Opinion
No. M — 377.
April 7, 1941.
Charles B. McInnis, of Washington, D.C. (C. Leo DeOrsey, of Washington, D.C., on the brief), for plaintiff.
J.A. Rees, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Suit by the Ragan-Malone Company against the United States to recover income taxes alleged to have been wrongfully collected.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the report of a commissioner and the evidence makes the following special findings of fact:
1. Plaintiff was incorporated September 7, 1909, pursuant to the laws of Georgia, for a period of 20 years with the privilege of renewal at the expiration of that time. From the date of incorporation until about April 1, 1925, plaintiff was engaged in the wholesale drygoods and notions business as jobbers, with its principal place of business in Atlanta, Ga.
2. About April 1, 1925, plaintiff began a voluntary liquidation and made a voluntary deed of assignment for that purpose. It did not thereafter resume its merchandizing business and thereafter transacted no business other than such matters as were connected with the liquidation.
3. When the twenty-year period provided in its charter for the term of its corporate existence terminated September 7, 1929, plaintiff allowed the charter to expire without renewal at that time. However, June 29, 1934, on application of plaintiff's officers and directors an order was issued by the Superior Court of Fulton County, Ga., reviving the original charter and extending it for a period of 20 years from that date.
4. December 30, 1918, plaintiff, pursuant to the provisions of the Revenue Act of 1917, 40 Stat. 300 et seq., filed its income and profits tax return for the fiscal year ended November 30, 1918, showing a tax liability of $68,920.20. June 15, 1919, plaintiff filed a similar return for the same year under the Revenue Act of 1918, 40 Stat. 1057 et seq., which disclosed a tax liability of $100,090.86.
February 21, 1919, on his January, 1919, assessment list, the Commissioner of Internal Revenue assessed the original tax of $68,920.20 shown on the first return filed for the fiscal year ended November 30, 1918, and on October 30, 1919, assessed an additional amount of $65,630.49, on account of the tax shown due on the return for the same year filed June 15, 1919, making the total assessments against plaintiff $134,550.69 for the fiscal year ended November 30, 1918. Payments were made in 1919 on account of such assessments as follows:
January 2, 1919 ............ $17,230.32 January 24, 1919 ........... 17,230.05 June 15, 1919 .............. 15,585.06 September 23, 1919 ......... 25,022.72 September 23, 1919 ......... 23,316.45 __________ Total .................. 98,384.60
These payments left a balance outstanding of the assessments for the fiscal year ended November 30, 1918, of $36,166.09.
5. January 21, 1920, plaintiff filed a claim for abatement of $1,357.89 for the fiscal year ended November 30, 1918. March 27, 1920, the Commissioner advised plaintiff that the claim for abatement would be rejected and the collector for its district would return its bond upon the payment of the tax covered by the abatement claim. Pursuant to an examination and report of a revenue agent dated October 20, 1923, the Commissioner on January 28, 1924, advised plaintiff of the determination of an overassessment for the fiscal year ended November 30, 1918, of $30,235.41. On or about April 12, 1924, the collector delivered to plaintiff a certificate of overassessment for the fiscal year ended November 30, 1918, of $30,235.41, such certificate showing a total assessment of $134,550.69, the correct tax liability $104,315.28, and further showing that the amount of overassessment had been abated. After that abatement had been made there remained an outstanding balance of the assessments for the fiscal year ended November 30, 1918, of $5,930.68.
April 24, 1924, plaintiff filed a claim for credit of $5,582.31 and at the same time referred to a previous claim for credit of $348.37, making a total of $5,930.68. Upon receipt of that claim the collector suggested to plaintiff that apparently the claim for credit of $5,930.68 should have been filed as a claim for abatement, and thereafter plaintiff took the necessary action to make the change suggested by the collector.
February 12, 1925, the Commissioner advised plaintiff that its protest dated August 29, 1924, against the determination set forth in his letter of January 28, 1924 (referred to in the first paragraph of this finding), had been carefully considered but that the contentions set out therein had been denied, thereby sustaining the previous determination of plaintiff's tax liability of $104,315.28 for the fiscal year ended November 30, 1918, and that its claim for abatement of $5,930.68 "will be rejected in full." The amount covered by the abatement claim was paid in two installments of $1,706.26 and $4,224.42 on September 28, 1926, and November 26, 1926, respectively, as shown in finding 8.
6. February 16, 1920, plaintiff filed its income and profits tax return for the fiscal year ended November 30, 1919, showing a tax liability of $56,920.84, which was assessed March 18, 1920. The tax liability so assessed was paid in part during 1920 as follows:
February 16, 1920 ........... $14,230.21 May 17, 1920 ................ 14,230.21 August 18, 1920 ............. 5,015.43 November 16, 1920 ........... 11,158.62 __________ Total .................... 44,634.47
These payments left an outstanding balance for the fiscal year ended November 30, 1919, of $12,286.37. April 28, 1920, plaintiff filed a claim for credit of an alleged overpayment of $12,286.37 for the taxable year 1918 against its outstanding tax liability for the taxable year 1919.
7. January 13, 1925, as a result of a letter from the Commissioner dated January 7, 1925, plaintiff filed a waiver which extended the period for making assessments for the fiscal year ended November 30, 1919, to December 31, 1925, and that waiver was duly accepted by the Commissioner. December 10, 1925, the Commissioner mailed a deficiency notice to plaintiff for the fiscal year ended November 30, 1919, showing a deficiency of $11,270.97. December 12, 1925, plaintiff executed and forwarded to the Commissioner an agreement consenting to the immediate assessment of the foregoing deficiency for the fiscal year ended November 30, 1919. The agreement was received by the Commissioner December 14, 1925, and the deficiency was assessed by the Commissioner December 22, 1925.
