Aiken v. Commissioner

FRIEND M. AIKEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Aiken v. Commissioner Docket No. 21513. United States Board of Tax Appeals 10 B.T.A. 553; 1928 BTA LEXIS 4069; February 7, 1928, Promulgated *4069 1. Where the Commissioner made a jeopardy assessment in March, 1925, and the taxpayer, within 10 days after notice and demand, filed a claim in abatement but did not accompany it with a bond, and where in October, 1926, the Commissioner made his final determination of the deficiency, held, that the Board has jurisdiction to determine the deficiency although the Commissioner did not in terms refer to the claim in abatement. 2. Where the Commissioner made a jeopardy assessment in March, 1925, and at a time when both the assessment and collection of the tax were barred by the statute of limitations, and where in February, 1926, the taxpayer and the Commissioner entered into an agreement extending the period within which assessment might be made to December 31, 1926, and where Commissioner finally determined the dificiency in October, 1926, and where an appeal was lodged with the Board within 60 days thereafter, held, that the assessment and collection of the tax are not barred by the statute of limitations. 3. Where an option to purchase stock was granted in 1916, and where the option was exercised and the stock sold and delivered in 1917, held, that the gain from*4070 the sale was taxable in 1917. Claude Collard, C.P.A., M. M. Mahany, Esq., and L. E. Cahill, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. MILLIKEN *554 This proceeding involves the redetermination of deficiencies in petitioner's income and profits tax for the year 1917, and in his income taxes for the years 1918, 1919, and 1920. Respondent determined the following deficiencies: for the year 1917, $51,614.09, for the year 1918, $986.30, and for the year 1920, $29,249.86; and for the year 1919 he determined an overassessment of $5,120.24. Petitioner alleges that respondent committed the following errors: (1) Error in computing net income for the year 1920 by reason of not determining the true amount of liquidating dividend from the Admiralty Zinc Co. (2) Error in computing net income for the year 1917 in failing to determine the true amount of liquidating dividends from the Queen Esther Mining Co. (3) Error in computing net income for the years 1917, 1918, and 1920 in failing to determine the true amount of liquidating dividends from the Cushing Gasoline Co. (4) Error in determining that taxable gain was realized*4071 in the year 1917 from the sale of shares of stock of the Peerless Refining Co. (5) Error in including in income for the years 1917, 1918, and 1920 income from restricted Indian lands. (6) Error in refusal to allow as a deduction from gross income for 1917 an adequate salary to petitioner. (7) Respondent was without authority to make, on March 12, 1925, a jeopardy assessment of any war income or war excess-profits taxes for the year 1917, because such right was then barred by the statute of limitations. (8) Respondent was without authority to make a jeopardy assessment on March 12, 1925, of any normal tax or additional tax for the year 1917 sought to be imposed under the Revenue Act of 1916, as *555 amended by the Revenue Act of 1917, because such right was then barred by the statute of limitations. (9) Respondent now is and since April 1, 1923, has been without authority to collect any taxes imposed under the Revenue Act of October 3, 1917, for war income or war excess-profits taxes, such right being barred by the statute of limitations. (10) Respondent now is and since April 1, 1923, has been without authority to collect any normal or additional tax for the*4072 year 1917 sought to be imposed under the Revneue Act of September 8, 1916, as amended by the Revenue Act of October 3, 1917, such right being barred by the statute of limitations. (11) The respondent now is and since April 28, 1925, has been without authority to collect any taxes sought to be imposed under the Revenue Act of 1918, such right being barred by the statute of limitations. Petitioner, at the hearing, waived error (6) and introduced no evidence to sustain errors (1), (2), (3), and (5). This proceeding, in so far as it involves taxes for the year 1919, was dismissed at the hearing. The parties stipulated that the deficiency for the year 1920 was $29,249.86. FINDINGS OF FACT. Petitioner is a resident citizen of the United States, and was, during the years 1917, 1918, 1919, and 1920, engaged in business with his principal offices located at Tulsa, Okla. Petitioner filed an income and profits-tax return for the year 1917 with the collector on March 30, 1918. On March 18, 1919, petitioner filed with the collector a tentative income-tax return for the year 1918, and on April 28, 1919, he filed with the collector his complete return for said year. On February 5, 1921, petitioner*4073 executed the following instrument in writing: WAIVER (Individual) I, Friend M. Aiken, in consideration of the assurance given me by officials in the Income Tax Unit of the Bureau of Internal Revenue that my liability for all Federal taxes imposed by the Act of Congress, approved September 8, 1916, as amended by the Act of Congress approved October 3, 1917, for the year ended December 31, 1917, on my net income received from all sources in said year, shall