ................... | 370,413.49 | 370,413.49 | _____________ | _____________ Invested capital as reported on books ............ | 4,129,738.49 | 4,129,738.49 Increases: | | (a) Paid in surplus allowed ................... | 13,375,857.00 | 13,375,857.00 (b) Increase in inventory ..................... | 432,616.75 | 432,616.75 (c) Adjustment of depletion — | | Book reserve ........................... | $4,758,307.93 | Adjusted reserve ....................... | 3,703,135.88 | | _____________ 1,055,172.05 | 1,055,172.05 (d) Reserve for income and excess-profits ..... | | taxes .................................... | 280,680.24 | 280,680.24 (e) Reserve for bad debts ..................... | 492.69 | 492.69 | _____________ | _____________ | 19,274,557.22 | 19,274,557.22 Decreases: | | (f) Dividends charged to depletion reserve .... | 1,059,251.55 | $1,059,251.55 (g) Adjustment of depreciation reserve ........ | 229,211.72 | 229,211.72 (h) Intercompany stock eliminated ............. | 260,000.00 | 260,000.00 (i) 1917 income and excess-profits tax prorated | 944,019.84 | 950,089.86 (j) Dividends paid February 15, 1918 .......... | 66,840.51 | 412,907.92 | _____________ 2,559,323.62 | _____________ 2,911,461.05 | _____________ | _____________ Adjusted invested capital ........................ | 16,715,233.60 | 16,363,096.17 ----------------------------------------------------------------------------------------------------------------

12. In the audit previously made of the plaintiffs' tax liability for the fiscal year ended November 30, 1917, said plaintiffs' excess profits tax liability had been computed under section 210 of the Revenue Act of 1917. In the computation of said tax liability the Commissioner had allowed plaintiffs $1,414,946.40 as a deduction from income for depletion and $207,047.39 as a deduction from income for depreciation, which latter amount was the deduction for depreciation taken on the return as filed by the Freeport Sulphur Company.

13. Thereafter, and under date of April 29, 1927, the Commissioner of Internal Revenue issued to the plaintiffs a communication setting forth the details of the re-examination of the returns of the plaintiffs covering the fiscal year ended November 30, 1917.

14. The communication of April 29, 1927, discloses that the Commissioner of Internal Revenue adjusted the invested capital of the plaintiffs for the fiscal year ended November 30, 1918, by the plaintiffs' failure to take adequate deductions for depletion and depreciation in the year 1917. The Commissioner computed the total consolidated tax liability and income tax liability of the plaintiffs on the net income and consolidated invested capital for the year 1917, as finally determined in the light of all the evidence, and found this amount of tax to be $1,003,720.84. The Commissioner then computed the tax, using the same invested capital and the same net income increased by $691,806.80 and $29,860.10, the amounts by which the deductions for depletion and depreciation, respectively, for the year 1917 were inadequate, and on account of which the invested capital for 1918 was in part reduced, and found this amount of tax to be $1,325,433.95. The difference between these two amounts, $321,713.11, and interest thereon in the amount of $152,157.08, were duly refunded to the plaintiffs.

15. In arriving at the total tax liability of $1,003,720.84 for the year 1917, in the light of all the evidence, the Commissioner determined the revised consolidated net income to be $4,384,445.36 and the consolidated invested capital, under the provisions of section 207 of the Revenue Act of 1917, to be $16,605,060.92. This invested capital was computed as follows:

Capital stock outstanding as shown by revenue agent's report dated June 24, 1918 ..................................... $2,464,162.50 Surplus and reserves as shown by balance sheet ........................................ 1,425,322.65 _____________ Total ....................................... 3,889,485.15 Additions: (a) Paid-in surplus allowed ................. 13,375,857.00 (b) Increase in inventory ................... 260,302.08 (c) Sale of capital stock ................... 873,547.18 _____________ Total .................................. 18,399,191.41 Deductions: (d) Depletion reserve ........ $1,596,382.68 (e) Adjustment of depreciation reserve ................. 183,475.60 (f) 1916 income taxes prorated ................ 14,272.21 _____________ 1,794,130.49 _____________ Adjusted invested capital .............. 16,605,060.92

