Opinion
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. Plaintiff is a corporation and on July 14, 1919, filed its income and profits tax return for the year 1918 showing a total tax liability of $41,727.02, which was paid during the year 1919.
2. During the times complained of in the petition, including the year 1918, Samuel Corkran was the secretary and treasurer of plaintiff company and was the sole manager of the business. None of the other stockholders or directors of the corporation took any part in the management of the business during that time. He was in sole and complete control of the plaintiff company as manager and directed its bookkeeping.
The compensation of Mr. Corkran as such officer was fixed early in January of each year, for such year, by resolution of the board of directors. The resolution fixing such compensation for the year 1911 was as follows:
'Upon motion duly made and seconded, the salary of the Secretary and Treasurer was fixed on a basis of twenty percent of the net profits per year, the other officers receiving no salary whatever.'
The board of directors during the month of January for each year thereafter, to and including the year 1918, adopted an identical resolution fixing his compensation.
The board of directors at their annual meeting for the year 1919 fixed Mr. Corkran's compensation at $10,000 for that year. For the year 1920 his compensation was $10,000, provided the net profits did not exceed $50,000, and if the net profits for that year exceeded $50,000, he was to receive 20 per cent. of such profits. These changes were brought about because of the dispute which arose between Mr. Corkran and the directors over his compensation for the year 1918.
Under the direction of Mr. Corkran, his account on the books of plaintiff was credited as of December 31, 1918, with $17,986.09 as compensation for his services for the year 1918. As a result of the dispute between Mr. Corkran and the directors of plaintiff as to the proper method of computing his compensation for the year 1918, his account for that year was charged back with $4,000.58, the entry thereof on plaintiff's journal being as follows:
June 1919:
Entries as of December 31, 1918:
S. Corkran.....................................
$4,000.58
To profit & loss..............................
$4,000.58
To adjust S. Corkran's compensation for 1918.
The difference between $17,986.09 credited as of December 31, 1918, and $4,000.58 debited June, 1919, is $13,985.51, and this is the amount that was deducted in plaintiff's income and profits tax return for the year 1918 under schedule A-- 13 as compensation of officers.
In computing his compensation for the year 1918 at 20 per cent. of the net profits of plaintiff company, Mr. Corkran did not deduct from the income of the plaintiff the sum of $21,487.46, which was the income and profits tax assessed for 1917 and paid by plaintiff in 1918. His contention was that said tax was not a proper expense of the business in 1918 and should be excluded in computing his compensation for that year. The other directors held that such tax should be deducted before Mr. Corkrans's compensation was computed. This controversy was settled in favor of Mr. Corkran as disclosed by the following entries made in the journal of plaintiff:
December 31, 1921:
As of December 31, 1920, undivided profits.....
$4,299.79
S. Corkran,pers..............................................
$4,299.79
To credit Mr. Crokran's compensation for year 1918on basis of 20% of profits before income tax for prioryears is deducted.
The difference between the $4,000.58 charged to Mr. Corkran as of December 31, 1918, and the $4,299.79 credited to him December 31, 1921, for the year 1918, is due to bookkeeping adjustments of late items at the end of 1918 which did not come in until January, 1919, under which his 20 per cent. compensation was computed.
Mr. Corkran had no regular way of drawing his compensation but drew thereon from time to time, his account being a current running account closed at the end of each year. This sum of $4,299.79 was paid to him during the year 1922.
3. The books of plaintiff company, including the year 1918, were kept on the accrual basis. In its income and profits tax return for the year 1919, its amended return for 1919, its second amended return for 1919, its return for 1920, its amended return for 1920, and its return for 1921, plaintiff reported in each of said returns that the basis of return was made on the basis of the actual receipts and disbursements. Its return for 1918 does not state upon what basis the return was made. In its claim for refund filed March 13, 1926, for the year 1921, plaintiff says:
'Taxpayer does not keep its accounts upon an accrual basis but strictly upon basis of receipts and disbursements, as evidenced by the balance sheets attached to the returns filed for the year 1921 and for other years.'