8. September 28, 1926, plaintiff paid to the collector $23,557.34, the remaining outstanding balance ($12,286.37) of original tax assessed for the fiscal year ended November 30, 1919, and the deficiency ($11,270.97) referred to in finding 7, and at the same time also paid $1,706.26 for the fiscal year ended November 30, 1918. Prior to the payment of $1,706.26 there was an outstanding balance due for the fiscal year ended November 30, 1918, of $5,930.68, and the foregoing payment reduced that amount to $4,224.42, which was paid by plaintiff November 26, 1926. In addition to the principal amounts paid, as set out in this finding, plaintiff paid interest as follows:
a. $1,634.85 as interest upon $4,224.42 paid November 26, 1926, as original tax for the year 1918.
b. $638.61 as interest upon $1,706.26 paid September 28, 1926, as additional tax for the year 1918.
c. $3,941.47 as interest upon $12,286.37 paid September 28, 1926, as original tax for the year 1919.
d. $347.71 as interest upon $11,270.97 paid September 28, 1926, as additional tax for the year 1919.
9. Plaintiff filed seven separate formal claims for refund for the fiscal year ended November 30, 1918, and eight similar claims for the fiscal year ended November 30, 1919. A summary of the facts relating to the various claims follows:
Fiscal Year Ended November 30, 1918
A. A claim for $25,000, filed December 13, 1926, based upon (a) allowance of employees' bonuses as a deduction for wages paid; (b) special assessment under the provisions of section 210 of the Revenue Act of 1917, and sections 327 and 328 of the Revenue Act of 1918, 40 Stat. 307 and 1093; (c) the collection of $4,224.42 after the statute of limitations for collection had expired, and (d) any other adjustments respecting income and invested capital.
B. A claim for $1,706.26 and a claim for $4,224.42, both filed March 15, 1927, and both containing the same grounds, namely, that these payments were barred by the statute of limitations when made and therefore these amounts were erroneously and illegally collected.
C. July 18, 1927, the Commissioner advised plaintiff that the three claims referred to in paragraphs A and B above would be rejected in full and they were formally rejected August 3, 1927.
D. A claim for $13,992.63 filed July 19, 1928, based solely on the ground that plaintiff was entitled to special assessment. October 2, 1928, the Commissioner advised plaintiff that the claim was considered as an application for a reopening and reconsideration of a prior claim which stated the same ground, and, after reciting the previous action which had been taken, denied the request for a reopening and reconsideration, concluding such action with the following statement:
"In view of the foregoing this office has carefully considered the Forms 853 which you have filed and concludes that the previous decisions of the Bureau should be sustained and your request for the reopening and reconsideration of your tax liability for the fiscal years ended November 30, 1917 to 1919 is denied."
E. A claim for $5,930.68 filed September 14, 1929, based upon the ground that this tax "was not assessed against this taxpayer by the Commissioner, and/or was not collected at a time when the Commissioner had a legal right so to do; or it was assessed and/or collected at a time when the assessment and/or collection was barred by the Statute of Limitation."
September 28, 1929, the Commissioner advised plaintiff that the claim would be rejected in full and it was rejected on a schedule dated October 10, 1929.
F. A claim for $5,930.68 filed October 11, 1929, based upon the sole ground that compensation paid or accrued to employees for so-called dividends or bonuses on stock is a proper deduction in determining taxable income, and urging that there had been a change in policy on the part of the Bureau of Internal Revenue from that followed at the time a previous claim on the same ground had been considered and disallowed. The Commissioner treated the claim as a request for a reopening and reconsideration of a prior claim and April 11, 1930, denied such request, his letter reading in part as follows:
"The forms are considered as requests for reopening the years in question due to the fact that in refund claims filed in December, 1926, for those years, the same issue was presented as is now made the subject of those forms.
"It is contended that since the stock bonus plan adopted by the taxpayer in 1916 contains provisions similar to those set forth in a general discussion of such plans in an article appearing in the May, 1929 issue of the Internal Revenue News, wherein it was stated that under certain conditions, such payments may be deducted by a corporation as compensation to employees, income of the corporation should be adjusted for the years in question to reflect payments made under that plan.
"However, it should be observed that the primary reason ascribed in the article referred to for the deductibility of such payments in some cases as compensation to employees is the fact that title to the stock remains in the corporation until such time as payments under the plan have been completed and consequently amounts credited to employees' accounts pending existence of all conditions precedent to ownership of subscription stock could not in point of law represent dividends.
"In the instant case, by the terms of the resolution creating the stock bonus plan, ownership of the stock would necessarily be vested in the subscriber thereto within the fiscal year of taxpayer, since it is provided in the resolution that `such subscriptions may be paid in cash or in monthly installments of not less than $10.00 per month on any one subscription, and deferred payments for such subscriptions shall be closed by note or a series of notes, the last of which shall mature within the fiscal year * * *.' It thus appears that, since ownership of the stock was acquired by a subscriber in each case within the fiscal year of the taxpayer, it cannot be held that the payments thereon did not constitute dividends paid by the corporation.
"Accordingly, it follows that, as dividends, the payments in question may not be permitted to be deducted from gross income of the taxable years under discussion.