In arriving at the consolidated invested capital of $16,605,060.92, the Commissioner determined that the sulphur deposit had a valuation at date of acquisition of $13,375,857.00, as hereinbefore shown, and a value at December 1, 1916, of $11,779,474.32. In arriving at the revised consolidated net income of $4,384,445.36, the Commissioner increased the income previously determined by $580,917.92, representing a net inventory adjustment of $172,314.67, and an increase of $408,603.25, due to the fact that the plaintiffs had deducted this amount in 1917 as royalties which the Commissioner found to be deferred payments of original cost or purchase price of sulphur deposits. In arriving at the revised consolidated net income of $4,384,445.36, the Commissioner also reduced the income previously determined by $721,666.90, representing the additional deductions for depletion and depreciation in the respective amounts of $691,806.80 and $29,860.10. The consolidated excess profits tax liability as revised for the eleven months of the calendar year 1917, falling within the plaintiffs' fiscal year 1917, was determined to be $795,816.87. The total income tax liability of the plaintiffs was determined to be $207,903.97.

16. Upon receipt of the refund check issued by the Commissioner of Internal Revenue in the amount of $321,713.11, and interest, the plaintiffs protested and asked that the amount of $730,193.16, and interest, be refunded, or the difference between the amount previously paid of $1,733,914 and the amount of the total tax liability for the fiscal year ended November 30, 1917, as determined in the light of all the evidence by the Commissioner of Internal Revenue in the letter of April 29, 1927. The Commissioner determined that the balance of said overpayment was barred because plaintiffs had not filed a claim for refund therefor within the time allowed by law. On or about August 2, 1927, a claim for refund was filed by the plaintiff, the Freeport Texas Company, with the collector of internal revenue for the Second district of New York, and with the Commissioner of Internal Revenue, asking for the refund of $408,480.05 on the ground that the entire amount of said overpayment was refundable under the provisions of section 284(c) of the Revenue Act of 1926, 26 USCA § 1065(c).

17. Thereafter, on or about October 10, 1927, the said claim for the refund of $408,480.05 for the fiscal year ended November 30, 1917, was rejected by the Commissioner of Internal Revenue, because not filed within the time prescribed by law.

18. The total income taxes of $207,903.97, as computed by the Commissioner in the light of all the evidence, were based upon an aggregate of the net incomes of the plaintiffs for the fiscal year ended November 30, 1917, amounting to $4,464,710.41, which represents the consolidated net income of $4,384,445.36, shown in finding 15, increased by operating losses of two of the plaintiffs in the total amount of $80,265.05. The Commissioner did not include in such aggregate of $4,464,710.41, for the purpose of computing the normal tax of 2 per cent., an item of $1,812,243.63, representing certain dividends received by the plaintiff, Freeport Texas Company, during the fiscal year 1917 from its subsidiary, the plaintiff Freeport Sulphur Company, which was reported as taxable income on the separate income tax return filed by the plaintiff Freeport Texas Company. The original tax payments of $108,471.23, paid on the original returns, as shown in finding 3, included an amount of $36,244.87, representing the tax at 2 per cent. on such dividends.

Attached to the stipulation of the parties filed herein, marked Exhibit E, and made a part hereof by reference, is a statement showing changes in consolidated net income, invested capital, and tax liability of the plaintiffs for the fiscal year ended November 30, 1917.

H. Kennedy McCook, of Washington, D.C. (De Vries, Crawford McCook, of Washington, D.C., on the brief), for plaintiffs.

Charles R. Pollard, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (Wright Matthews, of Washington, D.C., on the brief), for the United States.

Before GREEN, WHALEY, WILLIAMS, and LITTLETON, Judges.

GREEN, Judge.

The facts in the case are stipulated and set forth at length in the findings, but we shall refer only to such facts as we consider necessary to understand the issues in the case.

The plaintiffs are affiliated corporations engaged in the business of producing and marketing sulphur. The Freeport Texas Company was the parent company and the owner of all of the capital stock of the other plaintiffs joined.

