Opinion
Nos. J-592, K-381, K-382, K-489, K-490.
December 2, 1935.
Allen H. Gardner and Morris, KixMiller Baar, all of Washington, D.C., for plaintiffs.
J.H. Sheppard, 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.
Suits by O.S. Lattimore, Mrs. O.S. Lattimore, Charles R. Keith, Dora Holland, and Russell C. Lewis against the United States.
Judgment for first-named plaintiff in accordance with opinion, and petitions of other plaintiffs dismissed.
These cases, which were consolidated for the purpose of presentation to the court, involve the recovery of income tax for 1918, 1919, and 1920. The principal controversy arises in connection with a determination of the correct income of partnerships in which plaintiffs had an interest, either as partners or through the community property laws of the state of Texas. The facts relating to the partnerships are set out in our findings and will be availed of in the disposition of the cases of the several plaintiffs in so far as material. In addition there are certain issues principally relating to the statute of limitations, which concern only certain plaintiffs, and separate findings are being made on these issues.
These cases having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. In or prior to 1915 Kirk D. Holland and Russell C. Lewis, one of the plaintiffs in these proceedings, became interested in a certain type of piston ring which was being made by two individuals in Texas by the names of Osburn and Miles. After some consideration and negotiation they conceived the idea of forming a partnership for the purpose of selling these piston rings. Miles was the inventor of the piston ring and Osburn owned the factory where the rings were being manufactured.
December 1, 1915, the Double Seal Ring Sales Company (hereinafter sometimes referred to as the "sales partnership") was accordingly organized with its principal place of business at Fort Worth, Tex., for the purpose of selling the piston rings then being manufactured by Osburn and Miles. Holland and Lewis each had one-half interest therein. Holland and Lewis also had an option for the purchase of the factory where the rings were being manufactured, and, when the manufacturing operations as being carried on by Osburn and Miles did not prove satisfactory, Lewis and Holland decided to exercise their option and acquire the factory. At that time they induced O.S. Lattimore, one of the present plaintiffs, to join them in a partnership which would acquire the factory and manufacture the piston rings. The Double Seal Ring factory partnership was accordingly created March 27, 1916 (hereinafter sometimes referred to as the "factory partnership"), with its principal place of business at Fort Worth, Tex. Lattimore invested $6,000 in the partnership, and $5,000 of that amount was used to acquire the factory under the option held by Holland and Lewis. Miles, who had been associated with Osburn in the manufacture of the rings, was assigned an interest in the partnership, the initial interest of the original partners being as follows: O.S. Lattimore, $6,000; R.C. Lewis, $4,000; Kirk D. Holland, $4,000; C.H. Miles, $2,000. The only cash invested in the business was the $6,000 furnished by Lattimore. Kirk D. Holland was at that time married and living with his wife, Dora Holland, in the state of Texas.
2. Shortly after the formation of the factory partnership, Lattimore became dissatisfied with the business arrangement then existing with respect to the two partnerships and insisted that he not only have an interest in the factory partnership, but also an interest in the sales partnership. The controversy was settled by the assignment to Lattimore of an interest in the sales partnership and a change in his interest in the factory partnership. At or about that time Kirk D. Holland assigned, apportioned, or allocated his entire interest in the factory partnership to his wife, Dora Holland, and kept an interest in the sales partnership in his own name in the same proportion as Dora Holland held in the factory partnership.
In the filing of income tax returns and protests against, or claims for, various adjustments in the returns for the years here in controversy, the interests of Kirk D. Holland and Dora Holland have been shown on the basis that Kirk D. Holland represented the Holland community property interest as partner in the sales partnership and that Dora Holland had a similar interest in the factory partnership. The determinations of the Commissioner, hereinafter referred to, were made consistent with such representations. Typical of the representations so made was an affidavit by Kirk D. Holland dated February 8, 1926, which read in part as follows:
"Affiant further states that on December 31, 1919, the said interest of C.R. Keith was purchased by R.C. Lewis and affiant out of earnings received from the partnership, and a forty-percent interest in the factory partnership was at that time apportioned to Mrs. Kirk D. Holland, and a forty-percent interest in the sales company was apportioned to affiant. A thirty-percent interest in each of the two companies was assigned to R.C. Lewis, and the interest of said O.S. Lattimore in each of the two companies remained thirty percent. Affiant further states that the interest of each of the partners remained as last stated until July 1st, 1922.
"Affiant further states in the beginning of these two enterprises, the said R.C. Lewis and affiant started the Double Seal Ring Sales Company and the Double Seal Ring factory without any capital invested whatever. Affiant further states that his wife, Mrs. Kirk D. Holland, had always assisted affiant in whatever enterprises he conducted, and was considered a partner therein. Affiant further states that while he was running the automobile line in Ranger, Texas, Mrs. Kirk D. Holland, affiant's wife, was in charge of the office and all clerical work, and affiant was in charge of the machine shop, and of the running of the automobiles. Affiant further states that in the early beginning of the Double Seal Ring Sales Company, Mrs. Kirk D. Holland, affiant's wife, assisted for a time in keeping the books of the said company. Affiant further states that in the beginning of the said enterprises very little wages, if any, were drawn by affiant or his wife, or any of the partners. Affiant further states that on the returns of the partnership, and on the income tax returns of Mrs. Kirk D. Holland it is shown that the partnership allowed her the sum of Four Hundred and Eighty Dollars ($480.00) for her services during one year, in addition to the salary paid affiant.
"Affiant further states that in the beginning of the enterprises it was thought to be so arranged that the earnings of the two companies would be about equal. Affiant further states that the earnings of the two companies for the year 1918 were approximately the same. Affiant further states that all cash received by him or his wife has been placed in a bank as a joint account, and that their income is so carried to this day, and that each have an equal right to check against same.
"Affiant further states that neither R.C. Lewis or his wife, affiant or his wife, ever put any money into either the Double Seal Ring Sales Company or the Double Seal Ring Factory except such money as had accumulated from their accrued interests in the business as heretofore stated. The total interests of each in the said two companies accumulated from their accrued interests, as heretofore stated, while R.C. Lewis and Daisy Lewis were living together as man and wife, and affiant, Kirk D. Holland, and Dora Holland were living together as man and wife under the Community Property Law of the State of Texas [Vernon's Ann.Civ.St.Tex., art. 4619]."
Consistent with the above explanation as to the Holland interest, the following tabulation is set out as reflecting the interests of the several partners in the two partnerships on the dates indicated:
On May 1, 1917, C.H. Miles' interest was purchased by the factory partnership for $3,500 and his shares retired.
3. January 1, 1921, the two partnerships were combined under the name of the Double Seal Ring Company and thereafter the interests therein were as follows: O.S. Lattimore, 30 per cent.; R.C. Lewis, 30 per cent.; Dora Holland, 25 per cent.; K.D. Holland, 15 per cent. The aforesaid interests were in effect from January 1, 1921, to July 7, 1922, on which date the Double Seal Ring Company was combined with the partnership known as the Double Seal Piston Company, and a corporation was organized under the name of the Double Seal Ring Piston Company with a capitalization of $400,000, consisting of 4,000 shares of stock at $100 per share. The stock of the corporation was issued for the assets of the two partnerships which were transferred to the corporation, and the partners of the Double Seal Ring Company received stock as follows: O.S. Lattimore, 1,155 shares; R.C. Lewis, 1,155 shares; Dora Holland, 962 shares; K.D. Holland, 578 shares. The corporation continued in existence until 1925, when it became involved in financial difficulties and liquidated its business through an arrangement with its creditors.
4. The factory partnership duly filed an original and three amended returns for 1919 in which the distributable net income was shown in the respective amounts of $116,085.79, $125,420.10, $106,103.91, and $100,070.71.