"In view of the above facts, it is the opinion of this office that the requests for reopening the fiscal years ended November 30, 1918, and November 30, 1919, cannot be allowed and the applications are accordingly denied."
G. A claim for $5,930.68 filed September 27, 1930, stating several grounds including (a) collection at a time when the statute of limitations had run; (b) deduction for so-called dividends or bonuses as additional compensation to employees; (c) correction in the computation of the war profits credit; (d) benefit of section 205 of the Revenue Act of 1917, 40 Stat. 304; (e) deductibility of the income tax for 1917 from gross income for 1918; and (f) special assessment. Prior to stating the foregoing grounds the claim set out:
"Refund claims have heretofore been filed on behalf of this corporation for the refund of a part or all of the tax paid for this taxable year, and this claim is intended to be a new claim, as well as an amendment to or completion of prior claims."
The record contains no evidence showing the action taken, if any, by the Commissioner upon this claim.
Fiscal Year Ended November 30, 1919
A. A claim for $14,440.50 filed January 9, 1924, based on a request for the application of sections 327 and 328 of the Revenue Act of 1918. December 10, 1925, the Commissioner advised plaintiff of his determination of a deficiency ($11,270.97) for the fiscal year ended September 30, 1919 (See finding 7), and in the same communication made the following reference to action on the foregoing claim for refund:
"Inasmuch as your application for assessment under Section 328 of the Revenue Act of 1918 has now been withdrawn, the rejection of your claim for refund of $14,440.50, based upon such application as set forth in Bureau letter of February 12, 1927, is accordingly sustained."
B. A claim for $25,000 filed December 13, 1926, stating as grounds that refunds should be made "due to increased invested capital on account of paid-in surplus; decreased income on account of bonuses disallowed; special assessment; or any other adjustments respecting income or invested capital."
C. A claim for $12,286.37 and a claim for $11,270.97, both filed March 15, 1927, stating as grounds therefor that "at the time of payment this tax was barred by the Statute of Limitations and the amount was erroneously and illegally collected."
D. July 18, 1927, the Commissioner advised plaintiff that the claims referred to in B and C above would be rejected, and they were formally rejected on a schedule dated August 3, 1927.
E. A claim for $11,270.97 filed July 19, 1928, based solely upon a request for special assessment. October 2, 1928, the Commissioner advised plaintiff that the claim was considered a request for a reopening and reconsideration of a prior claim which stated the same ground and denied the request in the same manner as a similar claim for the fiscal year ended November 30, 1918. (See paragraph D above for the fiscal year ended November 30, 1918.)
F. A claim for $23,557.34 filed September 14, 1929, based solely upon the ground that this tax "was not assessed against this taxpayer by the Commissioner, and/or was not collected, at a time when the Commissioner had a legal right so to do; or it was assessed and/or collected at a time when the assessment and/or collection was barred by the Statute of Limitation." September 28, 1929, the Commissioner advised plaintiff that the foregoing claim would be rejected in full and it was rejected on a schedule dated October 10, 1929.
G. A claim for $23,557.34 filed October 11, 1929, stating as its sole ground that compensation paid or accrued to employees for so-called dividends or bonuses on stock is a proper deduction in determining taxable income, and urging that there had been a change in policy on the part of the Bureau of Internal Revenue from that followed at the time a previous claim on the same ground had been considered and disallowed. The Commissioner treated the claim as a request for a reopening and reconsideration of a prior claim and denied such request, his letter reading as shown in paragraph F above for the fiscal year ended November 30, 1918.
H. A claim for $23,557.34 filed September 27, 1930, stating several grounds including (a) collection at a time when the statute of limitations had run; (b) deduction for so-called dividends or bonuses as additional compensation to employees; (c) correction in the computation of the war profits credit; (d) correction of invested capital as provided by Article 845(a) of Regulations 45; (e) deductibility of the income tax for 1918 from gross income for 1919, and (f) special assessment. Prior to stating the foregoing grounds the claim set out:
"Refund claims have heretofore been filed on behalf of this corporation for the refund of a part or all of the tax paid for this taxable year, and this claim is intended to be a new claim, as well as an amendment to or completion of prior claims."
The record contains no evidence showing the action taken, if any, by the Commissioner upon this claim.
All the claims for refund referred to in this finding except those referred to in paragraph G, for the fiscal year ended November 30, 1918, and paragraph H, for the fiscal year ended November 30, 1919, were duly sworn to and signed "Ragan-Malone Co. by James J. Ragan, Pres." The two claims referred to in paragraphs G and H, respectively, and just mentioned, were duly sworn to and signed "Ragan-Malone Co. by Willis E. Ragan, Vice Pres." James J. Ragan was president of plaintiff corporation from December 11, 1923, to October 14, 1926, when, as previously stated, he was duly appointed liquidating agent for the corporation. Willis E. Ragan was vice president of plaintiff corporation from December 31, 1923, and director from December 9, 1924. No regular or special meetings of either the stockholders or the directors of plaintiff were held from October 15, 1926, to May 27, 1934.
