Melahn v. Commissioner

Elmer M. Melahn, Petitioner, v. Commissioner of Internal Revenue, Respondent Melahn v. Commissioner Docket No. 9050 United States Tax Court 9 T.C. 769; 1947 U.S. Tax Ct. LEXIS 50; October 28, 1947, Promulgated *50 Decision will be entered for the respondent. Petitioner, engaged in the road paving business, filed returns reporting substantial losses sustained for the years 1930 to 1932, inclusive. Prior to filing his 1933 return he added back to unrecovered costs on equipment used part of depreciation claimed in loss years, and in his return understated the amount of depreciation claimed in those years. On November 25, 1943, after the statute of limitations applying to years prior to 1940 had expired, petitioner voluntarily filed amended returns for the years 1933 to 1941, inclusive, in which he reduced the amount of depreciation claimed as deductions in each of those years. No waivers extending statutory period were executed. Amounts shown to be due as additional taxes on amended returns were paid to collector, and were assessed in December 1943. In determining amounts petitioner could deduct as depreciation for 1940 and 1941, Commissioner refused to recognize reductions made for years 1930 to 1932 and in amended returns for 1933 to 1939, inclusive. Held, the filing of amended returns with payment and assessment of additional taxes after the expiration of the statutory period *51 did not meet the requirements of section 276 (b), I. R. C., and Commissioner correctly determined that petitioner's bases for depreciation in 1940 and 1941 should be reduced by amounts allowed in original returns for years 1932 to 1939, inclusive. Max Bloomstein, Jr., Esq., G. H. Hennessey, Jr., Esq., and Hugh N. Smith, C. P. A., for the petitioner. David F. Long, Esq*52 ., for the respondent. Harlan, Judge. Turner and Murdock, JJ., concurring. Van Fossan, Disney, and LeMire, JJ., agree with the concurring opinion. HARLAN *769 The Commissioner determined deficiencies in income tax for the calendar years 1940 and 1941 in the amounts of $ 2,275.55 and $ 2,724.02, respectively. The Court is called upon to decide whether or not the Commissioner erred in disallowing the amounts of $ 7,130.79 and $ 6,900.45 from the respective amounts of $ 10,994.07 and $ 10,059.76 claimed as depreciation deductions by the petitioner in his original income tax returns for the taxable years of 1940 and 1941, respectively. The question arose out of the refusal by the Commissioner *770 to permit the taxpayer to adjust his basis for depreciation by adding thereto an amount which petitioner alleged constituted excessive depreciation deductions which he had claimed in prior years and to correct which he had filed, for some of the years involved, amended returns and had paid therewith an additional tax thereon. The validity of the refusal of the Commissioner to recognize this change in basis for depreciation presents the primary question for decision. *53 FINDINGS OF FACT. We incorporate by reference the stipulation of facts in our findings of fact herein, but only set forth from said stipulation and the entire record such specific findings as we deem relevant to the decision. The petitioner is an individual, who, during 1940 and 1941, resided at Algonquin, Illinois. He filed his Federal income tax returns with the collector of internal revenue for the first district of Illinois. From 1928 to 1941, inclusive, petitioner was engaged in the road-paving business as a sole proprietor. From 1928 to 1939, inclusive, his income tax returns showed the following net income after depreciation and amount of depreciation: Net income Depreciation or (loss) after claimed in deducting Date filed Taxable computing depreciation year net income claimed on or (loss) returns 3-15-29 [1928] $ 13,153.91 $ 15,460.51 3-15-30 [1929] 28,361.07 4,907.29 3-16-31 [1930] 25,365.18 (34,048.63) 3- 3-32 [1931] 26,925.61 (9,116.52) 3-15-33 [1932] 16,970.38 (6,536.99) 3-15-34 [1933] 14,138.37 11,900.69 5-15-34 3-14-35 [1934] 6,189.23 5,049.71 3-16-36 [1935] 10,191.31 6,345.16 5-15-36 3- 9-37 [1936] 16,444.21 13,833.06 3-15-38 [1937] 20,564.75 18,811.80 3-14-39 [1938] 17,412.05 7,189.24 3-13-40 [1939] 13,383.79 17,219.56 *54 Since the establishment of petitioner's business in 1928, he has maintained a depreciation ledger, with a separate account for each item of equipment. During the years 1928 to 1933, inclusive, the petitioner had numerous separate items of depreciable equipment. Prior to the filing of his original Federal income tax return for the year 1933, the petitioner, by a credit to a liability account in his books and records, described as "Business Profit & Loss," and a debit to the depreciation reserve account, added back to the unrecovered costs of the various items of equipment part of the depreciation he claimed during his *771 loss years 1930, 1931, and 1932, aggregating the sum of $ 32,267.53. Petitioner did not communicate this change in his bookkeeping to the Commissioner, nor did this fact appear directly in any income tax return. He did not file any amended returns reflecting this change. In his Federal income tax return for the year 