About April 1, 1918, the plaintiffs each filed a return for their income and excess profits tax for the fiscal year ending November 30, 1917, except that the Freeport Town Site Company filed no separate excess profits tax return. The Freeport Texas Company filed also a consolidated excess profits tax return for the affiliated group. The Commissioner of Internal Revenue examined and audited these returns in 1919, and reduced the depletion deduction, which resulted in an increase of the taxable income and in an increase of the total tax liability to $1,733,914. The difference between this amount and the amount of $108,471.23, shown by the original return, was paid by plaintiffs.

In June, 1919, the plaintiffs filed a consolidated income and profits tax return for the fiscal year ending November 30, 1918, and reported a consolidated invested capital of $37,285,083.98, which included an addition of $31,050,415.86 to the amount of consolidated invested capital and surplus as shown by the plaintiffs' books. This increase over the book value was based upon the original value of the sulphur deposits which the company owned. In adjusting the plaintiffs' tax liability for the fiscal year 1918, the Commissioner found the value of the sulphur deposits to be $13,375,857 at the date of acquisition, and this value was used for the purpose of determining the invested capital and depletion deductions after making certain adjustments for accrued depletion during the years 1913 to 1917, of which the amount $2,106,753.20 represents depletion for the fiscal year of 1917. The Commissioner found that plaintiffs' consolidated invested capital for the fiscal year 1918 was reduced by their failure to take adequate deductions for depletion and depreciation for the fiscal year 1917 in the amount of $691,806.80 for depletion and $29,860.10 for depreciation, making a total of $721,666.90. Subsequently the Commissioner made a re-examination of the plaintiffs' tax liability for the fiscal year ending November 30, 1917, and in the light of all the evidence determined it to be $1,003,720.84; the consolidated invested capital for 1917 was determined to be $16,605,060.92, and the consolidated net income was determined to be $4,384,445.36; computed the amount of overpayment of taxes to be $730,193.16, and held that the refund to which the plaintiffs were entitled for the fiscal year 1917, due to their failure to take adequate deduction for depletion and depreciation, was $321,713.11, which was paid to plaintiffs. Thereafter the plaintiffs filed a claim for refund of $408,480.05, being the difference between the amount of refund allowed and paid and the total amount of overpayment. This application was denied by the Commissioner on the ground that the amount refunded was all that had been overpaid on account of the taxpayers' failure to take adequate deduction for depletion and depreciation. The issue in the case is whether this ruling of the Commissioner was correct.

Plaintiffs contend that the facts in the case bring it within the provisions of section 284(c) of the Revenue Act of 1926, 44 Stat. 66, 26 USCA § 1065(c), which provides as follows: "If the invested capital of a taxpayer is decreased by the commissioner, and such decrease is due to the fact that the taxpayer failed to take adequate deductions in previous years, with the result that there has been an overpayment of income, war-profits, or excess-profits taxes in any previous year or years, then the amount of such overpayment shall be credited or refunded, without the filing of a claim therefor, notwithstanding the period of limitation provided for in subdivision (b) or (g) has expired."

On behalf of the defendant it is said that plaintiffs took as a deduction in their 1917 returns depletion in a much larger sum than was subsequently allowed. The argument is that it is not the deduction that the taxpayer failed to get, but only that which he fails to take, that is covered by the provisions set out above, and this construction finds some support from the fact that, where the taxpayer took a deduction in his return, which the Commissioner failed to allow, he had an adequate remedy for this disallowance at the time thereof. Upon this theory and under the facts in the case, the Commissioner might have refused to allow any refund whatever. The Commissioner, however, did allow a large refund. Defendant, however, does not urge the application of this theory and we do not find it necessary to pass upon it.

It will be observed at the outset that the plaintiffs seek to recover a refund of $408,480.05 by reason of having failed to take deduction for depletion and depreciation for the fiscal year 1917, in the amount of $691,806.80, and that the Commissioner has already allowed $321,713.11 upon the original claim, so that plaintiffs are asking for a reduction in taxes of $730,193.16 by reason of the failure to take deduction for depletion in the sum of $691,806.80. Or, in other words, plaintiffs claim a refund in a sum which exceeds the amount of the deductions which fix the amount of the refund. Counsel for the defendant say in argument that this is manifestly absurd. Without going so far as to say that it is impossible that such a result would follow, it is apparent that it is highly improbable, and we think it will appear clearly upon further consideration that all and probably the most of the overpayment did not result from the failure to take proper deductions for depletion.