10. August 12, 1916, plaintiff's stockholders adopted a resolution providing for the issuance of a separate series of additional capital stock not in excess of $30,000, to be known as "Employees' Profit-Sharing Stock," hereinafter referred to as "special stock," which was to be sold exclusively to plaintiff's employees. The material portions of that resolution read as follows:
"Said stock shall be issued in shares of the par value of $100.00 each as subscribed for exclusively by employees of said corporation who have been in its service not less than two years prior to the time of their several subscriptions. Such employees shall be entitled to subscribe to said stock during the first two months of any fiscal year of said corporation (which fiscal year runs from December 1st to December 1st) in a sum not exceeding the percentage hereinafter stated. Such subscriptions may be paid in cash or in monthly installments of not less than $10.00 per month on any one subscription, and deferred payments for such subscriptions shall be closed by note or a series of notes, the last of which shall mature within the fiscal year, which said notes for deferred payments shall draw interest at the rate of six percent per annum.
"Said stock shall be treated, so far as dividends are concerned, as full paid stock upon the giving of said notes, but all dividends and bonuses declared on said stock shall be first applied to the liquidation of any balances, if any, due on said subscription notes. No subscription for additional stock in said series shall be made by any employee in any succeeding year unless all previous subscription notes have been paid in full.
"Stock in this series shall be especially preferred stock as to payment of dividends and bonuses and (on liquidation or retirement) the full par value thereof over and above the common stock of said corporation, but in all respects subject to the rights and preferences of the outstanding eight hundred shares of 6% preferred stock of this company.
"Whenever the earnings of said corporation justify it cash dividends of six percent per annum shall be declared and paid on this series of stock on December 1st of each and every year, and said dividends shall be paid next after the payment of the dividends on said eight hundred shares of 6% preferred stock now outstanding and in preference to any dividends on the common stock.
"In addition to said cash dividends this series of stock shall be entitled to bonuses under the following conditions, to wit:
"1. After the payment of the operating expenses of said business and of six percent on all its issues of stock, and customary allowances for bad debts and depreciation, if the balance to credit of profit and loss in any given fiscal year of said corporation amounts to $10,000 or over and not exceeding $15,000, a bonus of $5.00 per share on this series of stock shall be paid and charged to said profit and loss account; and such bonus shall terminate all right or further participation of said stock in the profits of said business for that year."
(Here followed similar provisions where the credits to profit and loss were in amounts from $15,000 to $35,000.)
* * * * * * *
"7. In like manner, if said balance to the credit of profit and loss under said conditions equals or exceeds $40,000, said bonus shall be $30.00 per share on this series of stock, which shall extinguish its right of participation in the profits of the business for that year.
"After payment of bonuses under the conditions named, the entire balance standing to the credit of profit and loss account in said corporation shall be distributed to the holders of the common stock in accordance with the pooling contract between them.
"None of this special series of stock shall be issued after January 31st, 1923, and the entire issue of said stock then outstanding shall be retired on the terms and conditions herein stated within sixty days after December 1, 1923.
"None of the stock issued in this series can be sold, assigned, transferred, pledged, or hypothecated by any of the holders thereof, but certificates for the same when issued shall be deposited by the parties subscribing thereto with the treasurer of this corporation and shall be kept by said treasurer in suitable fireproof receptacle so long as the same is outstanding, and said corporation shall at all times have prior lien on said stock to secure the payment of any indebtedness due to the company from the subscriber thereto or holder and owner thereof.
"Within two months following the close of each fiscal year of said corporation, that is to say between December 1st and February 1st, following, the said employees and the said corporation shall have the following options relative to said stock:
"(a) Said corporation shall have the unqualified option at its pleasure to take up and retire any of this series of stock at the time outstanding by the payment of the par value thereof to the party in whose name said stock was issued, or his legal representatives, together with all dividends and bonuses due and unpaid thereon, first deducting therefrom any indebtedness, if any, due to this corporation from such employee, or his estate in case he is dead.
"(b) During the same period of time any of the employees of said company, and holders of any of this series of stock, shall have the right and option to surrender, cash in, and retire, his or their said holdings and shall be entitled to receive the par value thereof, together with any dividends and bonuses due thereon remaining unpaid, less any indebtedness due to said corporation, and in case of death of any such employee his personal representative shall have the right to exercise this option.
"At no other period and under no other conditions can such stock be paid off and retired, and in all such cases the status of such stock as to dividends and bonuses shall be as fixed by the closing of the books at the end of the preceding fiscal year of said corporation, to wit, November 30, preceding.
"The right to bonuses on said stock hereinbefore stipulated shall cease and determine whenever the holder of any such stock ceases to be an employee of said company by resignation, or other means, except in case of death. In case of the death of any such employee the right of bonuses and dividends shall continue up to the date of such death and shall be ascertained from the condition of the books of said corporation as last closed and the average of the preceding twelve months' operations of said company prior to the last close of said books upon the beginning of the fiscal year up to the death of such employee.
"In the event said corporation has its books audited by a certified public accountant at or about the close of the fiscal year of said corporation, then the report of said auditor as to the net earnings of said corporation applicable to dividends and bonuses on this issue of stock shall be binding and conclusive on the corporation and its employees and the then owners of this stock as to the amounts payable on said stock under these terms of its issuance.
"The right of the employees of said company to subscribe to this stock shall be limited to twenty-five per cent of the yearly salary or commissions of such employee earned during the preceding year. No fractional shares will be issued. All subscriptions to said stock are subject to acceptance by the Board of Directors.
"This series of stock shall not be entitled to any vote in the corporate action of said company.
"The certificates for this series of stock in said corporation shall contain on their face an express reference to these resolutions, which resolutions shall thereby become a part of such certificate, and the party in whose name said certificate is issued and his heirs, executors, administrators and assigns shall be in all respects bound by each and all of the terms and conditions herein expressed and upon which alone said stock is authorized to be issued."
