Opinion
No. 42281.
March 4, 1935.
Benjamin H. Saunders, of Washington, D.C. (Frank C. Olive, of Indianapolis, Ind., and Ralph C. Williamson, of Washington, D.C., on the brief), for plaintiff.
John W. Hussey, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by Frank J. Horuff against the United States.
Petition dismissed.
Plaintiff sues to recover $13,246.90, additional income tax voluntarily paid for the calendar years 1920 to 1923, inclusive, on the ground that the period of limitation within which such additional taxes could have been assessed and collected expired prior to the date on which payments of such additional taxes for each year were made.
Special Findings of Fact.
1. Plaintiff is, and at all times mentioned herein was, a citizen of the United States and a resident of Indianapolis, Ind. From 1919 to 1928, as well as for many years prior to 1919, he operated a chain of retail shoe stores.
2. March 12, 1921, plaintiff duly filed his individual income tax return for 1920 disclosing gross income of $189,239.29, net income of $4,740.21, and a total tax of $101.61. After appropriate assessment the latter amount was paid March 12, 1921. November 23, 1921, plaintiff filed a claim for the refund of $21.79 for 1920, and such amount, after allowance on July 28, 1922, was thereafter duly refunded to plaintiff.
3. March 14, 1922, plaintiff duly filed his individual income-tax return for 1921, which disclosed gross income of $265,119.41, net income of $4,356.17, and a total tax of $58.25. After appropriate assessment the latter amount was paid March 14, 1922.
4. March 12, 1923, plaintiff duly filed his individual income-tax return for 1922, which disclosed gross income of $449,415.24, net income of $8,656.37, and a total tax of $300.51. After appropriate assessment the latter amount was paid in installments during 1923 as follows: March 12, $75.13; June 13, $75.13; September 12, $75.13; and December 11, $75.12.
5. March 12, 1924, plaintiff duly filed his individual income-tax return for 1923, which disclosed gross income of $746,891.75, net income of $14,938.93, and a total tax due of $980.67. After appropriate assessment the latter amount was paid in installments during 1924 as follows: March 12, $245.17; June 12, $245.17; August 31, $245.17; and September 13, $245.16.
6. During 1927 the Commissioner of Internal Revenue duly assessed additional taxes against plaintiff of $236.46 for 1922 and $97.98 for 1923, which amounts were paid February 9, 1927, and March 16, 1927, respectively.
7. In filing his returns for 1920 to 1923, inclusive, as set out in findings 2, 3, 4, and 5, plaintiff made use of inventories determined as follows:
Plaintiff was engaged in the retail shoe business and was on the cost basis for the purpose of preparing his inventories. When goods were purchased he followed the practice of marking the goods at a figure which purported to represent to his employees cost but which was from 10 to 100 per cent. in excess of cost. The marked-up price was entered on his books as "cost," and the correct cost did not appear on the books. The object in doing this was to improve the morale of his employees by having them feel that real values were being offered to the public. In making such mark-ups no fixed basis, in so far as percentage or amount was concerned, was followed; but the goods were marked up at such figures as plaintiff thought they would stand, based upon his knowledge and judgment as to their value and salability. The employees were unaware that the so-called cost as appearing on the various items was other than the correct cost. Plaintiff was unfamiliar with bookkeeping or accounting and paid little attention to the bookkeeping methods followed in his business; he was primarily a merchandise man who had grown up with the business and who was chiefly concerned with the management of the business from the standpoint of purchases and sales.
When plaintiff came to prepare his inventories for 1920 to 1923, his employees listed the various items on hand at the ends of these years and priced each item at the marked-up cost appearing thereon. After the sheets were received from the various stores, they were checked and totaled. Plaintiff then made percentage reductions of from 10 to 30 per cent. in order to take care of shrinkage, obsolete or shop-worn goods, or similar factors. The reductions taken tended to offset the mark-ups which had been made from cost, though they bore no necessary relation thereto and were estimates based upon plaintiff's experience in order to take care of the factors referred to in the preceding sentence. The inventory thus obtained was placed on plaintiff's books and used by him in his returns for 1920 to 1923, inclusive. The inventories thus used did not show mark-ups and markdowns which had been made in arriving at the ultimate amounts set out in the returns.
The foregoing returns were examined by a revenue agent prior to 1928, who was furnished the books but was not advised by plaintiff of the inventory adjustments, and no change was made by him from the inventories as used in the returns.
8. Early in 1928 certain bankers were negotiating with plaintiff for the incorporation of his business and the sale by them of the stock of the new corporation. As an incident to the transaction the bankers employed a firm of certified public accountants to audit plaintiff's books and prepare a statement of profits for the three years ended January 31, 1928. Plaintiff placed his books and records at the disposal of the bankers and accountants, but did not otherwise participate in the preparation of the data secured and used by them. In examining those years, the accountant assigned to the work found that percentage reductions had been made in plaintiff's inventories and upon further investigation found that similar reductions had been made in the inventories for prior years, including the years 1920 to 1923, inclusive. The accountant stated to plaintiff that the regulations of the Commissioner of Internal Revenue did not approve of reductions of the character which had been made and suggested that since the information which he was preparing would show profits at variance with those shown in plaintiff's returns, and since the information would become available to the public through the prospectus which was to be issued, difficulties might arise if the differences in the amounts became known to the Internal Revenue Bureau. The accountant accordingly suggested to plaintiff that amended returns be filed which would eliminate the percentage reductions in the inventories. Plaintiff accordingly instructed the accountant to prepare and file amended returns.