During 1919 the factory partnership paid excise tax on the manufacture and sale of piston rings in the amount of $16,474.11. The excise tax so paid was later found to have been erroneously collected from the partnership and the entire amount was refunded in 1922. In his final determination the Commissioner made various adjustments in his computation of the partnership net income for 1919, among which was an increase to the extent of the foregoing excise tax, such increase being made on the ground that this excise tax had been "deducted as an expense in 1919" and that since it had been returned to the partnership it could not be considered a proper deduction from gross income. The net income of the partnership for 1919 was finally determined in the amount of $136,401.22, and the net taxable incomes of the several partners were likewise proportionately increased.
5. The factory partnership duly filed an original and three amended returns for 1920 which showed distributable net income in the respective amounts of $118,052.09, $33,955.22, $31,483.29, and $28,225.52. In the original return, cost of goods sold was determined by using the following items in its closing inventory at December 31, 1920:
Raw material (castings) .............. $ 43,447.32 Finished products (piston rings) ..... 176,234.85 Supplies ............................. 9,798.82 ___________ Total ............................ 229,480.99
The three amended returns, the first of which was filed on or about December 16, 1922, did not show the items making up the closing inventory, merely setting out the total inventory at December 31, 1920, in the amount of $216,446.79, and thus showing a reduction in income of $13,034.20 on account of defective castings. In addition a deduction was claimed of $26,435.24 on account of obsolescence of "Piston rings for engines and tractors on hand for which manufacture ceased." A further change in the amended returns was that an amount of $7,500 which had been received in 1922 from the Carondelet Foundry Company on account of a claim for defective castings on hand at December 31, 1920, as shown in finding 8, was included as an item of income.
After an examination by a revenue agent the Commissioner made various changes in the factory partnership's net income for 1920 by which it was increased from $33,955.22, as shown in the first amended return, to $115,058.66. Among the changes made were the following: The closing inventory was increased by $39,469.44, which corresponded to the two decreases of $13,034.20 and $26,435.24 claimed in the amended return on account of defective castings and piston rings. A reduction of $7,500 was made in income on account of the elimination from income of the amount referred to above as having been paid to the partnership in 1922 by the Carondelet Foundry Company.
In his final determination for 1920 the Commissioner adhered to the changes set out above except that he made a reduction in the closing inventory of $7,500 on the basis that that amount received by the factory partnership in 1922 from the Carondelet Foundry Company measured the extent of the overstatement of the raw material inventory on account of defective material. The net income of the factory partnership as thus finally determined for 1920 was $107,558.66.
6. Throughout the period involved in these suits, the factory partnership kept its books and rendered its returns on the accrual basis. It valued its inventories on the basis of cost.
7. The sole product manufactured and sold by the factory partnership was piston rings for use in internal combustion engines, air compressors, pumps, and similar equipment. These rings were manufactured from iron castings which were purchased by the factory partnership for that purpose. During 1918, 1919, and 1920 piston ring manufacturers generally were finding it difficult to obtain good castings from any source, since most of the castings that were being made contained flaws in some respects. However, beginning during the latter part of 1920 there was a decrease in the demand for castings, due to the general business depression, and, accordingly, the makers of castings were put in the position where it was necessary to produce a higher quality of castings in order to secure business. Theretofore complaints by the factory partnership as to the character of castings were given little consideration, the foundry company from which they were acquired taking the position that if the factory partnership was dissatisfied with the material it could seek out another manufacturer. The defective castings were reflected in the manufacture of piston rings in two ways: In the first place it became necessary to place in process a larger number of castings in order to produce the required number of rings, and in the second place many of the rings which were considered as merchantable or acceptable rings did not come up to the higher standard which was attained when a better grade of castings was received. With the improvement in the castings, which likewise meant a better grade of rings, purchasers of rings demanded a better grade of product. Up to that time, as will hereinafter appear, slightly imperfect rings could be sold to repair men who would not observe such imperfections or were satisfied with a lower grade of product. However, when the quality of castings improved and piston rings made therefrom were generally obtainable, the market for the imperfect rings suffered a marked decline.
8. During 1918, 1919, and 1920 the factory partnership obtained its castings from the Carondelet Foundry Company, which castings in common with others obtainable at that time, as shown in the preceding finding, contained some imperfections. Complaints were made to the foundry from time to time, but these were unavailing, though the partnership continued to do business with the same foundry until the latter part of 1920. At the latter date the foundry company was seeking to secure future orders from the factory partnership but the latter took the position that, unless the foundry company would make some adjustment for the defective castings furnished during 1920, the partnership would not continue to purchase its castings from that source. The foundry company agreed to make an adjustment under an arrangement by which tests would be made to determine the extent of the defective castings and one-half of the loss from such defects would be borne by each party. Tests were made in the early part of 1921 from which it was found that castings were defective and of no value to the extent of 31 per cent. of the castings on hand at December 31, 1920. The total cost of castings on hand at that time was $43,447.20, 31 per cent. of which amounted to $13,468.63. After some further controversy the foundry company finally paid the factory partnership $7,500 in 1922 in final settlement for the defective material.
9. The factory partnership manufactured the piston rings in approximately 60,000 sizes, varying in diameter from a half inch to seventy-two inches. During 1918, 1919, and 1920 the factory partnership manufactured and carried large stocks of rings on hand and maintained these stocks at advantageous points at its branches throughout the United States where they could be supplied quickly on demand. Some of the quantity on hand accumulated in the following manner: Where an order was received for a given number of rings it was not possible to determine the exact number of the desired rings which could be obtained from the castings of the character then being obtained, but the partnership would take into consideration its past experience and endeavor to put into process sufficient castings to produce the requisite number of perfect rings. Not only was it necessary to turn out the number of rings called for on the order, but also an excess quantity which could be used in the event it became necessary to replace some that proved defective after receipt by the consignee. In addition, some of the rings thus manufactured contained only minor defects which, while making them unacceptable on a given order, were not sufficient to render them unsalable to the automobile repair trade where slight imperfections would pass unnoticed.
10. During the period 1916 to 1920 the sales partnership maintained 32 branches throughout the country for the sale of the piston rings which were manufactured by the factory partnership, and kept on hand at the branches a substantial supply of piston rings for sale. The first branch was established in Atlanta, Ga., in 1916, and later in that year a second branch was established in Denver, Colo. During 1917, 1918, 1919, and 1920 other branches were established at various other points throughout the country. Only one branch was established in 1920 and no branches thereafter. Beginning in 1921, there was a gradual closing of the various branches.
The following tabulation shows the number of piston rings on hand both at the factory and at the branches, the number manufactured, and the number sold during the years 1918, 1919, 1920, 1921, and 1922:
-------------------------------------------------------------------------------------------------- | 1917 | 1918 | 1919 | 1920 | 1921 | 1922 ----------------------------------|-----------|----------|---------|-----------|---------|-------- Rings on hand Jan. 1: | | | | | | At factory .................... | ......... | 136,416 | 129,247 | 156,598 | 321,788 | 281,806 At branches ................... | ......... | 32,007 | 44,264 | 254,671 | 319,666 | 287,281 |-----------|----------|---------|-----------|---------|-------- Total ....................... | ......... | 168,423 | 173,511 | 411,269 | 641,454 | 569,087 Rings made ...................... | 234,420 | 347,933 | 770,133 | 914,944 | 292,680 | 108,744 |-----------|----------|---------|-----------|---------|-------- | ......... | 516,356 | 943,644 | 1,326,213 | 934,134 | 677,831 Rings sold ...................... | ......... | 342,845 | 531,375 | 684,759 | 365,047 | 122,978 |-----------|----------|---------|-----------|---------|-------- Balance on hand Dec. 31 ...... | ......... | 173,511 | 411,269 | 641,454 | 569,087 | 554,853 -------------------------------------------------------------------------------------------------- While there was considerable complaint during 1919 and 1920 by the purchasers of rings from the factory partnership, business continued good until the latter part of 1920, when, due to the general business depression and the unsatisfactory character of pistons theretofore sold by the factory partnership, the factory partnership lost many of its old customers. In 1921 the partnership spent considerable money in endeavoring to regain the business which it had lost, but was unable to do so. An outlet was obtained, however, for its product in a new kind of business with factories manufacturing ice machinery, Diesel and marine engines, and air brakes.The piston rings which the factory partnership had on hand at December 31, 1920, less those sold after 1920, were carried in its inventory or that of its successors until 1925, when they were sold as junk for a nominal amount. That inventory was considered as an asset in the hands of the factory partnership in connection with its consolidation with the sales partnership in 1921, and similar recognition was accorded to it in connection with the formation of the corporation which succeeded the successor partnership in 1922.