December 19, 1916, plaintiff's Board of Directors adopted the following resolution:
"Resolved, That the officers of this corporation are hereby expressly authorized to pay out of the net earnings of the Company the usual three percent semi-annual dividends on capital stock account as well as dividends on the employees' profit-sharing stock on June 1st and December 1st, provided the net earnings as they appear on the books of the Company on said dates justify said payment; * * *."
11. In accordance with the resolution of August 12, 1916, referred to in the preceding finding, approximately ninety-five percent of plaintiff's employees who were eligible thereunder subscribed to and became owners of shares of special stock as follows:
--------------------------------------------------------------- | Shares issued during | Employes | years ended November | | 30 — | Total |-------------------------| | 1917 | 1918 | 1919 | ---------------------|--------|--------|-------|--------------- Hanes Brothers ..... | 25 | 34 | 60 | 119 S.B. Hanes. | | | | J.C. Hanes. | | | | John C. Hanes ...... | 1 | ...... | ..... | 1 J.L. Warman ........ | 3 | 3 | ..... | 6 J.C. DeFreese ...... | 2 | 3 | 3 | 8 J.G. Robertson ..... | 5 | 4 | 15 | 24 W.C. Daniel ........ | 2 | 3 | 4 | 9 Z.F. Daniel ........ | 6 | 8 | 14 | 28 S.H. Morgan ........ | 3 | 3 | 3 | 9 W.W. Scott, Jr. .... | ...... | 5 | 10 | 15 F.E. Hanna ......... | ...... | 1 | 3 | 4 M.C. Croft ......... | ...... | 5 | 14 | 19 J.R. Pickens ....... | ...... | 3 | 11 | 14 B.S. Sharp ......... | ...... | ...... | 2 | 2 W.R. Rumph ......... | ...... | ...... | 10 | 10 F.A. Yarbrough ..... | ...... | ...... | 3 | 3 John V. Freel ...... | ...... | ...... | 2 | 2 S.G. Jones ......... | ...... | ...... | 2 | 2 C.B. Pritchett ..... | ...... | ...... | 1 | 1 W.L. Foster ........ | ...... | ...... | 2 | 2 W.M. Johnson ....... | ...... | ...... | 2 | 2 (Unidentified) ..... | ...... | 1 | ..... | 1 |________|________|_______|_______________ Total ........... | 47 | 73 | 161 | 281 ---------------------------------------------------------------
Three unidentified shares were retired on December 3, 1918.
No special stock was issued during the fiscal year ended November 30, 1916. The total number of shares of special stock issued and outstanding at the close of the three succeeding fiscal years was as follows:
November 30, 1917 .................. 47 shares November 30, 1918 .................. 120 shares November 30, 1919 .................. 278 shares
None of plaintiff's employees who so subscribed for any of the special stock owned any of plaintiff's common or preferred stock and none of the special stock was subscribed for or owned by any of plaintiff's officers.
12. At meetings of plaintiff's Board of Directors on December 11, 1917, and December 10, 1918, resolutions were adopted which in each instance read as follows:
"On motion duly seconded the officers are directed to pay in addition to the 6% per annum dividend on profit-sharing stock of employees a bonus of $30 per share for the current year, payable all cash to the holders of the stock entitled thereto under the resolutions under which said stock was issued adopted at the stockholders' meeting of said company held on August 12, 1916, and appearing in this Minute Book beginning at page 66."
At a meeting on December 9, 1919, plaintiff's Board of Directors authorized the payment of "* * * $30 a share bonus for the fiscal year ending Nov. 30, 1919, on the Employees' Profit-Sharing Stock, the profits of the business for this year authorizing said bonus of $30 a share under the provisions of the resolution of Aug. 12, 1916, under which said stock was issued, payable December 10th, 1919."
December 11, 1917, December 10, 1918, and December 9, 1919, plaintiff's stockholders adopted a resolution which in each instance read as follows:
"Resolved, that all of the acts and doings of the Directors of the Company since the last annual meeting thereof as they appear on the books of the corporation be and they are hereby in all respects ratified and confirmed by the stockholders."
13. For the year ended November 30, 1917, plaintiff accrued on its books separate items of "Dividends" and "Bonus" in the respective amounts of $279 and $1,380, and these separate items were either credited to amounts owing by the employes or paid to the employes during the following fiscal year. The amount of $1,380 was claimed as ordinary expenses and as deductions from gross income on plaintiff's return for the fiscal year ended November 30, 1917.