not be determined except after deliberate, intensive and thorough consideration, thereby waive any and all statutory limitations as to the time within which assessments based upon such liability may be entered. It is understood, however, that I do not, by the execution of this waiver, admit in advance the correctness of any assessment which may be made against me for said year by the officials of the Income Tax Unit. (Signed) FRIEND M. AIKEN by E. F. BLAISE, Attorney-in-fact. Taxpayer. *556 The above instrument was filed with respondent on February 7, 1921, and now bears on its face the following notation: Approved D. H. Blair, Commissioner of Internal Revenue, Date Nov. 29, 1922. On March 3, 1924, petitioner*4074 executed an intrument in writing, which was thereafter executed by respondent and which reads: MARCH 3, 1924. INCOME AND PROFITS TAX WAIVER. In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Friend M. Aiken, of Tulsa, Oklahoma, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said individual for the years 1917 and 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes" approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. (Signed) FRIEND M. AIKEN *4075 Taxpayer. By (Signed) D. H. BLAIR Commissioner. Under date of February 16, 1925, petitioner executed the following instrument in writing and thereafter delivered it to respondent: FEBRUARY 16, 1925. INCOME AND PROFITS TAX WAIVER (For taxable years ended prior to March 1, 1921.) In pursuance of the provisions of existing Internal Revenue Laws, F. M. Aiken, a taxpayer of Tulsa, Oklahoma, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1917 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the*4076 date of mailing of said notice of deficiency and the date of final decision by said Board. (Signed) F. M. AIKEN by E. F. BLAISE, Atty.-in-Fact. Taxpayer. *557 This instrument is stamped on its face "Received Mar. 2, 1925 Service Division." It was not executed by respondent and bears the further notation in writing "not acceptable." On February 16, 1925, petitioner executed the following instrument in writing and thereafter delivered it to respondent: FEBRUARY 16, 1925. INCOME AND PROFITS TAX WAIVER (For taxable years ended prior to March 1, 1921.) In pursuance of the provisions of existing Internal Revenue Laws F. M Aiken, a taxpayer, of Tulsa, Oklahoma, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1918 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said*4077 taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. (Signed) F. M. AIKEN, by E. F. BLAISE, Atty.-in-Fact. Taxpayer. This instrument was not executed by respondent. Stamped on its face is the notation "Received Mar. 2, 1925, Service Division." On March 12, 1925, respondent made a jeopardy assessment against petitioner covering the calendar year 1917, in the amount of $70,740.88. On the same day respondent made a jeopardy assessment against petitioner covering the calendar year 1918 in the amount of $29,739.39. Within 10 days after notice and demand on both the above jeopardy assessments, petitioner filed with the collector claims in abatement covering both said assessments. The claims were not accompanied by bonds. On February 5, 1926, petitioner executed an instrument in writing, which was thereafter executed by respondent, and which reads: *4078 INCOME AND PROFITS TAX WAIVER For taxable years ended prior to Jan. 1, 1922 FEBRUARY 5, 1926. In pursuance of the provisions of existing jinternal Revenue Laws FRIEND M. AIKEN, taxpayer of Tulsa, Oklahoma, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1917, 1918, 1919 and 1920 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice *558 of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. (Signed) FRIEND M. AIKEN By L. E. CAHILL, Atty.-in-Fact.*4079 Taxpayer. (Signed) D. H. BLAIR, Commissioner. Subsequently, under date not shown, petitioner executed two instruments in writing similar in all respects to the instrument of February 5, 1926, except that one of them applied only to taxes for the year 1917 and the other to taxes for the year 1918. Each of these instruments was executed by respondent on February 17, 1926. Under date of October 7, 1926, there was mailed to petitioner from the office of respondent a letter which reads as follows: OCTOBER 7, 1926. IT:PA:PYA-60D ARM MR. FRIEND M. AIKEN, Cosden Building, Tulsa, Oklahoma. SIR: The determination of your income tax liability for the years 1917 to 1920, inclusive, as set forth in office letters of May 27, 1926Has been changed, as a result of your protest dated June 24, 1926, to disclose a deficiency in tax of $29,249.86 for 1920, and overassessments totalling $53,000.12 for 1917, 1918 and 1919. The adjustments made are explained in the attached statement. In accordance with the provisions of Section 274 of the Revenue Act of 1926, you are allowed 60 days from the date of mailing of this letter within which to file a petition for*4080 the redetermination of this deficiency. Any such petition must be addressed to the United States Board of Tax Appeals, Earle Building, Washington, D.C., and must be mailed in time to reach the Board within the 60-day period, not counting Sunday as the sixtieth day. Where a taxpayer has been given an opportunity to file a petition with the United States Board of Tax Appeals and has not done so within the 60 days prescribed and an