When the accountant came to prepare the amended returns, no inventory sheets were available for the period 1920 to 1923, but inventory sheets were available which were prepared at about the end of 1924 or early part of 1925, and plaintiff informed the accountant that 1920 was the first year in which the percentage reduction had been made. The accountant accordingly computed estimated inventories for 1920 to 1923 substantially in accordance with the following statement which was attached to the amended returns when filed:
"The attached Amended Individual Income Tax Return is now being voluntarily filed and the additional tax paid, for reasons as follows:
"The undersigned taxpayer has conducted a business operated as a sole proprietorship, not incorporated, under the name of the Horuff Shoe Company, the main office of which is located at 125 South Meridian Street, Indianapolis, Ind. My present address is 5130 North Meridian Street, Indianapolis, Ind.
"In closing the books at the end of 1920 and all subsequent years the inventories at the end of each year were reduced by flat percentages ranging from approximately 12% to 30%, such reductions having been made to allow for possible inventory shrinkages by way of shop-worn merchandise, merchandise out of style and season, fluctuations in purchase price, trade discounts, etc. During these years it was the taxpayer's belief that he had the right to reduce the inventory by a flat percentage to allow for such contingencies, but he is now advised by Messrs. Ernst Ernst, Indianapolis, Ind., that the aforementioned inventory reductions were not permissible under Federal income-tax regulations and that he should have reported taxable income from year to year based upon the physical inventories as taken and without reductions unless same could be identified to specific inventory items.
"Owing to the fact that the original physical inventory sheets cannot now be located prior to the inventory taken at January 31, 1925, it is necessary to redetermine the approximate inventories at the end of 1920, 1921, 1922, and 1923. The basis, upon which the inventories have been redetermined for these years, is set forth on schedule `B' attached hereto. The actual merchandise purchases from 1920 to 1924, inclusive, plus the actual inventory at January 1, 1920, and minus the actual inventory at December 31, 1924, show the actual cost of sales during this five-year period to be $1,856,470. The percentage of this total to the actual sales during this five-year period is 71.346302%, thus showing an average gross profit during this five-year period of 28.653698%. Upon the assumption that the gross profit would be approximately the same during this period, and such is a fact, I have thus redetermined the proper cost of sales for each year and in this manner have redetermined the beginning and ending inventories as shown on schedule `A' attached.
"At this point it should be stated that for a number of years the books of the Horuff Shoe Company have been closed on a fiscal year basis ending January 31, whereas the undersigned taxpayer has reported his individual income tax on a calendar-year basis. For this reason it has been necessary to adjust the physical inventories at the end of 1924, 1925, and 1926 from the amounts determined on January 31st each year to the estimated inventory at the preceding December 31st by considering the sales and cost of sales for each month of January."
9. April 3, 1928, plaintiff voluntarily filed amended returns for 1920, 1921, 1922, and 1923, which were prepared in the manner set out in finding 8, and such returns showed the following net income and additional tax:
----------------------------------------------- | | Additional Year | Net income | tax ----------------------|------------|----------- 1920 ................ | $15,786.81 | $1,244.34 1921 ................ | 18,532.02 | 1,664.87 1922 ................ | 33,045.42 | 3,611.47 1923 ................ | 54,641.18 | 6,726.22 -----------------------------------------------
The foregoing additional taxes were voluntarily paid by plaintiff April 4, 1928, and they were thereafter assessed by the Commissioner on July 12, 1928. No interest was paid by plaintiff on the additional taxes nor was any assessed thereon by the Commissioner.
10. While, as heretofore indicated, plaintiff was on the cost basis for preparing his inventories, the record is insufficient to show that either the inventories used in the original or amended returns accurately represent cost of the respective inventories. No records have been retained by plaintiff from which the correct cost of his inventories for the years 1920 to 1923 can now be ascertained.
11. June 12, 1931, plaintiff filed claims for the refund of the additional taxes which were paid as set out in finding 9, and the Commissioner rejected these claims June 27, 1932. The claim for 1921, and similarly for the other years except as to year and amount, assigned the following basis for recovery:
"That on or about April 4, 1928, the above-named taxpayer paid to the collector of internal revenue, at Indianapolis, the sum of $1,664.87, this sum representing an alleged deficiency in tax assessed against the taxpayer for the year 1921.
"In this connection it is respectfully submitted that at the time of payment of the above-mentioned amount, the statute of limitations, applicable to the assessment and collection of tax, had run against any collection of the alleged deficiency in tax for the year 1921. It is also submitted that the assessment of this alleged deficiency in tax for the year 1921 was likewise barred by the statute of limitations. See section 277(a)(2) of the 1926 Revenue Act ( 26 USCA § 1057(a)(2); also see section 607 of the 1928 Revenue Act (26 USCA § 2607).