For the fiscal years ended November 30, 1918, and November 30, 1919, "Dividends" and "Bonus" were accrued on plaintiff's books on the stock referred to in finding 11, as follows:
------------------------------------------------------------------------ | Year ended | Year ended Employes | Nov. 30, 1918 | Nov. 30, 1919 |-------------------------|----------------------- | Dividends | Bonus | Dividends | Bonus ----------------------|------------|------------|------------|---------- Hanes Brothers ...... | $354.00 | $1,770.00 | $714.00 | $3,570.00 S.B. Hanes. | | | | J.C. Hanes. | | | | John C. Hanes ....... | 6.00 | .......... | ........ | ......... J.L. Warman ......... | 36.00 | 180.00 | 36.00 | 180.00 J.C. DeFreese ....... | 30.00 | 150.00 | 48.00 | 240.00 J.G. Robertson ...... | 48.00 | 240.00 | 138.00 | 690.00 W.C. Daniel ......... | 30.00 | 150.00 | 54.00 | 270.00 Z.F. Daniel ......... | 84.00 | 420.00 | 168.00 | 840.00 S.H. Morgan ......... | 36.00 | 180.00 | 54.00 | 270.00 W.W. Scott, Jr. ..... | 30.00 | 150.00 | 90.00 | 450.00 F.E. Hanna .......... | 6.00 | 30.00 | 24.00 | 120.00 M.C. Croft .......... | 30.00 | 150.00 | 114.00 | 570.00 J.R. Pickens ........ | 18.00 | 90.00 | 84.00 | 420.00 B.S. Sharp .......... | .......... | .......... | 12.00 | 60.00 W.R. Rumph .......... | .......... | .......... | 60.00 | 300.00 F.A. Yarbrough ...... | .......... | .......... | 18.00 | 90.00 John V. Freel ....... | .......... | .......... | 12.00 | 60.00 S.G. Jones .......... | .......... | .......... | 12.00 | 60.00 C.B. Pritchett ...... | .......... | .......... | 6.00 | 30.00 W.L. Foster ......... | .......... | .......... | 12.00 | 60.00 W.M. Johnson ........ | .......... | .......... | 12.00 | 60.00 |____________|____________|____________|__________ Total .............. | 708.00 | 3,510.00 | 1,668.00 | 8,340.00 Unidentified error | | | | above ............. | .......... | .......... | 12.00 | ......... | | |____________| Correct total ..... | .......... | .......... | 1,656.00 | ......... ------------------------------------------------------------------------
14. The total of the separate items shown in the tabulation in the preceding finding as "Dividends" and "Bonus" in the respective totals of $708 and $3,510 which were accrued upon plaintiff's books for the fiscal year ended November 30, 1918, were either credited to amounts owing by the employes mentioned or paid to them during the following fiscal year. The amount of $3,150 was claimed as ordinary expenses and as a deduction from gross income upon plaintiff's return for the fiscal year ended November 30, 1918, but that deduction was disallowed by the Commissioner in his final determination of plaintiff's tax liability for that year.
15. The total of the separate items shown in finding 13 as "Dividends" and "Bonus" in the respective amounts of $1,656 and $8,340 for the fiscal year ended November 30, 1919, and which were accrued on plaintiff's books for that year were either credited to amounts owing by the employees or paid to them during the following fiscal year. The amount of $8,340 was claimed as ordinary expenses and as a deduction from gross income on plaintiff's return for the fiscal year ended November 30, 1919, but such deduction was disallowed by the Commissioner in his final determination of plaintiff's tax liability for that year.
16. Although defendant does not concede that the "Dividends" or "Bonus" referred to in the preceding findings constituted a part of the salaries of the employees to whom they were paid, it is stipulated that should the court decide otherwise the salaries received by each of the employees mentioned during the fiscal years ended November 30, 1918 and 1919, including the payments for "Dividends" and "Bonus," as shown above, were severally reasonable.
17. Plaintiff kept its books and rendered its returns for the fiscal years ended November 30, 1918 and 1919, on the accrual basis.
Conclusion of Law
Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court decides as a conclusion of law that the plaintiff is not entitled to recover, and the petition is therefore dismissed.
Judgment is rendered against the plaintiff for the cost of printing the record herein, the amount thereof to be entered by the clerk and collected by him according to law.
Plaintiff, a corporation, was assessed income and profits taxes for each of the fiscal years ending November 30, 1918, and November 30, 1919.
Of the 1918 tax $98,384.60 was paid in installments during 1919, leaving a balance of $5,930.68, of which balance $1,706.26 was paid September 28, 1926, and $4,224.42 was paid November 26, 1926.
Of the 1919 tax $44,634.47 was paid in installments during 1920, leaving a balance of $12,286.37, and this sum, together with a deficiency assessment of $11,270.97, a total of $23,557.34 was paid September 28, 1926. Plaintiff also paid on September 28, 1926, $638.61 as delinquent interest for 1918, and $4,289.18 as delinquent interest for 1919, and paid on November 26, 1926, $1,634.85 as delinquent interest for 1918.
Beginning on December 13, 1926, plaintiff filed seven separate formal claims for refund for 1918, and eight for 1919. Only three of the claims for each of these years relied upon the ground which, as is hereinafter shown, is the only ground for refund asserted in the amended petition upon which this suit is founded, viz., that certain payments to employees should have been allowed to be deducted as compensation for services, and therefore, business expenses. Two such claims, one for each of the two years, were filed on December 13, 1926, and both were rejected by the Commissioner on August 3, 1927. Two such claims, one for each of the two years, were filed on October 11, 1929. The Commissioner treated these two claims as requests for reconsideration of his former rejection of the two claims of December 13, 1926, and closed a rather lengthy letter of April 11, 1930, with the statement "In view of the above facts, it is the opinion of this office that the request for reopening * * * cannot be allowed and the applications are accordingly denied."
On October 10, 1931, plaintiff filed its original petition in this case. In that petition plaintiff recited in paragraph 2 that it had a just claim for refund of $29,488.02 paid by it in 1926 as income taxes for 1918 and 1919. It recited in paragraph 9, that it had, on September 15, 1929, filed a claim for refund of the entire amount, $29,488.02, paid by it in 1926 for the years 1918 and 1919, on the ground that the assessment and collection of these taxes had been barred by the statute of limitations. It recited in paragraph 11 of the petition that it had, on October 11, 1929, filed the claims for refund, hereinabove mentioned, for the entire sum paid in 1926 for the years 1918 and 1919, on the ground of the refusal to allow as deductions payments made to employees and claimed by plaintiff to be compensation for services.