The Commissioner made a calculation, according to the Bureau regulations, of the amount of the overpayment resulting from the failure to take adequate deductions. Plaintiffs contend that the method used by the Commissioner in so determining the amount of the overpayment is purely theoretical, and insist that plaintiffs' taxes could not, in the first instance, have been properly computed in such manner. It may be conceded that, if the Commissioner had been able to compute the taxes for 1917, in the first instance, upon the facts as now known to exist, the computation would not be made in the manner shown in finding 14, for, if the correct amount invested was ascertainable, plaintiffs were not entitled to the benefit of the special assessment provisions which were used in computing the 1917 tax. But this is not material nor do we need to determine whether the method used to compute the overpayment gave exactly correct results. If we exclude the computation made by the Commissioner, we have no evidence before us as to the correct sum which constituted overpayment resulting from the failure to take proper deductions in 1917. The contention of the plaintiffs is that the Commissioner should have used the amount which he found to be invested capital for 1917 after the proper deductions were made and the value of the ore deposits redetermined. This contention seems to be based on the theory that no figure or sum was used as the amount of the invested capital in the original computation of the taxes for 1917, and, as the correct amount of the invested capital for 1917 has now been determined, this sum should be used, not only in computing the correct taxes of plaintiffs for 1917, but also the amount of overpayment thereon. This is manifestly incorrect. The plaintiffs asked to have the provisions of section 210 of the act of 1917 applied in determining the amount of their taxes for that year. The Commissioner complied with the request, so computed the taxes, and his conclusion to apply this section, and his determination of the taxes thereunder was an exercise of his discretionary powers, and is not now subject to review. Williamsport Wire Rope Company v. United States, 277 U.S. 551, 48 S. Ct. 587, 72 L. Ed. 985. The provisions of section 284(c) of the Revenue Act of 1926, under which plaintiffs claim a refund, do not change the general manner of computing the tax under section 210 of the Revenue Act of 1917. They merely provide that, under certain circumstances, allowance shall be made for deductions that had not been taken. In computing the taxes under the provisions of this section, the Commissioner did not use the correct amount of invested capital, as subsequently ascertained, for the provisions of this section only apply where "the Secretary of the Treasury is unable in any case satisfactorily to determine the invested capital," but it was impossible to compute the excess profits taxes without the use of a certain sum as the amount of invested capital, for one of the main provisions of the excess profits tax depends on the percentage of the profits on the amount of invested capital. The Commissioner, in computing the 1917 tax, accordingly fixed and used a certain sum as the amount of invested capital. This sum, for want of a better term, we will call "constructive invested capital," and we assume that it was the best estimate that the Commissioner could make of the amount of invested capital at the time he applied the "special assessment" provision. If, in computing the amount of change in plaintiffs' taxes for 1917 resulting from the failure to take proper deductions, a change was made in the amount of invested capital to make it accord with the increase in value of the ore deposits, or for any other reason, the overpayment would then be determined, not by the results of the failure to take the proper deductions, but by what resulted from changes made in the invested capital which resulted from other causes.

In order to determine accurately the amount of the difference in plaintiffs' taxes caused by reason of the failure of the plaintiffs to take certain deductions, the computation must be made in accordance with section 210 of the 1917 act, allowing plaintiffs the amount of the deductions which they should take, and using the same figures for the constructive invested capital as the Commissioner used. In other words, the computation must be made in the same manner in which the Commissioner would have made it, had he known of these deductions at the time he originally computed the tax. But this we cannot do, as the agreed facts do not show the amount of this constructive invested capital. It would seem that evidence on this point could have been obtained, but we assume that it was not furnished by plaintiffs because, under the theory of their counsel, the sum used by the Commissioner as the amount of invested capital in making his original calculations is immaterial.