1932 petitioner stated that the depreciation claimed for the years 1928 to 1932, inclusive, aggregated $ 97,075.74, whereas in his original Federal income tax return for the year 1933 petitioner stated that the depreciation claimed for the years*55 1928 to 1932, inclusive, aggregated only $ 64,808.21. A detailed schedule showing the prior depreciation claimed on each separate item of depreciable assets is attached to petitioner's Federal income tax returns for the years 1932 and 1933. The 1933 return was examined by a revenue agent for the Commissioner in August 1935. Said agent did not examine at that time the 1932 return and did not discover the discrepancy between the two returns in the amount of prior claimed depreciation deductions. The only change made in the return in the 1933 assessment was the disallowance of a claimed loss deduction. The agent considered the depreciation deduction claimed for 1933 to be a proper amount. Petitioner's 1936 and 1937 original Federal income tax returns were examined by a revenue agent in December 1938. As a result of the revenue agent's examination of the said 1936 and 1937 original returns certain deductions for bonuses and bad debts claimed were disallowed, which produced deficiencies for the year 1936 in the amount of $ 859.36 and for 1937 in the amount of $ 3,121.62, which petitioner paid in February 27, 1939. Prior to his investigation in January 1944 of the original returns*56 filed by the petitioner for the taxable years 1940 and 1941, the Commissioner had not questioned the correctness of the depreciation deductions, or the computation of depreciation, reported by the petitioner on his original Federal income tax returns for any of the years 1928 to 1939, inclusive. Petitioner's books, as of January 1, 1940, disclose the following facts concerning all depreciable chattels purchased by the taxpayer during the years 1928 to 1939, inclusive, which were still in his possession on that date: Prior Unrecovered Classification Cost depreciation cost Machinery and equipment $ 123,520.04 $ 128,813.62 ($ 5,293.58) Automobiles 2,439.36 840.79 1,598.57 Trucks 24,486.36 19,740.99 4,745.37 Furniture and fixtures 918.80 1,254.15 (335.35) *772 The amount of depreciation claimed by the petitioner in his original Federal income tax return for the taxable year 1940 and the adjustments made by the Commissioner's determination are as follows: Claimed Allowed Disallowed Machinery and equipment $ 8,375.63 $ 1,288.95 $ 7,086.68 Automobiles 572.28 572.28 None Trucks 1,998.05 1,998.05 None Furniture and fixtures 48.11 4.00 44.11 Total 10,994.07 3,863.28 7,130.79 *57 The amount of depreciation claimed by the petitioner in his original Federal income tax return for the taxable year 1941 and the adjustments made by the Commissioner's determination are as follows: Claimed Allowed Disallowed Machinery and equipment $ 7,234.08 $ 1,547.01 $ 5,687.07 Automobiles 425.78 425.78 None Trucks 1,945.90 732.52 1,213.38 Furniture and fixtures 4.00 4.00 None Archer Avenue Building 450.00 450.00 None Total 10,059.76 3,159.31 6,900.45 On November 25, 1943, the petitioner voluntarily filed with the collector of internal revenue for the first district of Illinois what he contends to be amended Federal income tax returns for the years 1933 to 1941, inclusive. The statute of limitations respecting assessment of additional taxes for the years 1933 to 1939, inclusive, and for the years 1928 to 1932, inclusive, had expired prior to November 25, 1943, and no waivers existed extending the statute of limitations for the years 1929 to 1939, inclusive, on the date said alleged amended returns were filed. The only change in the alleged amended returns from the originals was a decrease in the item of depreciation. A statement attached*58 to each alleged amended return reads as follows: The only difference between this Amended Return and the Original Return is in the amount of depreciation claimed on road paving machinery and equipment. Because of the seasonal nature of our work (road paving and grading) our equipment was only used, on the average, less than one-half the year, and always kept in first class repair and condition. Depreciation was originally claimed in error on a full year basis and without giving credit for the amount of repairs made thereon and was therefore excessive. An analysis of the depreciation deductions claimed in the original income tax returns filed by the petitioner with those in the amended returns is as follows: *773 Original Depreciation Deductions Year Paving Automobiles Trucks Furniture Total equipment [1933] $ 9,482.65 $ 312.72 $ 4,283.09 $ 59.91 $ 14,138.37 [1934] 4,369.07 135.20 1,625.05 59.91 6,189.23 [1935] 7,014.90 118.71 2,997.00 60.70 10,191.31 [1936] 11,719.24 158.22 4,506.05 60.70 16,444.21 [1937] 15,731.03 394.39 4,369.24 20.09 20,564.75 [1938] 14,069.36 394.39 2,886.29 62.01 26,039.09 [1939] 11,894.33 157.23 1,270.39 61.84 13,383.79 Total 106,950.75 Amended Depreciation Deductions [1933] $ 4,839.95 $ 312.72 $ 2,892.80 $ 46.67 $ 8,090.14 [1934] 4,051.14 135.20 1,549.53 46.67 5,782.54 [1935] 4,063.41 128.95 2,121.81 56.67 6,370.84 [1936] 3,419.51 3,751.79 36.67 