11. At the time the factory partnership was organized in 1916 its only equipment consisted of a rented lathe and piston ring grinder. Shortly thereafter it purchased some machinery for manufacturing rings. At the end of 1916 its inventory of machinery and stock on hand was valued at $20,000. Further purchases of machinery and equipment were made during the years 1917 and 1918, but it did not own a building until 1918, when it purchased a lot and erected a building 80 feet x 100 feet for its plant. In 1919 a second building was erected of the same dimensions as the first building. The second building was constructed with concrete floors and foundations, brick walls, and metal windows. Its cost was $17,266.64. New machinery was purchased and installed in the new building at a cost of $10,414.44 in 1919, and $10,185.56 in 1920. The new building was used for the purpose for which constructed from the time of its completion in 1919 until the fall of 1920, after which time it was used only to a negligible extent. The lack of use of the building was due in part to the depression which was prevailing at the end of 1920 and in part to the fact that in December, 1920, the partnership began to obtain a better grade of castings and thereafter did not have need for as great an amount of space, in that it was not necessary to machine as many castings in order to produce the requisite number of piston rings. The factory partnership or its successors continued to carry the building erected in 1919 as an asset in its financial statements and claimed depreciation thereon at least through 1922, and the successor corporation finally turned it over to its creditors in 1925.
O.S. Lattimore — No. J-592.
12. O.S. Lattimore is, and during the period here involved was, a citizen of the United States and a resident of the state of Texas. During 1918 he was married and living with his wife (Mrs. O.S. Lattimore, plaintiff in No. K-381) in the state of Texas. March 15, 1919, April 30, 1919, and April 19, 1920, he filed tentative, original, and amended joint income tax returns, respectively, for 1918, in which he reported the community income for himself and his wife for that year. The tentative return showed an estimated tax liability of $187, on account of which $93.50 was paid March 17, 1919. The original return showed a tax liability of $164.68, and the difference between that amount and the amount paid on the tentative return, namely, $71.18, was paid April 30, 1919. The amended return showed a tax liability of $6,250.53, and the difference between that amount and the amount previously paid, namely $6,085.85, was paid April 23, 1920.
On or about December 13, 1920, O.S. Lattimore filed a further amended return for 1918 reporting therein a tax liability of $2,133.73, which differed from the amended return previously filed almost entirely in that the last return filed was based upon his individual tax liability under the community property laws of Texas instead of being a joint return for himself and wife as was the case of the other return. (On the same day, as will appear from finding 17, Mrs. O.S. Lattimore also filed an individual return for 1918.) Shortly thereafter, namely, on or about December 27, 1920, and in connection therewith he filed a claim for refund for 1918 of $479.84 and assigned the following basis therefor:
Two returns were filed for year 1918 —
Original disclosed .............................. $ 164.68 As correct tax liability — amended return made correction — indicating tax for 1918 to be underpaid in amount of .................. 5,823.67 _________ The total paid for 1918 ..................... 5,988.35
Returns filed under T.D. No. 3071 disclose correct tax to be as follows: Mrs. O.S. Lattimore ................... $2,133.73 O.S. Lattimore ........................ 2,133.73 _________ 4,267.46 _________ Amount overpaid for 1918 .......... 1,720.89 ========= Claim for credit filed to apply on balance outstanding for year 1919 — as attached hereto .......................................... 410.09
Claim for credit filed by Mrs. Lattimore to cover balance of her tax outstanding for year 1919 ....................................... 830.96 _______ Amount of overpayment exhausted by credit claims ............................... 1,241.05 Balance of overpayment subject to refund and claim for refund of same is being hereby filed: Overpayment ..................................... 1,720.89 Credit claims ................................... 1,241.05 _________ Subject to refund ............................. 479.84
Accompanying the aforesaid claim for refund was a claim for credit by O.S. Lattimore which assigned the following basis therefor:
Original and amended return for year 1918 disclosed tax liability in the amount of $5,988.35
Payments in full were made to apply on tax due.
Amended returns filed under T.R. No. 3071 disclose combined net tax liability of husband and wife to be ........................... 4,267.46 _________ Indicating an overpayment in the amount of .............................. 1,720.89
A claim for credit for .................... $410.09
To apply on my account for 1919, and a claim for credit by Mrs. O.S. Lattimore ................................ 830.96
To apply on her 1919 account and a claim for refund in the amount of 479.84 _______ 1,720.89
— exhaust the overpayment for 1918.
Claims for refund and Mrs. Lattimore's claim for credit are made a part hereof, and are attached hereto.
On or about April 14, 1921, O.S. Lattimore filed a further claim for credit in which request was made that the overpayment of $479.84 for 1918, referred to above, be applied as a credit to the tax liability for 1920, such claim reading as follows:
"During year 1920 claims for credit and refund were filed under authority of T.D. No. 3071. Claim for refund for the amount of $479.84 was filed. To date no action or refund has been had on said refund claim. In accordance with provision of regulations no. 45, which authorizes such procedure, the refund claim is now being converted into a claim for credit and the overpayment requested to be applied to cover liability for current year 1920."
During 1923 the Commissioner determined an overassessment in favor of O.S. Lattimore for the year 1918 in the amount of $1,983.07, and such amount, having been determined to be an overpayment, was credited and/or refunded on April 3, 1923, as follows:
Credited to 1919 tax of Mrs. O.S. Lattimore $ 830.96 Credited to 1919 tax of O.S. Lattimore .... 410.08 Credited to 1920 tax of O.S. Lattimore .... 479.84 Refunded to O.S. Lattimore ................ 262.19 ________ Total .................................. 1,983.07
The certificate of overassessment which was prepared in connection with the above determination set up the following:
Original assessment account #304911 ..... $ 164.68 Additional assessment April, 300326 ..... 6,085.85 _________ Total assessment ..................... 6,250.53 Tax liability ........................... 4,267.46 _________ Overassessment ....................... 1,983.07
A recomputation of tax based on the division of community income discloses that your correct tax liability and that of Mrs. O.S. Lattimore is $2,133.73 each or a total of $4,267.46 as reported.