The contentions made on the part of the plaintiffs show, as we think, a misunderstanding of the statute. Three matters are required to be established by the provision under consideration. These matters appear quite plainly from the statute, but the misapprehension arises from the fact that they are often applied to the wrong year. They are:

First, a decrease in the invested capital of the taxpayer. This, however, applies to the subsequent year, not to the year for which the taxpayer may recover an overpayment.

Second, that such decrease is due to the fact that the taxpayer failed to take adequate deductions in previous years. Here again the "decrease" is the decrease in subsequent years which must be due to the failure to take "adequate deductions in previous years."

Third, the above matters having been shown, it must further appear that the result is that there has been an overpayment of income or profits taxes in the previous years.

It seems to be thought that, if the taxpayer failed to take adequate deductions in previous years, this is sufficient to entitle it to recover for any overpayment resulting therefrom. This is an error, for such a state of facts will not entitle the taxpayer to recover unless by reason thereof the invested capital of the taxpayer is reduced in a subsequent year, and, if the invested capital is reduced, even then only to the extent that an overpayment is caused by the failure to take such reductions. Or, in other words, as stated in the statute, unless "the invested capital of a taxpayer is decreased by the commissioner, and such decrease is due to the fact that the taxpayer failed to take adequate deductions in previous years," and even then it must further appear that this has resulted in an overpayment of income or profits taxes in the previous year, and the extent thereof must be shown.

After having applied the two provisions of the statute first mentioned above, we find that the outstanding defect in plaintiffs' case arises in connection with the third requirement, as we shall see upon a further consideration of the facts of the case.

The Commissioner, in 1919, increased the unit value of the ore deposits. This undoubtedly entitled the plaintiffs to additional deductions for depletion in 1917, and these reductions would be reflected in a decrease of invested capital for 1919, but only to the extent of the amount thereof; and for and on account of the failure to take these deductions the Commissioner reduced the taxes of plaintiffs for 1917. As this amount which was allowed by the Commissioner did not cover the whole of the overpayment, it is assumed on the part of the plaintiffs that the overpayment resulted entirely from the failure to obtain the proper deductions. This is manifestly an error for the following reasons:

The failure to take proper deductions in 1917 on account of the increase made by the Commissioner in the unit value of the ore deposits did, as we have stated above, decrease to a certain extent the invested capital for the following years, and caused the plaintiffs to make an overpayment for 1917. But the overpayment for 1917 was not caused entirely, nor as we think even principally, by this failure to get the proper deductions. While an overpayment was caused thereby, the same matter that gave rise to it also gave rise to an overpayment in another manner. If plaintiffs had been allowed the value which the Commissioner subsequently fixed upon their ore deposits, the result would have been to greatly increase the amount of their invested capital; and, if their invested capital had been increased in accordance with this value, the result would have been to have lowered their excess profits tax, as that tax was based on the relative percentage of their profits to invested capital. This explains how it is that plaintiffs are claiming the right to have a total refund (including what has been refunded before) of taxes in the sum of $730,193.16, by reason of the failure to take deduction for depletion in the sum of only $691,806.80. Plaintiffs make this claim because they are now seeking to recover, not only the overpayment of taxes resulting from the failure to take proper depletion, but also the overpayment of taxes resulting from a failure to obtain proper adjustment of their invested capital in accordance with the value of their ore reserves. It may be said that, conceding this to be a fact, it nevertheless remains that plaintiffs have overpaid the taxes of 1917 in a greater sum than they have yet received. This may be conceded, but the plaintiffs sue under a special provision of the statute which allows them to recover notwithstanding the statute of limitations, if certain facts have been shown. If these facts have not been shown, there can be no recovery, and in no event can plaintiffs recover beyond the amount of overpayment resulting from the failure to allow adequate deductions for depletion. See Southwestern Oil Gas Co. v. United States (D.C.) 29 F.2d 404. We think, as was said in the same case on further consideration by the Circuit Court of Appeals, 34 F.2d 446, that to sustain the contention of the plaintiffs we would have to read into the statute upon which plaintiffs base their case a provision which would enable the plaintiffs not merely to recover overpayments resulting from any of the matters required to be shown by section 284(c), but any overpayment for the previous year or years. This is not the law. The statute of limitations applies to any overpayment caused by matters not specified in said section 284(c).