Paragraph 14 of the original petition is as follows:
"That said sum is erroneously, illegally and wrongfully withheld from the claimant for the reason that, the aforesaid additional tax was wrongfully assessed against the claimant after the expiration of the statutory period of limitation within which such tax could lawfully be assessed; and for the further reason that, the tax paid in the year 1926 as aforesaid, was erroneously, illegally, and wrongfully collected from the claimant subsequent to the expiration of the statutory period of limitation within which such collection lawfully could be made, as provided by Sections 250(d) of the Revenue Act of 1918 ( 40 Stat. 1057, 1083, c. 18), 250(d) of the Revenue Act of 1921 ( 42 Stat. 227, 265, c. 136) and 277(a)(2) of the Revenue Act of 1924 ( 43 Stat. 299, c. 234 [26 U.S.C.A. Int.Rev. Acts, page 59]); and Sections 277(a)(3) and 1106(a) of the Revenue Act of 1926 ( 44 Stat. 58, 113, c. 27 [26 U.S.C.A. Int. Rev. Acts, pages 207, 318]); and for the further reason that, such sum was collected under duress and without due process of law, the latter in violation of Sections 274(a) and 283 of the Revenue Act of 1926 ( 44 Stat. 55, 63, c. 27 [26 U.S.C.A. Int.Rev. Acts, pages 203, 216]) and the Fifth (Vth) Amendment to the Constitution of these United States."
Paragraph 15, the closing paragraph, contains formal recitals and a prayer for judgment for $29,488.02.
This court referred the case to a commissioner and a hearing was held in Atlanta, Georgia, October 19-20, 1933. At this hearing much evidence was presented relating to facts bearing on the question of whether the assessment and collection of the taxes paid by plaintiff in 1926 had been barred by the statute of limitations. Plaintiff also offered evidence intended to show that the payments made to employees, disallowed as deductions by the Commissioner of Internal Revenue, were compensation for services. Defendant objected on the ground that this evidence was not relevant to the claim stated in plaintiff's petition. The commissioner of this court ruled for defendant. Plaintiff stated that it intended to amend its petition to cover this issue. Defendant claimed that the petition could not be so amended, since to do so would not be merely amending the petition but stating a new cause of action on which the statute of limitations had run. The commissioner of this court, having no power over the question of amendment, in order to save the expense and inconvenience of a further hearing admitted the proffered evidence conditionally, the evidence to be considered if the amendment was made.
Plaintiff submitted no proposed findings of fact to the commissioner of this court, and did not amend its petition until after the commissioner had, on June 16, 1936, made his report to the court. Thereafter, on April 4, 1938, plaintiff filed its amended petition in which it asserted a claim against the defendant for $8,500, stating that it had filed the claims for refund hereinbefore mentioned of December 13, 1926, October 11, 1929, and September 27, 1930; and recited the action and failure to act of the Commissioner of Internal Revenue thereon.
Paragraph 23 of the amended petition is as follows:
"That said sum is erroneously, illegally and wrongfully withheld from the plaintiff for the reason (A) that the Commissioner erroneously failed, when computing the net income of the plaintiff for each of the taxable years 1918 and 1919, to allow as a deduction, as an ordinary and necessary expense paid or incurred during the respective taxable years in carrying on its trade and business, the amounts paid pursuant to the employees' stock profit sharing contracts, designated as dividends and bonuses to such employees, representing compensation for personal services actually rendered, which are allowed by paragraph (1) of subdivision (a) of section 234 of the Revenue Act of 1918; and (B) that the Commissioner, when computing the invested capital of plaintiff for the taxable year of 1919, erroneously reflected an amount for 1918 income and profits tax greater than the correct amount thereof, and contrary to article 845(a) of Regulations 45."
Defendant demurred to the amended petition, one of its grounds being that the court was without jurisdiction because the amended petition was filed after the statute of limitations had run.
The demurrer was, on November 14, 1938, overruled, and the matter was again referred to the same commissioner of this court who, on April 11, 1940, filed a supplemental report relating to the evidence admitted conditionally at the 1933 hearing, and to the subject of an agreed statement of facts submitted by the parties.
The questions presented in the briefs and arguments of the parties are (1) whether the statute of limitations has run against plaintiff's claim, and (2) whether or not the payments made by the plaintiff to its employees were compensation for services and therefore deductible as business expenses, or were dividends paid to those employees as stockholders.
Our disposition of the first question makes it unnecessary to discuss the second.
In our opinion plaintiff did not bring its present suit until it had filed its amended petition on April 4, 1938. Its original petition filed in 1931, while it recited in an intermediate paragraph that claims for refund had been made on the grounds now relied on by plaintiff, was specific, in paragraph 14 which we have recited, in stating the grounds upon which it claimed "that said sum is erroneously, illegally and wrongfully withheld" from the plaintiff. Neither this paragraph nor the petition as a whole contained any general language which could include the ground asserted in the amended petition and now exclusively relied on by plaintiff. See United States v. Factors Finance Co., 288 U.S. 89, 53 S.Ct. 287, 77 L.Ed. 633.