Thereafter and during 1926 the Commissioner determined a further overassessment in favor of O.S. Lattimore for 1918 of $3,537.18, the certificate of overassessment in that amount having been mailed to Lattimore by the Commissioner during September 1926. Of the foregoing amount $576.25 represented tax assessed against O.S. Lattimore for 1918 in 1923 and 1924 but not paid, and such amount was accordingly abated. The balance, $2,960.93, was found to be an overpayment for 1918 and $2,747.90 of that amount was credited in 1926, as follows, the schedule of overassessments being signed by the Commissioner August 19, 1926:
Credited to assessment made against Mrs. O.S. Lattimore for 1918 on August 28, 1923 $ 443.22 Credited to assessment made against Mrs. O.S. Lattimore for 1919 on August 28, 1923 709.54 Credited to assessment made against O.S. Lattimore for 1919 on August 28, 1923 ..... 709.54 Credited to assessment made against Mrs. O.S. Lattimore for 1918 on July 31, 1926 .. 885.60 ________ Total .................................... 2,747.90
The balance of the overpayment, $213.03, was refunded to plaintiff September 30, 1926, together with interest of $80.83. No interest was allowed or paid on the credits of $2,747.90 set out above. The overassessment of $3,537.18 was computed by the Commissioner in the following manner:
Original assessment, April 1919, account #304911 .............................. $ 164.68 Assessed in amended return, April 1920, account #300326 ................ 6,085.85 Additional assessment, August 1923, page 17 .............................. 443.22 Additional assessment, March 1924, P.O.L. 7 ............................. 133.03 _________ Total assessment ................... 6,826.78 Less refund January 29, 1923, Schedule 4762 ........................ 1,983.07 _________ $4,843.71
Correct tax liability ............................. 1,306.53 _________ Overassessment ................................. 3,537.18
13. March 15, 1920, O.S. Lattimore filed a joint return for himself and wife for 1919 showing a tax liability of $5,007.39, which was satisfied as follows:
Paid in cash March 15, 1920 ........... $1,251.85 Abated September 30, 1920 ............. 3,345.46 Credited from 1918 overpayment April 3, 1923 (see finding 12) ............... 410.08 _________ 5,007.39
On or about June 15, 1920, O.S. Lattimore filed an amended individual tax return for 1919 in which he showed a tax liability of $1,661.93. This return purported to reflect his one-half of the community earnings of himself and wife. Thereafter the abatement of $3,345.46, referred to above, was made, thereby reducing the amount payable by him for 1919 to that shown on the amended return. (At or about the same time Mrs. O.S. Lattimore likewise filed an individual income tax return for 1919 disclosing a tax liability in the same amount as that of her husband, namely, $1,661.93, as shown in finding 17.)
In August, 1923, the Commissioner made an additional assessment for $867.55 against O.S. Lattimore for 1919. (At the same time an assessment in the same amount for the same year was made against Mrs. O.S. Lattimore as shown in finding 19.) The additional assessment against O.S. Lattimore was satisfied as follows:
Abated .............................................. $145.67 Satisfied by credit April 14, 1926, from overpayment of O.S. Lattimore for 1920 ........................ 12.34 Satisfied by credit August 19, 1926, from overpayment of O.S. Lattimore for 1918 (see finding 12) ....................................... 709.54 _______ 867.55
As a result of the above adjustments, the tax liability of O.S. Lattimore was finally determined by the Commissioner in the amount of $2,383.81, based on a net income of $21,940.06. In arriving at the foregoing final tax liability, the Commissioner included in the net income of O.S. Lattimore, one-half of his pro rata share of the net income of the factory partnership as finally determined by the Commissioner for 1919 in the amount of $136,401.22, in accordance with his interest in the partnership as set out in finding 4. The remaining one-half of such interest in such income for 1919 was allocated to Mrs. Lattimore because of her community property interest therein.
14. March 15, 1921, O.S. Lattimore filed his individual return for 1920 on a community property basis, showing a tax liability of $1,539, which was satisfied as follows: Paid in cash July 21, 1921, $289.66; paid in cash September 22, 1921, $384.75; paid in cash December 20, 1921, $384.75; satisfied by credit from 1918 overpayment April 3, 1923 (see finding 13), $479.84.
In August, 1923, the Commissioner made an additional assessment against O.S. Lattimore of $105.44, which amount was not paid, but during 1926 the Commissioner determined an overassessment in favor of O.S. Lattimore for 1920 of $117.78, $105.44 of which amount was considered in the abatement of the additional tax referred to above, and $12.34 was credited on April 14, 1926, to an additional assessment against O.S. Lattimore for 1919. (See finding 14.)
During 1927 the Commissioner determined a further overassessment in favor of O.S. Lattimore for 1920 of $163.67, which was refunded to O.S. Lattimore on a schedule signed by the Commissioner November 5, 1927.
As a result of the above adjustments, the tax liability of O.S. Lattimore as finally determined by the Commissioner and satisfied as set out above was $1,362.99. In arriving at this figure the Commissioner used the net income of the factory partnership for 1920 of $107,558.66, and determined a taxable net income for O.S. Lattimore of $15,492.74. Included in O.S. Lattimore's income was one-half of his pro rata share of the above earnings of the partnership in accordance with his interest therein, as heretofore shown. The remaining one-half of such share of Lattimore's partnership income was allocated to Mrs. O.S. Lattimore on account of her community property interest therein.
15. November 22, 1923, O.S. Lattimore filed a claim for refund for 1918, 1919, and 1920 in the amount of $2,822.26 and showed the following basis therefor:
Tax paid on 1918 income ........ $2,145.73 Tax assessable ................. 2,054.50 _________ Overassessed ......................... $ 91.23 Tax paid in 1919 income ....... $1,677.97 Tax assessable ................ 546.94 _________ Overassessed ............................. 1,131.03 Tax paid for 1920 income ...... $1,600.00 Tax assessable .................. None _________ Overassessed .............................. 1,600.00 _________ Total claim for refund ..................... 2,822.26
Due to amended returns and claims of Double Seal Ring Factory copartnership now pending before the Commissioner of Internal Revenue under Symbols IT:SA:AM:JEL — 6332.
The Commissioner took final action with respect to the foregoing claim in so far as it related to 1918 by preparing a certificate of overassessment for that year in the amount of $3,537.18, which was delivered to O.S. Lattimore in September, 1926, and in signing a schedule of overassessments August 19, 1926, on which an overassessment appeared in favor of O.S. Lattimore for that amount. The overassessment was abated, credited, and/or refunded, as shown in finding 12.
April 14, 1926, and November 5, 1927, the Commissioner took final action with respect to the foregoing claim in so far as it related to 1919 and 1920 by signing schedules of overassessments on those respective dates in the amounts heretofore shown. Subsequent to the foregoing action of April 14, 1926, O.S. Lattimore protested the final action as taken for 1919, but the Commissioner on August 29, 1927, advised him that his prior action would be adhered to. In such final actions O.S. Lattimore's share in the net income of the factory partnership for 1919 and 1920 was determined by considering a net income for such partnership for such years in the respective amounts of $136,401.22 and $107,558.66.
Mrs. O.S. Lattimore — No. K-381.
16. Mrs. O.S. Lattimore is a citizen of the United States and a resident of Texas, where she was living with her husband during the period here involved.
17. December 13, 1920, Mrs. O.S. Lattimore filed an individual income tax return for 1918 showing a tax liability of $2,133.73, which amount was not assessed. (A joint return had theretofore been filed April 30, 1919, by her husband, O.S. Lattimore, as shown in finding 12.) That return, as well as the amended return of her husband, which was filed on the same day, as shown in finding 12, showed community property income separately. Subsequently the Commissioner made an assessment for 1918 against Mrs. O.S. Lattimore on his August, 1923, list of $443.22. January 5, 1925, Mrs. O.S. Lattimore executed a waiver for 1918, which extended the statutory period for assessments for one year after the expiration of the applicable statutory period of limitations within which assessments might be made.
January 6, 1926, the Commissioner mailed to Mrs. O.S. Lattimore a deficiency notice notifying her of the determination of a deficiency of $863.31 for 1918. February 15, 1926, she filed a petition with the United States Board of Tax Appeals against the determination set forth in the deficiency notice of January 6, 1926, but in such petition did not raise any question as to the statute of limitations. April 30, 1926, the said Board issued an order of redetermination to the effect that there was a deficiency of $863.31 for 1918, such redetermination being based upon a stipulation of the parties as to the deficiency due. Thereafter the Commissioner assessed the deficiency of $863.31 plus interest of $22.29, a total of $885.60, on his July 1926 assessment list.
The above assessments aggregating $1,328.82 ($443.22 plus $885.60) were satisfied by crediting thereto a portion of an overpayment in favor of O.S. Lattimore for 1918, as shown in finding 12, the schedule of overassessments being dated August 19, 1926.
18. June 15, 1920, Mrs. O.S. Lattimore filed an individual income tax return for 1919 disclosing a tax liability of $1,661.93, and on the same day, as shown in finding 13, O.S. Lattimore filed an individual return which showed the same tax liability and which was filed on the same community property basis. After appropriate assessment of the tax shown on Mrs. O.S. Lattimore's return of $1,661.93, $830.97 of such amount was paid by Mrs. O.S. Lattimore November 2, 1920. Subsequently the Commissioner assessed an additional tax of $867.55 against Mrs. O.S. Lattimore for 1919 on his assessment list for August 1923.