4. On August 12, 1921, plaintiff filed a claim for refund for the years 1916, 1917, 1918, and 1919, in which it asked for the refund of $5,579.86 on the ground 'as shown by amended returns for years 1916, 1917, 1918, and 1919, hereto attached. ' On the same date, plaintiff filed an amended income and profits tax return for the year 1918 showing a total tax liability of $39,243.53. Among other changes appearing in said amended return for 1918 is an increase of $4,299.79 in the amount of the deduction for compensation of officers under schedule A-- 13. This increased the deduction in schedule A--13 from $13,985.51 in the original return for 1918 to $18,285.30 in the amended return for said year.
5. On June 20, 1923, the Committee on Appeals and Review in the office of the Commissioner of Internal Revenue after considering the additional deduction claimed by plaintiff for 1918, on the item of compensation amounting to $4,299.79, made its recommendations, one paragraph of which reads as follows:
'In the instant case the amount of salary was contingent upon the amount of the net profits and also upon the interpretation of the contract as to what constituted net profits. The amount of the compensation being finally adjudicated by an entirely new set of officers, it is the opinion of the committee that the amount in question constitutes a deduction for 1921 rather than for 1918.'
On June 29, 1923, the chairman of the committee wrote plaintiff a letter inclosing its recommendations in which letter is the following statement:
'This is to advise you that the Commissioner of Internal Revenue has approved the recommendation of the Committee on Appeals and Review.'
6. On November 22, 1923, the Commissioner of Internal Revenue notified plaintiff by letter that it was liable for an additional tax of $805.02 for the year 1918. Plaintiff paid this sum under protest January 28, 1924, making the total tax paid for the year 1918 $42,532.04.
7. In 1924 a revenue agent made an investigation of plaintiff's books to determine its tax liabilities for the years 1921 and 1922. Said agent made a report recommending an additional assessment for said years of $585.60, $446.60 being for the year 1921. On November 10, 1924, plaintiff filed a statement in writing with the Commissioner of Internal Revenue giving its consent to the immediate assessment of the deficiency of $446.60 for the year 1921 and therein stated:
'Taxpayer consents to immediate assessment of the deficiency in tax indicated by the report as transmitted by the supervising internal revenue agent under date of October 22, 1924, only upon the condition that this amount of $4,299.79 will be allowed as a deduction for the year 1918, and taxpayer reserves all its rights under the provisions of section 274(a) of the Revenue Act of 1924 (26 USCA § 1048 note) to appeal from assessment of so much of the deficiency in tax for the year 1921 as is occasioned by the disallowance of the above-named amount of $4,299.79 as a deduction for the year 1921.'
8. On November 12, 1924, plaintiff filed a restatement of that portion of its claim for refund for the year 1918 filed on August 12, 1921, showing a total tax liability for the year 1918 of $39,528.95 and in which it asked for the refund of $3,579.21 upon the ground that it was entitled to the deduction of $4,299.79 on account of the compensation credited to Samuel Corkran under date of December 31, 1921, for the year 1918. A part of said claim reads as follows:
'The dispute between him and the directors continued until within the year 1920 the directors conceded the correctness of Mr. Corkran's contention. However, through negligence, Mr. Corkran's individual account was not credited with this $4,299.79 until an audit of the corporation's accounts, made in January 1922 disclosed the fact. At this time (in January, 1922) an entry was made on page 53 of the corporation's journal-- at the head of which the date of December 31, 1921, was written-- restoring this $4,299.79 to the credit of Mr. Corkran's account 'as of December 31, 1920' (1920 being the year in which the directors had agreed that Mr. Corkran's contention was correct) but for the year 1918.'
9. On June 19, 1925, the Commissioner of Internal Revenue wrote plaintiff a letter which reads in part as follows:
'In accordance with the above conclusions, your claim for refund of $3,579.21 for the year 1918 will be rejected in full. The claim for refund of $5,579.86 covering the years 1916 to 1919, inclusive, will be rejected for that portion applicable to the years 1918 and 1919.'
The claim for refund was rejected by the Commissioner of Internal Revenue on Schedule No. 4391, dated January 8, 1926.