It should be observed also in this connection that there is no evidence by which we can determine how much of the overpayment was caused by the increased value given to the ore deposits, and, as stated above, there can be no recovery under the law for an overpayment so caused.

If we concede, for the sake of the argument, that the method used by the Commissioner in calculating the overpayment is wrong, there is then no way of determining whether it gave the plaintiffs too much or too little. There is no testimony upon which we can make a segregation of the amount of overpayment resulting from a failure to receive proper deductions for depletion in 1917 and the amount thereof which resulted from the failure to make the proper adjustment of invested capital for that year. The Commissioner made the plaintiffs an allowance which he considered was all to which the plaintiffs were entitled under the statute, and there is nothing to show that the plaintiffs are entitled to anything more.

There is also another reason, as we think, why plaintiffs cannot recover. It will be observed that what plaintiffs seek now is to have their taxes recomputed without any regard to section 210 of the act of 1917, although they had heretofore requested that their taxes be computed thereunder. We do not think that the plaintiffs, after having originally requested that the section last named above be applied and having their taxes computed in accordance therewith, can now say that they prefer to have their taxes computed in some other way which would reduce them. It will be noted that, even if plaintiffs had filed a claim for refund, they could not have the decision given by the Commissioner when he was acting under the provisions of section 210 reviewed by this court, although the Commissioner could of his own volition correct any mistakes or errors that occurred in computing the taxes under this section. He did make a recomputation and a refund, and, while we have no way of estimating it exactly, it would seem that plaintiffs were granted as much as they were entitled under the provision by virtue of which the suit is brought.

The petition of the plaintiffs must be dismissed, and it is so ordered.

WHALEY and WILLIAMS, Judges, concur.

LITTLETON, Judge (concurring).

The defendant's computation gives the plaintiffs the refund of all the overpayment to which they are entitled under section 284(c). The Commissioner's method of computing the amount of overpayment refundable may not be mathematically perfect, but when, as in this case, various factors of computation and various profits tax rates are applicable, it is clear that the result of his computation is more nearly correct than any that we can work out or that has been suggested by the plaintiffs. The plaintiffs, while admitting that the only overpayment which they may recover is limited to the overpayment for 1917 resulting from their failure to receive the benefit of adequate deductions from income for depletion and depreciation, contend that the entire overpayment for 1917 of $730,196.16 was due to their failure to take or receive the benefit of adequate deductions for 1917, which deductions, when properly computed, operate to decrease invested capital in the subsequent year.

The argument in support of this claim is that plaintiffs' correct invested capital was determined for the first time when the Commissioner was called upon to refund the overpayment for 1917; that the previous determination and computation of the profits tax for 1917 under section 210 of the Revenue Act of 1917 ( 40 Stat. 307) must be ignored, because the provisions of that section limit its application to cases where the invested capital cannot be satisfactorily determined, and the plaintiffs' consolidated invested capital could be determined; that section 284(c) of the Revenue Act of 1926 (26 USCA § 1065(c) makes no mention of invested capital for "previous years"; and that there is only one "invested capital," and that is the correct invested capital; that therefore, in determining the amount of refund payable under section 284(c), the correct invested capital for 1917 must be used, and the refund computed upon the correct percentage of excess profits tax to net income, instead of at a rate considerably lower than the rate at which the additional profits tax was paid.

It is further pointed out by plaintiffs that the Commissioner of Internal Revenue in 1919, when he determined and computed the profits tax in accordance with section 210 of the 1917 act and determined the additional tax of $1,625,442.77, which was paid, made only one change in the net income reported in the return, such change being a reduction in the depletion unit from $9.39141 to $2.80 per ton; that, if the depletion unit had not been reduced, the plaintiffs would have had the benefit of an invested capital of $36,217,521.20 shown on the return. This, the plaintiffs say, makes the entire overpayment determined by the defendants on April 29, 1927, by the use of the correct invested capital of $16,605,060.92 and correct net income of $4,384,445.36, refundable under section 284(c).