September 10, 1923, Harry C. Kinne, the duly authorized representative of the Lattimores, sent the following telegram to the Commissioner in connection with the tax liability of Mr. and Mrs. O.S. Lattimore:
"Refer to symbols IT PA 1 FAH 103 and 1 PS and 4 FHB 403 FR and IT SA AM LMB 6332 your letters June first and twenty-fifth mine May twenty-ninth thirty-first June eighth, my five telegrams May twenty-fifth, yours May twenty-ninth, all regarding objections served partners Double Seal Ring Company Stop Collector, Austin, Texas, demanding from partners O.S. Lattimore and wife immediate payment of taxes involved in above symbols demand is made in error through your symbols IT PA 2 VCS can you recall these demands without our filing claim for abatement will personal conference with you at once be necessary."
On the same day the said Kinne sent the following letter to the Commissioner:
"I represent O.S. Lattimore and his wife, of Austin, Texas, formerly of Fort Worth, Texas. Mr. O.S. Lattimore is judge of the Court of Criminal Appeals of Austin, Texas, and has been a partner for a number of years in the Double Seal Ring Company and Double Seal Ring Factory of Fort Worth and Chicago regarding which objections and claims for refund are now pending before you as to taxes levied against the several copartners in the above companies as set forth in the symbols above designated.
"This is rather a complicated matter and was being handled by several departments in your office with reference to proposed additional assessment against, and claims for refund by, the several partners in the above concern. On May 25th, 1923, I sent five telegrams to the different department heads having charge of different phases of the above case with the result that on May 29 they telegraphed me as follows:
"`Conferences Double Seal Ring and partners not necessary at this time. Audit not yet completed.'
"On June 1st you stated that the entire matter would be audited as one case and that further correspondence should refer to IT:SA:AM-ETL 6332. I wrote you two letters of May 29th and May 31st and also on June 8th. On June 25th you wrote me as follows:
"`Reference is made to your letter of June 8, 1923, in the case of Double Seal Ring Company and partners.
"`You are advised that no further action on your part is necessary at this time. When the audit is completed revised letters will be issued on the partnership and all partners. In these letters ample time will be given for protest and conference, if desirable.
"`In any further correspondence with regard to this matter, kindly refer to IT: SA:AM-ETL 6332.'
"I am today telegraphing you as follows:
"`Refer to symbols IT:PA 1 FAH 103 and 1 PS and 4 FHB 403 FR and 4 FHB 403 and IT:SA:AM:LNB 6332 your letters June 1st and 25th, mine May 29th, 31st, June 8th, my five telegrams May 25th, yours May 29th all regarding objections several partners Double Seal Ring Company. Stop. Collector Austin, Texas, demanding from partners O.S. Lattimore and wife immediate payment of taxes involved in above symbols. Demand is made in error through your symbols IT:PA 2 VCS. Can you recall these demands without our filing claims for abatement. Will personal conference with you at once be necessary.'
"Judge Lattimore is very much worried about this matter and sent us a copy of his letter to Hon. E.W. Chatterton dated September 6, 1923. Of course, Judge Lattimore cannot understand why these demands should have been made upon him after having requested us to represent him in the matter and after having been assured by us that the matter was being audited by your office, as per your telegram and letters. I have advised Judge Lattimore that I believed it was an error to make demand on him for these taxes at this time and that the error had evidently occurred by reason of the enormous amount of business you had on hand and that probably his particular phase of the case had fallen into the hands of another department and that the notice had gone forth to the local collector under your new symbols IT:PA 2 VCS without any knowledge on the part of the transmitter of such instructions of the objections and claims for refund then pending under the several above-mentioned symbols.
"In view of the situation, is it not possible to have these demands for taxes recalled without the necessity for filing claims for abatement and the other difficulties incident thereto?
"Will you kindly advise me as to what can be done in the matter at as early a date as possible and also advise me whether it will be necessary now for me to meet you at your office for a personal conference with regard to these matters?"
September 13, 1923, the Commissioner replied to above telegram as follows:
"Telegram tenth Double Seal Ring Company. Collector advised to withhold action. Conference unnecessary."
19. November 22, 1923, Mrs. O.S. Lattimore filed a claim for refund for 1918, 1919, and 1920, in the amount of $2,822.26 which assigned the same basis therefor as that filed by O.S. Lattimore on the same day for the same amount as set out in finding 15.
In or about March, 1926, the Commissioner determined the tax liability of Mrs. O.S. Lattimore for 1919 in the amount of $2,383.81, and that since $2,529.48 (original assessment, $1,661.93, and additional assessment, $867.55) had been previously assessed, there was an overassessment of $145.67. At that time the additional assessment for 1919 against Mrs. Lattimore of $867.55 was outstanding and the Commissioner abated a portion of such additional assessment to the extent of the overassessment of $145.67 which he had determined for that year.
August 19, 1926, the Commissioner credited $709.54 from an overpayment in favor of O.S. Lattimore for 1918 against the foregoing unpaid additional assessment, as shown in finding 12.
20. After appropriate assessment in the amount of $1,539 against Mrs. O.S. Lattimore for 1920, payment of such assessment was made as follows:
March 16, 1921 .......................... $ 384.75 July 27, 1921 ........................... 384.75 September 22, 1921 ...................... 384.75 December 20, 1921 ....................... 384.75 ________ Total ................................ $1,539.00
In August, 1923, an additional assessment was made against Mrs. O.S. Lattimore for 1920 of $105.44, and during 1926 the Commissioner determined an overassessment in favor of Mrs. O.S. Lattimore for 1920 of $117.78, $105.44 of which was applied in abatement of the additional tax for that year, and the balance of $12.34 was credited April 14, 1926, on additional tax of Mrs. Lattimore for 1919, referred to in finding 18.
During 1927 the Commissioner made a final computation of Mrs. O.S. Lattimore's tax liability for 1920 in the amount of $1,362.99 and found an overpayment of $163.67, which was refunded to her on schedule dated November 5, 1927. In such determination the Commissioner used a net income of the factory partnership for 1920 of $107,558.66 and included in Mrs. O.S. Lattimore's income, pursuant to the community property laws of Texas, one-half of O.S. Lattimore's pro rata share thereof. The Commissioner in his final determination of Mrs. O.S. Lattimore's tax liability for 1919 and 1920, wherein he allowed an overassessment in her favor of $145.67 for 1919 on April 14, 1926, and an overassessment in her favor for 1920 of $163.67 on November 5, 1927, gave consideration to the claim for refund for those years referred to in finding 19, and took final action thereon through such determinations.
Charles R. Keith — No. K-382.
21. Charles R. Keith, the plaintiff herein, is a citizen of the United States and a resident of the state of Texas. During 1919 he was married and living with his wife in Texas.
22. March 10, 1920, Charles R. Keith filed his individual income-tax return for 1919 showing a tax liability of $760.27, which amount was paid at the time the return was filed.
23. August 15, 1923, Charles R. Keith filed a claim for refund for 1918, 1919, and 1920 in the amount of $1,637.43, of which amount $760.27 was for 1919, and assigned as a basis therefor that such refund was allowable on the basis of "amended returns and claim of Double Seal Ring factory copartnership now pending before the Commissioner of Internal Revenue."
During 1926 the Commissioner made a final determination of Charles R. Keith's tax liability for 1919 in the amount of $344.94, and since $760.27 had been assessed and paid on the original return, there was determined an overpayment of $415.33. The overpayment was credited to an outstanding deficiency against Keith for 1918, the schedule of refunds and credits on which such credit appeared having been signed by the Commissioner May 19, 1926. In such final determination the claim for refund referred to above was considered and acted upon.