10. On October 27, 1926, plaintiff, by its attorney, Frank H. Timken, wrote a letter to the Commissioner of Internal Revenue asking for reconsideration of the claim for refund of $3,579.21 filed November 12, 1924. On January 17, 1927, the Commissioner of Internal Revenue wrote the plaintiff a letter, the last paragraph of which reads as follows:
'Careful consideration has been given to the information submitted in Mr. Timken's letter but it is held that there is no additional information which would warrant reopening the claim referred to, therefore the rejection of the claim by Bureau letter dated June 19, 1925, is sustained.'
11. On February 18, 1927, plaintiff filed with the Commissioner of Internal Revenue its application for reconsideration of his findings in his letter dated January 17, 1927, and requested a conference in order to further discuss the points in issue.
On May 7, 1927, the Commissioner of Internal Revenue in a letter to the plaintiff granting its request for a conference said:
'You are advised that a conference has been scheduled for 1:45 o'clock, May 24, 1927, to be held in room 114, Treasury Annex No. 2, * * * Washington, D.C. 'All evidence upon which you rely is presumed to have been filed; therefore, no request for extensions for the purpose of submitting additional data will be entertained.'
On February 3, 1928, the Commissioner of Internal Revenue wrote the plaintiff the following letter:
'Reference is made to your request for reconsideration of a refund claim filed by you covering the taxable year 1918 and which was rejected by the Bureau under date of June 19, 1925. 'It appears that the Bureau received a letter from you dated October 27, 1926, wherein reconsideration of the above-mentioned claim was requested. This action was denied by the Bureau under date of January 17, 1927. It is further observed that your case was considered by the Committee of Appeals and Review attached to this office. 'After giving careful consideration to the entire record, this office has decided to deny your request for reopening the claim.'
12. Upon audit of plaintiff's income tax return for the year 1921, the Commissioner of Internal Revenue by his letter of March 16, 1925, disallowed the item of compensation of officers amounting to $4,299.79 as a deduction for 1921, and found a deficiency tax against plaintiff for said year in the amount of $446.60 and advised plaintiff that it had thirty days from the date of said letter within which to file protest. On April 22, 1925, the Commissioner of Internal Revenue advised plaintiff by letter of said deficiency of $446.60 and that it had sixty days within which to appeal to the U.S. Board of Tax Appeals. Plaintiff paid the said deficiency of $446.60 on August 3, 1925.
The plaintiff filed a waiver for 1921 on March 15, 1926, but no claim on the basis of said deficiency assessment was filed. Subsequently, the Commissioner of Internal Revenue without request being made by plaintiff, reconsidered plaintiff's income and profits tax return for the year 1921 and allowed as a deduction from the gross income for said year 1921 the said compensation item of $4,299.79 and issued certificate of overassessment No. 1100310 in due course to plaintiff, in which it appeared that because of the expiration of the statute of limitation the amount of the refund was necessarily restricted to so much of the tax for the year 1921 as was paid within four years, namely $446.60. The amount of $446.60 was duly listed on Schedule No. 29926, together with interest in the sum of $74.06, a total of $520.66, and payment of said $520.66 was made to plaintiff on June 27, 1928.
13. If the court finds that plaintiff is entitled to recover on the ground of failure to deduct from its gross income for the year 1918 the said sum of $4,299.79, there will be payable to plaintiff the sum of $3,003.09 with interest on $2,198.07 thereof from December 15, 1919, and with interest on the remaining $805.02 thereof from January 28, 1924. J. Louis Raap, of Baltimore, Md., for plaintiff.
Guy Patten, 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.
GREEN, Judge.
Plaintiff brings this suit to recover $3,003.09 with interest alleged to have been overpaid on its income taxes for the year 1918.
The facts in the case are not in dispute. The plaintiff duly filed an income and excess profits tax return for the year 1918 and paid the amount shown to be due in 1919. Later the Commissioner assessed an additional tax for 1918 which was paid in 1924. On August 12, 1921, plaintiff filed an amended return for 1918 in which it was alleged that the compensation of its officers for that year was $18,285.30, an increase of $4,299.79 over that shown in its original return.