"In view of the above, it is respectfully requested that the above-mentioned amount, together with interest as provided by law, be refunded this taxpayer."
The inventories employed by plaintiff as a basis for computing his income taxes in his original returns filed for the years 1920 to 1923, inclusive, were incorrect. They did not furnish the Commissioner with a working basis upon which he could correctly compute plaintiff's income taxes for the years involved. The original returns did not correctly reflect plaintiff's income.
After plaintiff had filed his original returns for 1920 to 1923, inclusive, and paid the taxes shown thereon to be due, he decided in 1928 to incorporate his business. In the negotiations leading up to the incorporation the bank which had agreed to undertake to sell the stock of the corporation sent accountants to make an audit of plaintiff's business and his books of account. As a result of this audit, errors were discovered in the method employed by plaintiff in handling his inventory. Such errors disclosed that he had underpaid his income taxes for the years in question. As a result plaintiff instructed that amended tax returns for 1920 to 1923 be prepared showing any additional taxes that might be due, together with a full statement concerning the matters giving rise to the additional tax. These returns, to each of which such a statement was attached, were duly executed by plaintiff and filed with the collector, and the additional taxes computed and shown thereon to be due were voluntarily paid to the collector without protest on April 4, 1928, and such taxes, for each of the years, were subsequently duly assessed by the Commissioner on a regular assessment list signed July 12, 1928.
July 12, 1931, plaintiff filed claims for refund of the additional taxes so paid on the sole ground that at the time of payment the period of limitation within which such taxes could have been assessed and collected for such years had expired. The refund claims were rejected.
In the circumstances of this case, we are of opinion that the additional taxes in question do not constitute an overpayment within the meaning of section 607 of the Revenue Act of 1928 (26 USCA § 2607) and that plaintiff is not, therefore, entitled to recover. This case is unlike one where a taxpayer who files his original return and voluntarily pays his tax later finds that such tax was overpaid, and it is also unlike a case where upon determination, assessment, and demand, an additional tax is voluntarily paid, the refund of which is later claimed on the ground that collection was made after the expiration of the period of limitation applicable thereto.
The facts and circumstances in this case constitute, we think, a waiver by plaintiff of his right to rely upon the statute of limitation with respect to the assessment and collection of taxes. The taxpayer's written evidence of his intention not to stand upon the statutory limitation period was accepted and approved by the Commissioner in writing when he signed the assessment list of such taxes on July 12, 1928. At the time the amended returns and the statements thereto attached were prepared and the additional taxes computed, and at the time such returns were filed and the additional taxes voluntarily paid by plaintiff, he knew that the period of limitation within which such additional taxes could be assessed and collected by demand or distraint had expired. It is well established that the statute of limitation can be effectively waived after the limitation period has run. Stange v. United States, 282 U.S. 270, 51 S.Ct. 145, 75 L.Ed. 335; Helvering v. Newport Co., 291 U.S. 485, 54 S.Ct. 480, 78 L.Ed. 929. And while an amended return standing alone may not be considered as a waiver extending the statutory period of limitation for assessment and collection, Appeal of National Refining Co. of Ohio, 1 B.T.A. 236, and Appeals of Belle R. Weaver et al., 4 B.T.A. 15, in the circumstances of this case it must be assumed that the taxpayer when he voluntarily paid the additional taxes in question intended that the payment should be effective and that he was not paying such amounts for the mere purpose of incurring the expense of having the same returned to him. It is also established that a waiver of the statute of limitation by a taxpayer need not be in any particular form, Stearns Co. v. United States, 291 U.S. 54, 54 S.Ct. 325, 78 L.Ed. 647; Sabin v. United States, 44 F.2d 70, 70 Ct. Cl. 574; or that the waiver shall be embraced in a single paper, Eclipse Lawn Mower Co. v. United States, 1 F. Supp. 768, 76 Ct. Cl. 354. And it has been held that a statute of limitation may be orally waived. Appeal of Warner Sugar Refining Co., 4 B.T.A. 5, 9. The making of the voluntary returns and the voluntary payment of the tax by the taxpayer in this case and the subsequent formal acceptance and assessment of the tax by the Commissioner of Internal Revenue give rise to a case analogous to an effective revival of a private debt by a new promise without new consideration. See Stange v. United States, supra.
Moreover, we think, notwithstanding the authority of the Commissioner legally to assess and enforce collection of taxes is limited by the statute, that a taxpayer may make a valid payment of a tax in a case where the statute has run without a formal written waiver as well as with one. If such a payment is made voluntarily before assessment or demand and the tax is thereafter assessed by the Commissioner and covered into the treasury by the collector, the taxpayer is in no position to complain on the ground that if the Commissioner and the collector had in the first instance compelled him to pay the tax he could recover it if the statute of limitation had run.
On the whole case, we are of opinion that plaintiff is not entitled to recover. The petition must therefore be dismissed. It is so ordered.