In arriving at the final tax liability of $344.94 the Commissioner determined a net income for 1919 of $16,126.32 and allocated one-half of such income to Mrs. Charles R. Keith under the community property laws of Texas, thus showing a net income taxable to Charles R. Keith of $8,063.16. As shown in finding 2, Charles R. Keith had a 14 per cent. interest in the factory partnership during 1919, and in his determination of Keith's net income for 1919 the Commissioner used a net income for the factory partnership of $136,401.22 and included in Keith's income one-half of his share in such partnership, the remaining one-half of such share being allocated to his wife under the community property laws of Texas.
Dora Holland — No. K-489.
24. Dora Holland is a citizen of the United States and a resident of the state of Illinois. She was a resident of the state of Texas from the date of her birth until the latter part of 1918, when she and her husband, Kirk D. Holland, moved to Chicago, Ill., where they have since resided.
25. March 1, 1920, Dora Holland filed her individual income tax return for 1919 disclosing a tax liability of $4,263.47, which was paid as follows:
March 1, 1920 ........................... $1,065.87 June 15, 1920 ........................... 1,065.87 September 14, 1920 ...................... 1,065.87 December 15, 1920 ....................... 1,065.86
26. March 15, 1921, Dora Holland filed her individual income tax return for 1920 disclosing a tax liability of $7,103.88, which was paid as follows:
March 15, 1921 .......................... $1,775.97 June 15, 1921 ........................... 1,775.97 September 15, 1921 ...................... 1,775.97 December 22, 1921 ....................... 1,775.97
27. On or about January 25, 1923, Dora Holland filed amended income tax returns for 1919 and 1920, together with a claim for refund for the years 1918, 1919, and 1920 in the amount of $7,265.50. The claim set forth the following basis therefor:
"Affiant was a member of a copartnership consisting of O.S. Lattimore, R.C. Lewis and affiant, known as `Double Seal Ring Factory', at 316 Lake St., Fort Worth, Texas, during the years 1918, 1919, and 1920; that upon the basis of the original income-tax reports of said copartnership for those years she paid an income tax of
$2,553.23 for 1918 4,263.47 for 1919 7,103.88 for 1920 _________ 13,920.58
that she should have paid as shown by amended returns hereto attached marked Exhibits `B-4, B-5,' and `B-6'
$2,484.40 for 1918 3,316.49 for 1919 854.19 for 1920 _________ 6,655.08
leaving a balance overpaid of $7,265.50, all as shown by exhibits hereto attached and marked `A,' `A-1,' `B1-6,' `C1-4,' and `D' to `N,' both inclusive.
"Affiant further states that she has never filed any other claim for refund of income tax for those years or any other years and has never received a refund of any of such income taxes."
28. January 2, 1925, Dora Holland filed a waiver for 1919 which extended the statutory period of limitations on assessment for one year after the expiration of the applicable statute of limitation.
29. February, 1926, the Commissioner made additional assessments against Dora Holland for 1919 and 1920 in the respective amounts of $1,464.29 and $807.88. These assessments were satisfied as follows:
$1,464.29 for 1919: Satisfied by credit from 1918 overpayment $ 973.69 Abated .................................. 490.60 _________ 1,464.29 $807.88 for 1920: Paid September 28, 1926 ................. $ 2.24 Abated .................................. 805.64 _________ 807.88
30. November 4, 1927, the Commissioner signed a schedule of overassessments showing thereon overassessments in favor of Dora Holland for 1919 and 1920 in the respective amounts of $3,618.43 and $5,826.95. Of the overassessment for 1919, $490.60 was abated as shown in the preceding finding, and $3,127.83 was refunded. Of the overassessment for 1920, $805.64 was abated as shown in finding 28, and $5,021.31 was refunded.
As a result of the above adjustments, the tax liability of Dora Holland was finally determined for 1919 and 1920 in the respective amounts of $2,109.33 and $2,084.81, and in such determination final action was taken on the claim for refund referred to in finding 27.
In making the above final determinations, the Commissioner computed Dora Holland's taxable net income for 1919 and 1920 in the respective amounts of $20,325.43 and $20,181.22 and in such computations took into consideration net income for the factory partnership for 1919 and 1920 in the respective amounts of $136,401.22 and $107,558.66, which amounts were arrived at as heretofore shown. From such factory partnership income for 1919, 28 per cent. thereof was allocated to Kirk D. Holland and Dora Holland as income from community property and one-half included in the taxable income of each. Similarly for 1920, 40 per cent. of the factory partnership income for 1920 was allocated to Kirk D. Holland and Dora Holland and one-half thereof included in the taxable income of each. Such allocation of income was in accordance with the various allegations and representations theretofore made by Kirk D. Holland and Dora Holland as to their partnership interest in the factory partnership.
Russell C. Lewis — No. K-490.
31. Russell C. Lewis is a citizen of the United States and a resident of the state of California.
32. February 28, 1920, Russell C. Lewis filed his individual return for 1919, disclosing a tax liability of $6,020.62, which was paid as follows:
February 28, 1920 ....................... $1,505.15 August 3, 1920 .......................... 1,505.15 September 14, 1920 ...................... 1,505.15 December 15, 1920 ....................... 1,505.17 _________ Total ................................ 6,020.62
33. March 15, 1921, Russell C. Lewis filed his individual return for 1920, disclosing a tax liability of $6,465.17, which was paid as follows:
March 15, 1921 .......................... $1,616.29 June 15, 1921 ........................... 1,616.29 September 14, 1921 ...................... 1,616.29 February 27, 1922 ....................... 300.00 March 14, 1922 .......................... 700.00 May 6, 1922 ............................. 200.00 September 2, 1922 ....................... 100.00 January 4, 1923 ......................... 150.00 February 19, 1923 ....................... 166.30 _________ Total ................................ 6,465.17
34. May 29, 1923, Russell C. Lewis filed amended returns for 1919 and 1920, together with a claim for refund for 1918, 1919, and 1920, in the amount of $5,880.95, assigning the following basis for the refund:
"Affiant was a member of the copartnership consisting of O.S. Lattimore, this affiant and Mrs. K.D. Holland (Dora), known as the `Double Seal Ring Factory', at 316 Lake Street, Fort Worth, Texas, during the years 1918, 1919, and 1920; that upon the basis of the original income-tax reports of said copartnership for those years he paid an income tax of $5,908.63 for 1918, $6,020.62 for 1919, $6,475.17 [sic] for 1920; total, $18,404.42; that he should have paid, as shown by amended return hereto attached marked exhibits, $5,835.12 for 1918, $5,544.15 for 1919, $1,144.20 for 1920; total $12,523.47; leaving a balance overpaid of $5,880.95, all as shown by exhibits hereto attached marked `A,' `A1,' `B16,' `C1, 2, 3'; `D, E, F, G, H, I, J, K, L, M, O, P,' and `Q.' Affiant further states that he has never filed any other claim for income tax for said years 1918, 1919, and 1920, or any other years, and that he has never received a refund of any of said income tax."
Subsequently, but within the statutory period for filing claims for refund, Russell C. Lewis filed other documents with the Bureau of Internal Revenue which the Commissioner recognized as informal claims for refund for 1919 and 1920.
35. January 13, 1925, Russell C. Lewis filed a waiver for 1919, which extended the statutory period of limitations on assessments for one year after the expiration of the applicable statute of limitations.
36. On his February, 1926, assessment list the Commissioner made additional assessments against Russell C. Lewis for 1919 in the amount of $2,318.96, which were satisfied by credits from overpayments for 1918 and 1920 in the respective amounts of $2,274.56 and $44.40.