It appears that one Samuel Corkran was the secretary and treasurer of plaintiff, employed under a contract which provided that he was to receive 20 per cent. of the profits of the concern. Corkran had himself credited in 1918 on plaintiff's books with $17,986.09 as compensation for his services for the year 1918. A dispute arose between Corkran and the directors as to the proper method of computing his compensation for that year and in June, 1919, his account was charged back with $4,000.58, plaintiff's journal reciting that this was done to adjust his compensation for 1918. Finally, however, in 1920, the controversy was settled in Mr. Corkran's favor and on December 31, 1921, he was credited on the company's books with $4,299.79 'as of December 31, 1920,' on account of compensation for the year 1918. Some bookkeeping adjustments make up the difference between the amount of this credit and the $4,000.58 originally charged against him.
Plaintiff contends that the amount of this credit became due to Corkran in 1918 and the consequently the amount of its income for that year had been overstated. Accordingly it filed two claims for refund, the latter of which filed November 12, 1924, needs only to be considered. In this claim it asked for the refund of $3,579.21 on the ground that it was entitled to the deduction of $4,299.79 on account of the compensation credited to Corkran for the year 1918. This claim for refund was rejected. On October 27, 1926, the plaintiff wrote a letter to the Commissioner asking for a reconsideration of its claim, to which the Commissioner replied stating that there was no additional information which would warrant reopening the claim. A further application for reconsideration was also denied. Subsequently the Commissioner of Internal Revenue without request reconsidered plaintiff's income and profits tax return for the year 1921 and allowed as a deduction from gross income for that year the compensation item of $4,299.79, and further proceedings were had under which $520.66 was paid to plaintiff on June 27, 1928.
Plaintiff kept its books under the accrual system and if the additional compensation finally allowed Corkran became a fixed liability in 1918 within the meaning of the law, it was entitled to a deduction accordingly. But we are clear that it did not. It is true that it was entered upon the books in that year by Corkran's directions, but this was disapproved by the directors and a counter-balancing entry made upon the books by their directions. The dispute as to whether Corkran was entitled to the sum he claimed was not settled until some time in 1920 and he was not given credit for the disputed item until December 31, 1921. We are not called upon to determine whether plaintiff was liable under the contract with Corkran. In Lucas v. American Code Co., 280 U.S. 445, 50 S.Ct. 202, 203, 74 L.Ed. 538, 67 A.L.R. 1010, it is said that 'the mere refusal to perform a contract does not justify the deduction, as a loss, of the anticipated damages. ' In the same case the court refers to the fact that the liability for which a deduction was sought was not entered on the books during the tax year for which it was claimed. In Columbus Plate & Window Glass Co. v. Miller (D.C.) 38 F. (2d) 509, 510, the general rule was laid down which we believe to be correct, as follows:
'The right to the deduction only obtains after the liability has been fixed, and during the year in which it so becomes fixed, and not in a year in which it is prospective, speculative, or contingent.'
The Supreme Court said further in Lucas v. American Code Co.,supra:
'The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test. And the direction that net income be computed according to the method of accounting regularly employed by the taxpayer is expressly limited to cases where the Commissioner believes that the accounts clearly reflect the net income. Much latitude for discretion is thus given to the administrative board charged with the duty of enforcing the act. Its interpretation of the statute and the practice adopted by it should not be interfered with unless clearly unlawful.'
We think the rules above laid down show that the Commissioner's refusal to allow the deduction for and in the year 1918 was correct.
There is, as we think, another fatal objection to plaintiff's cause of action. Its claim for refund was finally rejected on January 8, 1926. Suit was not begun until August 14, 1928, more than five years after the payment of the tax, and more than two years after the disallowance of the claim. It is consequently barred unless the claim was reopened and reconsidered by the Commissioner subsequent to January 8, 1926. Without reviewing specifically the facts upon which plaintiff relies, it is sufficient to say that we think the evidence shows all the Commissioner did after the date of rejection was to examine the files and papers for the purpose of determining whether there was any basis for the taxpayer's request, and that after such action the taxpayer was definitely notified of his refusal to reopen the case for further consideration. Under the rule laid down in Ford Motor Co. v. United States, 3 F.Supp. 423, 77 Ct.Cl. 581, it cannot be said that he reconsidered the case upon its merits.
Our conclusion is that the plaintiff's petition must be dismissed, and it is so ordered.