Schulman v. Commissioner

Max Schulman, Petitioner, v. Commissioner of Internal Revenue, Respondent Schulman v. Commissioner Docket No. 41506 United States Tax Court 21 T.C. 403; 1953 U.S. Tax Ct. LEXIS 7; December 29, 1953, Promulgated *7 Decision will be entered for petitioner. Upon the facts, held that section 3801 is not applicable to lift the bar of section 275 (a), Internal Revenue Code. James Brennen, 20 T. C. 495, followed. Nathan Schwartz, Esq., for the petitioner. Raymond B. Sullivan, Esq., for the respondent. Harron, Judge. HARRON *403 The Commissioner has determined a deficiency in income tax for the year 1945 in the amount of $ 2,514.99. The determination*8 of the deficiency by the respondent was made after the expiration of the 3-year statute of limitations provided by section 275 (a), Internal Revenue Code. The issue for decision is whether the adjustments made by the respondent are authorized by section 3801 (b) (2), (3), or ( 5), Internal Revenue Code. FINDINGS OF FACT. All of the facts have been stipulated. The facts are as follows: 1. The petitioner is an individual residing in Los Angeles, California. 2. Petitioner filed his individual income tax return for the year 1944 on or before March 15, 1945, and paid the tax shown as due thereon. 3. On November 30, 1944, petitioner purchased $ 50,000 face value callable and convertible American Telephone and Telegraph bonds for a total consideration of $ 62,259.55. These bonds were callable upon 30 days' notice, at a reduced price. Petitioner in his return for the year 1944 claimed a deduction in the amount of $ 10,000, as allowable amortization of bond premium. Interest on said bonds, received during the period they were owned by petitioner, was included in the gross income reported on income tax returns filed by him. *404 4. Subsequently, the Commissioner of Internal Revenue, *9 based upon a revenue agent's report dated April 8, 1947, disallowed said deduction of amortizable bond premium for the year 1944, which disallowance resulted in an additional tax for the year 1944 in the amount of $ 5,940.60. Other items for the year 1944 adjusted in said report are not here in issue. Petitioner paid the additional tax assessed on or before June 24, 1947. 5. Petitioner filed his individual income tax return for the year herein involved, 1945, on or before March 15, 1946, and paid the tax shown as due thereon. Petitioner filed an amended individual income tax return for the year 1945 on or before April 15, 1946, and paid the additional tax as shown due thereon. 6. In his return for the year 1945, petitioner reported the long-term capital gain on a sale made on June 5, 1945, of the aforesaid American Telephone and Telegraph bonds in the amount of $ 12,285.97, pursuant to section 117 of the Internal Revenue Code and included one-half thereof, $ 6,142.98, in adjusted gross income pursuant to said section. The gain on said sale was computed as follows: Selling price $ 64,545.52 Basis 52,259.55 Total gain $ 12,285.97 Amount included in adjusted gross income $ 6,142.98 *10 7. Subsequently, the Commissioner of Internal Revenue, based on a revenue agent's report dated April 8, 1947, adjusted petitioner's 1945 income tax return to reflect a decreased gain on the sale of American Telephone and Telegraph bonds by addition to petitioner's basis for gain the amount of $ 10,000, representing an amount equal to the $ 10,000 bond premium amortization which was disallowed concurrently for the year 1944. Petitioner's adjusted gross income was thereby decreased by $ 5,000, one-half of the $ 10,000, which resulted in a decrease in tax of $ 2,500. Other items adjusted in said report are not here in issue. The decrease in tax resulted in an overassessment and was applied on or before June 24, 1947, as a credit against petitioner's deficiency for the year 1944. 8. On August 15, 1948, petitioner filed with the collector of internal revenue for the sixth district of California, a timely claim for refund of taxes paid for the taxable year ended December 31, 1944, in the amount of $ 5,940.60. The basis of the claim for refund was the erroneous disallowance of bond premium amortization deduction in the amount of $ 10,000 claimed by the taxpayer in his return for the *11 taxable year 1944 which was allowable pursuant to the Tax Court decision in Christian W. Korell, 10 T. C. 1001 (1948), affd. 339 U.S. 619 (1950). *405 9. Subsequent to the filing of the pleadings and before the time of trial in this proceeding, the Commissioner of Internal Revenue completed the delivery of a certificate of overassessment allowing said claim for refund. This action has reference to the scheduling of said certificate on or about April 19, 1951, and is the subject of paragraph IX of the answer and reply. The parties agree that for all purposes of this proceeding, the notice of deficiency was issued within 1 year after the date of allowance of said claim for refund. 10. By the notice of deficiency involved in this proceeding, dated April 16, 1952, the Commissioner of Internal Revenue determined a deficiency in the amount of $ 2,514.99 for the taxable year 1945. $ 2,500 of said deficiency resulted from a determination by the Commissioner that petitioner's long-term capital gain for the year 1945 should be increased by the amount of $ 10,000, 50 per cent of which, $ 5,000, the Commissioner added to petitioner's*12 adjusted gross income for the year 1945. The increase in capital gain resulted from decreasing petitioner's basis for determining gain on the sale of the aforesaid American Telephone and Telegraph bonds by deducting from the cost the amount of $ 10,000 which represents amortizable bond premium allowed for 1944. See paragraphs 8 and 9 above. $ 14.99 of said assessment results from an error in computation of normal tax made in the prior revenue agent's report dated April 8, 1947. 