37. November 5, 1927, the Commissioner signed a schedule of overassessments including therein overassessments in favor of Russell C. Lewis for 1919 and 1920 in the respective amounts of $4,789.05 and $3,462.57. In the foregoing final determinations the Commissioner determined a taxable net income and a total tax liability for 1919 in the respective amounts of $28,078.69 and $3,550.53, and a taxable net income and a total tax liability for 1920 in the respective amounts of $25,074.72 and $2,958.20. In arriving at the foregoing taxable net incomes, the Commissioner used net income for the factory partnership for 1919 and 1920 of $136,401.22 and $107,558.66, respectively, which partnership income was determined in the manner heretofore stated. After excluding his wife's community property interest therein, the following percentages of the partnership income for those years were included in his taxable income pursuant to his interest therein: 1919, 15.125 per cent.; 1920, 17.125 per cent.
Conclusion of Law in Case No. J-592.
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 entitled to recover $885.60, with interest.
It is therefore adjudged and ordered that plaintiff in Case No. J-592 recover of and from the United States the sum of $885.60, together with interest as provided by law at 6 per cent. from April 23, 1920.
Conclusion of Law in Cases Nos. K-381, K-382, K-489, and K-490.
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 plaintiffs are not entitled to recover, and their petitions are therefore dismissed.
Judgment is rendered against the plaintiffs in cases Nos. K-381, K-382, K-489, and K-490 for the costs of printing the records herein, the amounts thereof to be entered by the clerk and collected by him according to law.
At the suggestion of the plaintiffs, these five cases — Nos. J-592, K-381, K-382, K-489, and K-490 — have been ordered consolidated for submission to the court. They will be considered in one opinion, but a separate judgment will be entered in each case.
The record in these cases shows that there were two partnerships in existence during the period involved, namely, Double Seal Ring sales partnership and the Double Seal Ring factory partnership. The sales partnership was a selling agency for the rings manufactured by the factory partnership.
The questions which arise in these cases involve only the factory partnership.
Each of the plaintiffs had an interest either as a partner, or as the wife or husband of a partner, in the income of a partnership under the community property laws of the state of Texas. In each case the plaintiff seeks to recover an alleged overpayment of income taxes for one or more of the years 1918, 1919, and 1920.
The findings of fact are necessarily voluminous and will only be referred to as the questions which arise from them are discussed and when necessary to clarify the issue involved. A summary repetition would attain no end and only burden the opinion.
(1) The first question is whether the Commissioner of Internal Revenue erred in increasing the income reported by the factory partnership by the amount of excise taxes paid by the partnership during the year 1919. It appears that in the year 1919 an excise tax of $16,474.11 was paid on the manufacture and sale of piston rings. However, in 1921 the Commissioner of Internal Revenue decided these piston rings were not automobile accessories and therefore refunded to the factory partnership the full amount collected for that year. Having refunded this amount, the Commissioner in his final determination of the net income of the factory partnership for 1919 increased the net income by the amount refunded on the ground that the partnership had taken that amount as a deduction in that year and as the amount had been returned to it the deduction was improper and not allowable. It is admitted that if the partnership took the deduction in its return the increase in net income made by the Commissioner is correct. This resolves itself into a question of fact. The plaintiffs have failed to show affirmatively that the deduction was not taken. Either the partnership or the individual partners had to pay the money to the government and, without evidence to the contrary, it is a fair assumption that the factory partnership made the payments and charged them to some account and the income of the partnership was affected to that extent. When the amount was returned as having been erroneously collected, the income for that year was increased accordingly by this sum. The Commissioner made the decision that a deduction had been taken in 1919. The burden of proving by the greater weight of the evidence that no deduction had been taken was on the plaintiffs. The evidence falls far short of overcoming the presumption of correctness of the findings of the Commissioner. The burden of proof has not been sustained by the plaintiffs. No recovery can be had on this item.
(2) The second question involves the value of certain castings and piston rings included in the closing inventory for the year 1920. A claim is made by the plaintiffs that the piston rings were of no value at the close of the year 1920.
The returns of the partnership show that it figured its inventory on finished articles at cost. Under the statute, section 203 of the Revenue Act of 1918, 40 Stat. 1060, and the regulations promulgated thereunder the partnership could elect to value its inventory at either cost or market whichever was lower. There was no change of basis by the Commissioner. There was no sale or offering for sale of any of the articles at less than cost within 30 days after the inventory was taken as provided by article 1582 of Regulations 45 as amended by Treasury Decision 3296.
The deduction now claimed constitutes the stock in trade at the end of the year 1920. The closing inventory for the year 1920 in the original income tax return for that year shows:
Raw material ....................... $ 43,447.32 Finished products (rings) .......... 176,236.85 Supplies ........................... 9,798.82 ___________ Total ........................... 229,480.99
The Commissioner used these figures in arriving at the final determination. The partnership used these inventory values in 1921. In July, 1922, the partnership combined with a company known as the Double Seal Piston Company and their assets were sold to a corporation known as the Double Seal Ring Piston Company. Among the assets transferred to this company are the piston rings sought to be charged off. These rings, less whatever had been sold in the meantime, were carried in the inventory of the corporation until it was dissolved in 1925. It was in that year the rings were ascertained to have no value, several years after the partnership had parted with its interest to the corporation. These rings were not only included in the inventory at cost, but, as shown above, were used on that same basis when the factory partnership combined with the sales partnership in 1921 and the same inventory, less sales, was valued on the same basis when the consolidated partnership was succeeded by a corporation in 1922. The Commissioner valued them on that basis, and we can find no reason for disturbing his decision.
(3) The third issue is a claim on account of defective castings which were on hand when the closing inventory for 1920 was made. The partnership made a claim against the foundry company which furnished these castings, and it was determined that the partnership had on hand at December 31, 1920, worthless castings which had cost it $13,486.63. The foundry company reimbursed the partnership on account of the loss to the extent of $7,500.
The partnership had included all of its castings in its closing inventory for 1920 at their full cost, and, after the payment of $7,500 had been made, a controversy arose between the plaintiffs and the Commissioner as to what adjustment should be made on account of those which were found worthless. In his final determination the Commissioner made a net reduction in income of $7,500 because of the item. The plaintiffs insist that the entire amount of defective material in the sum of $13,486.63 should have been deducted from the inventory and claim that, as only $7,500 has been allowed, a further allowance of $5,968.63 should be made. This is really a question of loss sustained by the partnership for which it has been partially compensated and not an inventory question in the usual sense. The total claim of the partnership against the foundry company was $13,468.63 for defective castings. The foundry company paid $7,500 of this loss and the Commissioner allowed a deduction in that amount. As a matter of fact, only the difference between the amount of the claim and the amount paid by the foundry company was a loss, and the reduction in income should have been only in that amount, namely, $5,968.63. The plaintiffs have gained an advantage by the decision of the Commissioner. No recovery can be had on this item.
(4) The fourth and last issue with respect to the factory partnership income for 1920 is a deduction claimed on account of an alleged abandonment of a building. This building was erected in 1919 and equipped with expensive machinery in that year and the following year. It was used in 1920 and carried on the books of the company as a live asset. There was no change which suddenly terminated the usefulness of the building, nor was the building discarded permanently from use in the business. Due to the depression in business, it was not used to its full capacity, but it was used. The record shows that the building was carried as an asset on the books of the partnership and its successors until 1925. It was considered an asset of substantial value in 1921 when the factory partnership consolidated with the sales partnership, and when the partnership sold to the corporation in 1922. At least through 1922 depreciation was taken on this building and presumably deducted from gross income in determining taxable net income for 1921 and 1922. As a matter of fact, the transfer to the corporation shows the buildings to be valued higher than the returns show the value in 1921. Where there is an increase of value, there can be no obsolescence. There is some evidence in the record that when the corporation in 1922 was contemplating a bond issue the building was appraised at a value of its cost less depreciation. The evidence of abandonment and heavy depreciation in 1920 of this building is supplied by an interested witness and is in direct variance with the documentary evidence supplied by the returns and statements of the partners. We can find no merit in this contention. Recovery cannot be had on this item.
A. The next question relates to the individual case of the plaintiff, O.S. Lattimore (No. J-592). The facts have been most minutely set out in the special findings of fact, and we feel it is unnecessary and burdensome to this opinion to again state them.