7,207.97 [1937] 6,167.48 394.39 3,029.29 40.67 9,631.83 [1938] 6,227.95 394.39 2,739.84 40.67 9,402.85 [1939] 6,432.18 157.23 2,011.57 40.67 8,641.65 Total 55,127.82 *59 In forwarding the alleged amended income tax returns to the collector of internal revenue, the petitioner enclosed a letter which read as follows: November 24, 1943. Collector of Internal Revenue, Chicago, Illinois. Sir: I enclose herewith amended returns covering my Federal income taxes for the calendar years 1933 to 1941, inclusive, together with my check in the amount of $ 10,880.29, covering the additional taxes as shown due and interest thereon to November 26, 1943, as follows: Year Tax Due Interest Total [1933] $ 753.77 $ 438.57 $ 1,192.34 [1934] 16.28 8.50 24.78 [1935] 299.44 138.29 437.73 [1936] 1,828.16 734.62 2,562.78 [1937] 2,858.63 977.17 3,835.80 [1938] 788.68 222.28 1,010.96 [1939] 711.15 157.76 868.91 [1940] 486.35 78.71 565.06 [1941] 346.63 35.30 381.93 Total $ 8,089.09 $ 2,791.20 $ 10,880.29 Respectfully, [Signed] E. M. Melahn, E. M. Melahn, In the taxpayer's original return for 1934 he explained his depreciation deductions with the following note: The normal and average paving season for this latitude, covers about 120 days yearly. Our operations for 1934 were far below normal, and as a consequence, the equipment and trucks lay idle*60 most of the time. Therefore, the normal depreciation should be adjusted accordingly. To the best of our belief, a charge of 40% of normal, to cover actual depreciation and possible obsolescence seems proper as a depreciation charge for 1934. *774 The alleged additional taxes shown due on the purported amended returns and voluntarily paid the collector of internal revenue by the petitioner were assessed in December 1943, account Nos. D-900, 257-8 9-60-1-2-3-4-5. Petitioner duly filed claims for refund for all the alleged additional taxes and interest and said claims for refund are open and pending. OPINION. The Commissioner, in determining petitioner's depreciation deductions for 1940 and 1941, disregarded petitioner's contention that he had reduced the depreciation deductions shown by his returns for 1930 to 1932, inclusive, and the Commissioner also refused to recognize the amended returns for the years 1933 to 1939, inclusive, whereby a further reduction of allowed depreciation deductions taken during those years was also attempted. In computing the allowable deductions for depreciation for the years 1940 and 1941 all deductions originally allowed to the petitioner were*61 totaled by the Commissioner and the sum thereof subtracted from the cost of each item. When the allowed deductions exceeded the cost, the Commissioner allowed no further depreciation in 1940 and 1941. He did allow, however, depreciation on those items not fully depreciated as of January 1, 1940, depending upon the amount of the unexhausted cost in each case and the anticipated period of usefulness beyond January 1, 1940. The only objection raised by petitioner to this procedure is as to the disregarding of his two attempts to reduce his prior depreciation deductions. It is our conclusion that the Commissioner acted correctly in each instance. Petitioner's attempt in 1933 to reduce prior depreciation deductions for three loss years is in direct conflict with the holding of the United States Supreme Court in Virginian Hotel Corporation v. Helvering, 319 U.S. 523. In that case the taxpayer attempted to reduce prior depreciation deductions allowed in loss years to an amount which would have been properly allowable. The taxpayer by this means attempted to increase his unexhausted cost basis for future deductions. The Court held therein that after*62 a depreciation deduction has been allowed it could not later be reduced merely because the taxpayer had not realized a tax benefit from the allowed deduction. In the case at bar the taxpayer filed no application with the Commissioner to reduce his depreciation deductions for 1930, 1931, or 1932. He filed no amended returns for those years. He did not inform the Commissioner that he was attempting to make any change in his depreciation reserve. He merely filed his 1933 return showing prior depreciation deductions amounting to $ 64,808.21 for the years *775 1928 to 1932, inclusive, whereas his return for the year 1932 had showed prior deductions of $ 97,075.74 for the same period. He also debited his depreciation reserve account for $ 32,267.53. It is our conclusion that the taxpayer did not give the Commissioner or the agent sufficient notice of his attempted change in depreciation deductions for the years 1930, 1931, and 1932; that when the Commissioner approved the 1933, 1936, and 1937 returns he did not approve a change in prior depreciation deductions; and that such unauthorized change is prohibited by the law of the Virginian Hotel Corporation case, supra. The*63 second attempt to reduce prior depreciation deductions occurred in November 1943, when petitioner filed amended returns for all years from 1933 to 1939, inclusive, and in those returns reduced his claim for depreciation deductions in each year, thereby increasing his taxable income for those years. He