The cause of action relied on in the amended petition is in fact a new cause of action, and not a mere particularization of the old. See United States v. Andrews, 302 U.S. 517, 58 S.Ct. 315, 82 L.Ed. 398; Lorenzen v. United States, D.C.W.D.Mo., 41 F.2d 369, affirmed 8 Cir., 52 F.2d 106, on the opinion of the trial court. If we should hold that the filing of the original petition here had in effect tolled the statute for the nearly seven years intervening before plaintiff stated the cause of action upon which it now relies, it would encourage just such dilatory conduct as occurred in this case. Here, even after the fact that the original petition did not include this ground of recovery was brought out at the hearing, and plaintiff indicated its purpose to amend the petition, and the commissioner of this court for that reason admitted plaintiff's evidence only conditionally, it waited nearly five years before amending. Indeed, if its contention is correct, it could have waited any number of years, so long as the case was pending on the original petition.
The case of Untermyer v. Bowers, 2 Cir., 79 F.2d 9, is not in point. In that case, the claim that an allowed refund for one year had been applied by the Commissioner of Internal Revenue as a credit on taxes for another year whose taxes were barred by the statute of limitations, was made in the original petition. Plaintiff neglected to state facts showing that he had been properly entitled to the credits allowed him. His supplying those facts in his amended petition was an amplification of his original petition, and not the statement of a cause of action arising out of another and different ground.
Plaintiff asserted in its brief in opposition to the defendant's demurrer, however, that even if the amended petition filed in 1938 were treated as an original petition, it was filed in time. It reasoned that because its claims for refund, filed with the Commissioner on September 27, 1930, have never been expressly rejected by the Commissioner, its right to sue continued and will continue until two years after the date of mailing by the Commissioner by registered mail of a notice of such rejection. See Revenue Act of 1932, section 1103(a)(b), 47 Stat. 169, 286, 26 U.S.C.A. Int.Rev. Acts, page 652; Revenue Act of 1936, section 807(a)(b), 49 Stat. 1648, 1745, 26 U.S.C.A. Int.Rev. Acts, page 958. Counsel for the defendant concede in their brief in support of defendant's demurrer that this would be the result "if, as alleged, refund claims were filed on September 27, 1930, and were still pending unrejected in the Bureau of Internal Revenue when that petition [the 1938 petition] was filed." Counsel for defendant then urge that the documents filed on September 27, 1930, were not "refund claims" because they were mere repetitions of the claims which had been filed in 1926 and rejected in 1927, and as to which an application to reconsider had been made and disallowed in 1929.
We agree with the defendant that the 1930 claims were not effective legal claims for refund and therefore were without legal significance. A taxpayer cannot keep his claim fresh indefinitely merely by repeating it. B. Altman Co. v. United States, 40 F.2d 781, 69 Ct.Cl. 721. See also Sugar Land Ry. v. United States, 48 F.2d 973, 71 Ct.Cl. 628; Hills, Executrix, v. United States, 50 F.2d 302, 55 F.2d 1001, 73 Ct.Cl. 128; Pacific Mills v. Nichols, Ct. Cl., 4 F. Supp. 738. The case of Jones et al. v. United States, 5 F. Supp. 146, 78 Ct. Cl. 549, does not establish a different doctrine. The Court there said (5 F. Supp. page 152, 78 Ct.Cl. pages 560, 561):
"These cases announce the rule that when the Commissioner, upon application made by a taxpayer within the time in which suit could be instituted on a disallowed claim, enters into a reconsideration of the merits of the claim and later makes a decision thereon rejecting the claim, or adheres to his former decision rejecting it, his decision for the purpose of the statute of limitations is in abeyance until he has reached and announced his final decision, and the taxpayer, under section 3226 of the Revised Statutes, as amended (26 U.S.C.A. § 156), has two years thereafter in which to institute suit. Whether there has been reconsideration on the merits is a conclusion to be drawn from the acts of the Commissioner in response to the application for reconsideration. There must be an actual reconsideration of the case, and the final decision must be upon the merits of the claim."
In this case there is no evidence that the Commissioner entered into a reconsideration of the case following the filing by the plaintiff of the documents of 1930. We, therefore, do not think that a claim for refund, as contemplated by the statute, stood unrejected after 1930. The provisions of section 1103(b) of the Revenue Act of 1932 make section 3226 of the Revised Statutes as it was before it was amended in 1932 the applicable statute. It provided that
"Suits or proceedings instituted before the date of the enactment of this Act shall not be affected by the amendment made by subsection (a) of this section to section 3226 of the Revised Statutes. In the case of suits or proceedings instituted on or after the date of the enactment of this Act where the part of the claim to which such suit or proceeding relates was disallowed before the date of the enactment of this Act, the statute of limitations shall be the same as provided by such section 3226 before its amendment by subsection (a) of this section."
"No suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. No such suit or proceeding shall be begun before the expiration of six months from the date of filing such claim unless the Commissioner renders a decision thereon within that time, nor after the expiration of five years from the date of the payment of such tax, penalty, or sum, unless such suit or proceeding is begun within two years after the disallowance of the part of such claim to which such suit or proceeding relates. The Commissioner shall within 90 days after any such disallowance notify the taxpayer thereof by mail." Revenue Act of 1924, § 1014, 43 Stat. 253, 343, 26 U.S.C.A. Int.Rev. Acts, page 128.
Plaintiff's amended petition, filed in 1938, being regarded as an original suit, is too late. It is eleven years after payment, where only five years are permitted; and nine years after rejection, when only two years are permitted.
Other questions raised in the briefs and argument we do not consider, since their resolution would not affect the result. We conclude, therefore, that the plaintiff's petition must be dismissed. It is so ordered.