11. More than 3 years passed from the date of the filing of petitioner's 1945 return on or before March 15, 1946, to the date of mailing of the notice of deficiency for 1945 in this proceeding, April 16, 1952, and, therefore, such assessment is barred by section 275, Internal Revenue Code. 12. More than 2 years has passed from the date on which the overassessment for the year 1945 was refunded or credited to petitioner's account, and, therefore, no suit to recover such refund may be brought pursuant to section 3746 (b), Internal Revenue Code. 13. The assessment of the deficiency determined by the Commissioner on April 16, 1952, is barred by the statute of limitations and other provisions of the Internal *13 Revenue Code unless the assessment constitutes an adjustment under the provisions of section 3801, Internal Revenue Code. 14. If it is found that section 3801 of the Internal Revenue Code applies, the deficiency would be $ 2,500. See paragraph 10. OPINION. The deficiency of $ 2,514.99 for 1945 results from an adjustment made by the respondent on April 12, 1952, the date of the mailing of the deficiency notice. The determination of a deficiency for 1945, on April 12, 1952, was barred by the statute of limitations *406 unless section 3801 of the Code applied, as respondent contends. Petitioner takes the view that section 3801 does not apply. He relies upon James Brennen, 20 T. C. 495. Briefly summarized, the facts are as follows: The petitioner purchased bonds in 1944. He claimed in his 1944 return a deduction of $ 10,000 representing the full amount of amortizable bond premium which he deducted under section 125, Internal Revenue Code. He sold the bonds in 1945. Having deducted $ 10,000 in 1944 for amortized bond premium, he adjusted the basis of the bonds, accordingly, in computing the amount of the gain in his 1945 return. As later developed, *14 petitioner's treatment was correct under the rule expressed in Commissioner v. Korell, 339 U.S. 619, affirming 176 F. 2d 152, which affirmed 10 T. C. 1001. However, the respondent disallowed the deduction taken on the 1944 return determining, in effect, that the premium for the bonds was not amortizable in full in the year of acquisition under sections 23 (v) and 125 of the Code, and determined a deficiency for 1944. The respondent originally took a correspondingly higher basis for the bonds for computing gain realized upon sale, in accordance with his determination for 1944, and he reduced the amount of the gain realized in 1945, and determined, originally, an overassessment of petitioner's tax for 1945. He then applied the overassessment thus determined for 1945 as a credit against the deficiency for 1944, and petitioner paid a deficiency for 1944 in a net amount resulting from the aforementioned credit. Thereafter, petitioner timely filed a claim for refund of 1944 tax allegedly overpaid. Following the decision of the Supreme Court in the Korell case, the Commissioner allowed petitioner's*15 claim for refund of the overpayment of tax for 1944. Thereafter, on April 12, 1952, the Commissioner asserted the deficiency for 1945 (which involved going back to the adjusted basis of the bonds under the rule of the Korell case), using the adjusted basis for computing gain in 1945 which petitioner originally adopted in his return for 1945, upon which basis the larger amount of gain upon sale was computed and reported by the petitioner. In the Brennen case, the facts were the same. We pointed out there that "the party who invokes the exception to the basic statutory limitation period must * * * assume the burden of proving all of the prerequisites to its application," citing D. A. MacDonald, 17 T. C. 934, 940. The burden is upon the respondent. In this proceeding, on brief, the respondent recognizes that the rule announced in the Brennen case precludes our sustaining his contentions here, but he urges us to overrule our decision in the Brennen case. We need not repeat here what we said in the Brennen case. We adhere to the view there expressed. Accordingly, it is held that subsections *407 (b) (2) and (b) (5) of section 3801, *16 Internal Revenue Code, do not apply under the facts of this proceeding. The respondent relies upon subsection (b) (3) 1 of section 3801, which is set forth in the margin, in addition to subsections (b) (2) and (b) (5), thereby bringing before us consideration of one of the other provisions of section 3801 which was not before us in the Brennen case. Subsection (b) (3) applies to a determination which "requires the exclusion from gross income of an item." Respondent, in invoking subsection (b) (3), argues that a deduction from gross income is equivalent to an exclusion from gross income for the purposes of subsection (b) (3). The respondent cites no authority in support of this novel contention, and, in our opinion, it is without merit. The determination made by the respondent, relating to the year 1944, did not require "the exclusion from gross income of an item with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year." *17 Since the deficiency is barred by the statute of limitations, Decision will be entered for petitioner. Footnotes 1. SEC. 3801. MITIGATION OF EFFECT OF LIMITATION AND OTHER PROVISIONS IN INCOME TAX CASES. (b) Circumstances of Adjustment. -- When a determination under the income tax laws -- * * * * (3) Requires the exclusion from gross income of an item with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year or from the gross income of a related taxpayer; or↩