Lattimore for the year 1918 filed a joint tentative original amended income tax return for himself and his wife, and the tax shown on this return was paid. Later he filed a separate individual return showing a much smaller tax due, and subsequently he filed a claim for refund. The main contention made in this case is that the Commissioner applied a part of the amount paid by Lattimore in the joint return to the individual tax of the wife after the husband and wife had made separate returns, and Lattimore contends that the overpayment due to him, as found by the Commissioner, could not and should not be applied to the liability of his wife. We can find no merit in this contention. The overpayment arose due to the fact that there had been a joint return made and the tax liability of both husband and wife was reported and paid, but the assessment was made in the name of the husband and thereafter separate returns were filed and the liabilities of the two parties were shown separately. This, of course, gave an overpayment in favor of the husband, in whose name the assessment on the joint return had been made. The Commissioner, after several audits and after taking into consideration the claims of the husband, arrived at the conclusion that the payment made by the husband on the joint return was made from community funds, and that therefore, when the joint return was split up into two separate individual returns, a part of the payment made by the husband belonged to the wife, and he applied a part of the tax paid by the husband to the payment of the tax found to be due against the wife on her individual return. The husband recognized that the wife was entitled to a part of the amount paid when he filed a claim for refund and credit, and in fact made such allocation to his wife. A similar situation was considered in Benjamin Clayton v. United States, 44 F.2d 427, 432, 70 Ct.Cl. 740, certiorari denied 283 U.S. 860, 51 S. Ct. 654, 75 L.Ed. 1466, wherein we said:
"When the original joint returns of plaintiff and his wife were made and the tax shown thereon was paid, a part of the tax was paid on the community income belonging to the wife and out of community funds belonging to her. To the extent, therefore, of the payment of the original tax on the entire income shown on these returns which should have been paid by the wife, it was her tax paid out of community funds. When the Commissioner of Internal Revenue, upon the claim of plaintiff and his wife, determined and computed the income and the tax separately on the community property basis and allocated a portion of the tax returned and paid upon the joint returns to the tax due by the wife upon that portion of the community income allocated to her, he was in contemplation of law using her money which had been paid on the joint return out of undivided community funds in respect of the tax for which she would have been liable had separate returns been filed in the first instance. To the extent, therefore, of the tax liability of the husband and the wife when the income shown on the joint returns was divided between them, there was, in reality, no overpayment. But, for administrative purposes, the Commissioner correctly treated the excess of the tax shown and assessed on the joint return over that due by the plaintiff on a separate basis as an overassessment, since he signed the return, and his name only appeared on the assessment list. The community fund is an undivided fund in which the husband and the wife each have a one-half interest."
In our opinion, the credits were valid and proper. There can be no recovery on this item.
(a) There is another issue in the individual claim of Mr. Lattimore which arose from the application of the four credits of the husband against the liability of the wife, the plaintiff contending that at the time of their application the statute of limitations had run on the collection of the assessments against which they were applied. Three of the assessments were $443.22 against Mrs. Lattimore for 1918, $709.54 against Mrs. Lattimore for 1919, and $709.54 against O.S. Lattimore for 1918, and it is admitted that these assessments were timely made in August 1923. Upon the making of the assessment the Commissioner sought to make collection, which likewise was at a time when the statute had not run on collection, but the authorized representative of the Lattimores strenuously objected to the collection and urged the Commissioner to withhold collection, pending adjustment of the controversy between them and the Commissioner. The Commissioner yielded to their request and postponed collection until August 19, 1926, which was after the statute had run on collection. In the meantime, further claims for refund and protests were filed, conferences were held and consideration was given to the settlement of the controversy, and the matter was not finally disposed of until 1926, when the statute had run on collection. The procedure carried out was that requested by plaintiffs, and they cannot now be heard to say that the collection was not timely. R.H. Stearns Company v. United States, 291 U.S. 54, 54 S.Ct. 325, 78 L.Ed. 647.
(b) The fourth assessment of $885.60 against Mrs. Lattimore for 1918 presents a somewhat different situation from the three which we have just discussed, though the question raised is that the statute had run on its assessment and collection when made, and that accordingly the credit application of August 19, 1926, is void. The assessment was made after the issuance of a deficiency notice on January 6, 1926, at which time the parties are agreed that the statute had run. However, within sixty days after the receipt of the deficiency notice, Mrs. O.S. Lattimore filed a petition with the United States Board of Tax Appeals in which she appealed from the determination of the Commissioner but did not raise any question as to the running of the statute of limitations on assessment. Thereafter, the parties filed a stipulation with the Board in which it was agreed that there was a deficiency for 1918 of the amount shown in the Commissioner's deficiency notice and the Board entered an order of redetermination in accordance with that stipulation. The Commissioner assessed the deficiency in July, 1926, and it was satisfied August 19, 1926, by a credit from the overpayment in favor of O.S. Lattimore as heretofore shown.
The defendant contends that since Mrs. Lattimore did not question the timeliness of the deficiency notice in her appeal to the Board she cannot now collaterally attack the determination of the Board by raising that question. We do not think this position is meritorious. An issue as to the statute of limitations is jurisdictional and of course may be raised at any time in a proceeding which is timely instituted. The petition to the Board was filed February 15, 1926, which was prior to the effective date of the passage of the Revenue Act of 1926 (February 26, 1926), and the decision of the Board was not made until April 30, 1926, which was after such date. In a petition filed by a taxpayer and disposed of by the Board at such times, section 283(b) of the Revenue Act of 1926, 44 Stat. 63, permits the payment of the deficiency and the institution of suit without regard to what question was raised before the Board. Old Colony Trust Co. v. Commissioner of Internal Revenue, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918. It accordingly follows that since the assessment of $863.31 was outlawed when made, its attempted collection, with interest of $22.29, by credit from a part of O.S. Lattimore's overpayment was of no force and effect and that plaintiff (O.S. Lattimore) is entitled to judgment in that amount.
B. The final question relates to the individual liability of Dora Holland for 1920. This whole claim is based on the alleged fact that this plaintiff had a community property interest with her husband in the partnership for 1920 of only 28 per cent. whereas the Commissioner has taxed her on the basis of an interest of 40 per cent. The difference is an interest which, it is alleged, plaintiff's husband, Kirk D. Holland, acquired as his separate property after the husband and wife moved to Illinois, where community property laws are not in effect. The records show that the wife, Dora Holland, possessed a 40 per cent. interest in the factory partnership during 1920, and we have so found as a fact. What the interests of the respective parties were in the factory partnership is a question of fact, and the evidence in the case shows that when the claim first arose affidavits were filed by both the husband and wife setting forth that the wife's interest was 40 per cent. and that this was community property. The Commissioner has found that the wife's interest was that as stated in the affidavits. The only evidence to overcome this finding is the subsequent testimony of the husband given many years after the filing of the affidavits. A change of an interest in ownership of the character contended for would result in a refund to the wife and an additional assessment to the husband which apparently cannot now be collected. We are unwilling to change the determination of the Commissioner which was based on both the affidavit of the husband and the wife solely on the testimony of the husband which is directly in contradiction with these affidavits made many years before and when the husband is not only an interested party but also the tax consultant and the only witness for the plaintiff in this case. There can be no recovery on this item.
C and D. The cases of Charles R. Keith, No. K-382, and Russell C. Lewis, K-490, depend entirely upon the recovery on the claims of the factory partnership. As we have found that these claims are not meritorious and no recovery can be had on them, judgments will be entered against the plaintiffs in both of these cases.
A judgment will be entered for O.S. Lattimore, No. J-592, in the sum of $885.60 with interest at 6 per cent. from April 23, 1920.
The petitions in the cases of Mrs. O.S. Lattimore, K-381, Charles R. Keith, K-382, Dora Holland, K-489, and Russell C. Lewis, K-490, are dismissed. It is so ordered.