then computed the increased tax, with interest to the date of payment, and sent a check for this amount with the amended returns. Petitioner stated in each amended return that the only change made was in prior depreciation allowance on road-paving machinery and equipment. As a matter of fact, however, he actually amended the depreciation originally claimed in all categories. He does not make it clear as to why the seasonal use of the paving equipment should occasion a changed depreciation allowance for his furniture and fixtures. Furthermore, his statement that he had made a change in the depreciation of his paving equipment due to the seasonal operation thereof is but a repetition of the same statement he made in his original 1934 return where he claimed that he was changing his rate of depreciation to 40 per cent of normal on this account. These two factors make the sincerity*64 of his contention questionable. Respondent denies the right of the taxpayer to file amended returns after the lapse of three years following the filing of the original return unless this period is extended by written agreement of the parties before the lapse of the three-year limitation. He relies on sections 275 (a) and 276 (b) of the Internal Revenue Code. 1 The petitioner contends that statutes of limitation are for the benefit of the debtor or, in this case, the taxpayer, and can be waived by the debtor or taxpayer as the case may be. In this case he contends that he waived the benefit *776 of the statute by filing his amended returns, which he says the taxpayer may do at any time, regardless of the provisions of section 276 (b). *65 We are therefore confronted with two questions: (1) Did the statute of limitations preclude the taxpayer, on November 25, 1943, from amending any of his returns filed prior to November 25, 1940? (2) If not, is the petitioner entitled to use the depreciation deduction set forth in his amended returns to increase his unexhausted cost as of January 1, 1940? If petitioner's right to seek a reassessment of his income tax at any time after a return is filed by the simple process of filing an amended return is sustained, interesting problems may soon be presented to the Commissioner. Property holders who have depreciated their buildings at 3 per cent per annum for 33 years, may well conclude, in view of the increased building costs and the increased tax rates, that their properties may well be used for another 17 years and, of course, such taxpayers would then file amended returns for the last 33 years and reduce those rates of depreciation to 2 per cent. The very contemplation of such a possibility shows the wisdom of the Congress in providing that the waiver of the statute of limitations must be signed by the Commissioner before the expiration of the period of limitation. This provision*66 was put into the statute by the Senate after the House had passed a bill permitting waivers to be filed after the period of limitation. The Senate Finance Report (No. 960, 70th Cong., 1st sess.), 1939-1 (Part 2) C. B. 409, at p. 430, and Conference Report (No. 1882, 70th Cong., 1st sess.), 1939-1 (Part 2) C. B. 444, at pp. 450 and 452, provide: [Senate Finance Report.] Section 276 (b) of the House bill corresponds to section 278 (c) of the Revenue Act of 1926 in so far as it provides that the Commissioner and the taxpayer may extend the period for assessment of the tax for 1928 and subsequent years by an agreement in writing and that in such case the tax may be assessed at any time prior to the expiration of the period agreed upon. Section 276 (b) of the House bill, however, goes somewhat further, in that it specifically provides that such a consent, usually called a "waiver," shall be valid, even though it is executed after the Commissioner's right to make the assessment has expired. In the interest of keeping cases closed after the running of the statute of limitations, the committee has stricken out the provisions in the House bill which make waivers in the case of taxes*67 for 1928 and future years valid when they have been executed after the limitation period has expired. [Conference Report.] Amendments Nos. 131, 132, 133, and 134: The House bill provided that waivers filed after the expiration of the period of limitation, in the case of income taxes imposed by the new law, should be valid. The Senate amendments eliminate this provision; and the Houses recedes. * * * * Amendments Nos. 170, 171, 172, and 173: These amendments, which relate to the validity of waivers executed after the expiration of the period of limitation intended to be waived, are similar to amendments Nos. 131, 132, 133, and 134 *777 above. The House bill made such waivers effective even though executed after the expiration of such period. The Senate amendment confined the provisions to waivers executed before the expiration of the period; and the House recedes. [Italics supplied.] The very nature of the question in the case at bar, furthermore, shows that the statute of limitations involved herein is not exclusively for the benefit of the taxpayer, as petitioner contends. It is much to the interest of the Commissioner and