The plaintiffs are in error in contending that the defendant's determination under section 210 of the Revenue Act of 1917 of the amount of profits tax computed upon such determination is immaterial to a determination of the amount of the overpayment refundable under section 284(c). The provisions of section 210 are mandatory, if the Commissioner is unable satisfactorily to determine invested capital, and, if he concludes that he cannot determine invested capital, it is his duty to so compute the profits tax. This section is recognized in the revenue law as much as is section 207 of the 1917 act, and a tax computed thereunder is as legal and valid as a tax computed on invested capital determined under section 207. Section 284(c), which was first enacted as a part of section 252 of the Revenue Act of 1921 ( 42 Stat. 268), does not mention invested capital for the previous year or years, nor does it mention any factor that might affect the correct tax liability for such previous year or years except those deductions from gross income which, when increased in order to determine the correct invested capital for a subsequent year, had the effect of reducing invested capital, and thereby increasing the profits tax for the year under consideration over what such taxes would be, if the deductions claimed and allowed in such previous year were permitted to stand. It is clear that the words "such overpayment" for the previous year refer to an overpayment measured by the inadequate deductions and nothing else, and that the words "with the result that there has been an overpayment" do not contemplate a determination of statutory invested capital where it has not theretofore been determined or a redetermination of invested capital through the retroactive allowance of a paid-in surplus, or for any other reason, except as it may be affected by deductions from gross income. It is evident in this case that the determination of the correct invested capital for 1917 was the cause of a large portion of the overpayment which had been made as the result of the assessment of an additional tax based upon a computation of the excess profits tax under section 210. Any portion of the overpayment resulting from this is not now refundable.

The excess profits tax computed by the Commissioner in 1919 under section 210 and paid by plaintiff for 1917 was $1,506,169.87, and the correct profits tax computed in 1927 on the correct invested capital and correct net income was $795,816.87, a difference of $710,353. The income tax determined by the Commissioner in 1919 on the net income computed without allowing adequate deductions for depletion and depreciation was $227,744.13, and the income tax determined in 1927 upon the correct net income, after allowing adequate deductions for depletion and depreciation and after adjusting the income on account of certain inventory items and a claimed deduction for royalties disallowed, resulting in a net decrease in income of $140,748.98, was $207,903.97, a difference of $19,840.16. The income and profits tax determined and computed by the Commissioner of Internal Revenue under the provisions of section 210 of the Revenue Act of 1917 upon a consolidated net income of $4,525,194.34 determined, without allowing plaintiffs adequate deductions for depletion and depreciation, amounted to $1,733,914. This resulted in the payment of an additional tax of $1,625,442.77 in excess of that shown and paid on the returns. The total income and profits tax computed upon the same net income of $4,525,194.34, arrived at without the allowance of adequate deductions for depletion and depreciation, and increased to $5,106,112.26 by proper adjustments in respect of the opening and closing inventories for 1917, and the restoration to income of the amount claimed as a deduction on the returns as royalties, and upon the correct consolidated invested capital of $16,605,060.92, was $1,325,433.25. The correct income and profits tax for 1917, computed upon a correct consolidated net income of $4,384,445.36, arrived at by making all proper adjustments and allowing adequate deductions for depletion and depreciation and upon the correct invested capital for 1917 of $16,605,060.92, is $1,003,720.84. It is clear, therefore, that the difference of $231,929.48 between the tax computed without the allowance of adequate deductions; but with all other proper and legal adjustments, and the tax computed upon the correct consolidated net income after the allowance of adequate deductions and upon the correct invested capital, is that portion of the overpayment for 1917 resulting from the failure of the plaintiffs to take or receive the benefit of adequate deductions for 1917.

The fact that, had the Commissioner of Internal Revenue in 1919 not reduced the value of the depletion unit below what it should have been, the plaintiffs would have received an adequate deduction for depletion in 1917, and would have had the benefit of a corresponding invested capital, and therefore would not have overpaid its tax, does not help the plaintiffs' case. Section 284(c) does not contemplate or include within its terms any items affecting the tax which may have some necessary relation to the inadequate deductions. It is the deductions, the increase of which in a subsequent year results in a decrease of invested capital for the subsequent year, that mark the limit of the amount which may be refunded after the expiration of the statute of limitations, and no other items are included, however closely they may be connected or related to such deductions.