to the stability of public revenue that*68 the waiver of limitations be done only in the manner set forth by the statute. A principle of statutory construction of ancient lineage provides that, when a statute limits the method of performing an act, it thereby precludes other methods. Raleigh & Gaston Railroad Co. v. Reed, 13 Wall. 269; Botany Worsted Mills v. United States, 278 U.S. 282. Petitioner relies upon Horuff v. United States (Ct. Cls., 1935), 9 Fed. Supp. 1016, to establish his right to waive the statute of limitations at any time by filing amended returns and paying additional tax. In that case Horuff, a merchant, had juggled his inventories during the years 1920 to 1923, inclusive, in such a way as to show a falsely low income and thereby decrease his tax. In 1928 he desired to incorporate and sell stock in his new corporation. He then found that a prospectus showing the falsely low income would not help the sale of his stock and that a true statement might involve him with the revenue department. Therefore he filed amended true returns in 1928 for the prior years and paid the additional tax thereon. After*69 his purpose was served, in June 1931, he then filed a suit to recover those payments which he had made in 1928, alleging that the Commissioner had been barred by the statute of limitations from accepting his additional tax payments. At the time Horuff filed his amended returns, section 278 (c) of the 1926 Revenue Act was applicable. It reads as follows: (c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon. There was no provision in the above section requiring that the waiver of limitation be executed before the running of the statute and the Court therein held that the requirements of the existing act had been fulfilled. The Court said: The taxpayer's written evidence of his intention not to stand upon the statutory limitation, was accepted and approved by the Commissioner in writing when he signed the assessment list of such taxes on July 12, 1928. Cf. Helvering v. Newport Co., 291 U.S. 485. Section 278 (c) of the 1926 Act, applied in the Horuff*70 case, and section 276 (b) of the code, which must be applied in the instant proceeding, *778 differ in that the former permits an extension, by consent, of the time within which an assessment may be made even though executed after the running of the statute, whereas the latter, as heretofore noted, requires that the consent be executed before the expiration of the period of limitation. The respondent has pleaded section 276 (b), supra, in defense of the deficiencies, urging that it constitutes a bar to any payment by petitioner or collection by the Commissioner of additional income taxes for years prior to January 1, 1940. We agree with the respondent. The difference between the statutory provisions applied in the Horuff case and those we have to apply in this proceeding require that our conclusion be contra to that reached in that case. Even if it be assumed for the purposes of this decision that the filing of amended returns, and the payment and assessment of the additional taxes shown as due thereon, qualified as the consent in writing by the Commissioner and the taxpayer required by section 276 (b), they were ineffective as a waiver because executed after *71 the expiration of the period of limitation and did not operate to change the allowance for depreciation claimed by petitioner in his original returns and allowed for the years prior to January 1, 1940. The inability of the petitioner and Commissioner under the law to execute a valid waiver as late as November 24, 1943, for the years 1933 to 1939, inclusive, rendered nugatory any action taken by either of them with a view to changing petitioner's liability for tax for those years. This being our conclusion, we deem it unnecessary to discuss whether petitioner has or has not proved that his depreciation deductions for years prior to 1940 were excessive. Respondent correctly decided that, in determining the allowances for depreciation petitioner may deduct in his returns for the taxable years, the cost of the depreciable assets must be reduced by the amounts claimed as deductions for depreciation in years prior to 1940 and allowed by the Commissioner prior to the filing of the amended returns. Decision will be entered for the respondent. TURNER; MURDOCK Turner and Murdock, JJ., concurring: A taxpayer can not claim and be allowed deductions for depreciation and then, years later, *72 when he discovers that lesser deductions would benefit him more in the long run, avoid the effect of Virginian Hotel Corporation v. Helvering, 319 U.S. 523, by filing amended returns for the earlier years. We find no occasion to decide whether or not amended returns could be filed. Footnotes 1. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION. Except as provided in section 276. -- (a) General Rule. -- The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. SEC. 276. SAME -- EXCEPTIONS. * * * * (b) Waiver. -- Where before the expiration of the time prescribed in section 275↩ for the assessment of the tax, both the Commissioner and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.