assessment has been made, or where a taxpayer has filed a petition and an assessment in accordance with the final decision on such petition has been made, the unpaid amount of the assessment must be paid upon notice and demand from the Collector of Internal Revenue. No claim for abatement can be entertained. If you acquiesce in this determination and do not desire to file a petition with the United States Board of Tax Appeals, you are requested to execute a waiver of your right to file a petition with the United States Board of Tax Appeals on the inclosed Form A, and forward it to the Commissioner of Internal Revenue, Washington, D.C., for the attention of IT:PA:PYA-60D-ARM. In the event that you acquiesce in a part of the determination, the waiver*4081 should be executed with respect to the items to which you agree. Respectfully, (Signed) D. H. BLAIR, Commissioner. by C. R. NASH, Assistant to the Commissioner. *559 In this letter respondent determined an overassessment for the year 1917 of $19,126.79 and an overassessment for the year 1918 of $28,753.09. These overassessments reduced the jeopardy assessments for the years 1917 and 1918 to the amounts of the deficiencies above shown. On November 25, 1926, petitioner filed with the Board his appeal from the letter of October 7, 1926. On November 10, 1916, the petitioner and Henry L. Doherty & Co. entered into an agreement, which was evidenced by the following letter: HENRY L. DOHERTY & COMPANY. Six Wall Street New York NOVEMBER 10, 1916. F. M. AIKEN, New York. DEAR MR. AIKEN: This is to confirm the understanding reached with you today by which you and your associates give us an option, good until February 1, 1917, upon the entire $300,000 of capital stock of the Peerless Refining Company of Oklahoma for $1,250,000. In consideration of this option, we hereby tender you our check for $50,000. It being understood that in event of*4082 our failure to complete the option on February 1, 1917, this payment is forfeited to you. In the event that we exercise the option, this amount paid to apply on the purchase price. During the interim between this date and February 1st all of the earnings of the property to remain with the corporation. The financial condition of the property being as set forth in the balance sheet of September, 1916. Yours truly, (Signed) HENRY L. DOHERTY & COMPANY By FRANK W. FREUAUFF. The check for $50,000 referred to in said letter was enclosed therewith. The remainder of the purchase price of $1,200,000 was paid in the year 1917 and the entire capital stock of the Peerless Refining Co. was transferred to Henry L. Doherty & Co. in the year 1917. Petitioner's gain on said transaction was $148,513.39. Henry L. Doherty & Co. were amply able financially to have paid the whole purchase price in the year 1916 if the option had been exercised in that year. OPINION. MILLIKEN: Three questions are presented for decision. They are: (1) Whether the Board has jurisdiction of this proceeding in so far as the taxes for the years 1917 and 1918 are concerned; (2) whether the assessment*4083 and the collection of said taxes are barred by the statute of limitations; and (3) whether respondent erred in attributing the gain arising from the sale of stock of the Peerless Refining Co. to Henry L. Doherty & Co. to the year 1917 rather *560 than to the year 1916. These issues will be discussed in the order set forth. Respondent contends that the Board is without jurisdiction for two reasons - first, because no bonds accompanied the claims in abatement and, second, because respondent did not in his letter of October 7, 1926, reject such claims in whole or in part, but acted on petitioner's protest of June 24, 1926. The Revenue Act of 1926 was enacted on February 26, 1926. Subsequent to that date respondent made his final determination of the taxes and this appeal was filed. In , we considered at length the effect of the provisions of the Revenue Act of 1926 on the jurisdiction of the Board, and reached the conclusion that the Board had jurisdiction where a jeopardy assessment had been made, a claim in abatement thereof had been filed and the claim rejected in whole or in part, even though*4084 no bond accompanied the claim. The rule laid down in that opinion disposes of respondent's first contention. At this point, respondent asserts that he did not reject the claim in abatement in whole or in part; that in his final letter he did not even refer to it, and that what he in fact did was to reject in part a protest made by petitioner long after the filing of his claim. This contention leads to the result that the Board has or has not jurisdiction in such cases, depending not on what respondent actually does, but on what is stated in respondent's letter of final determination. If petitioner had accompanied his claim in abatement with a bond, we think it could hardly be contended that respondent could oust the Board of jurisdiction by merely determining a deficiency, without stating whether he rejected the claim in abatement in whole or in part; but, as already seen, the giving of the bond is not now a jurisdictional fact. The filing of a protest, which probably would have been filed even if a bond had been given, did not obviate the necessity of passing on the merits of the claim in abatement. It was before respondent for consideration, and he could not finally determine*4085 a deficiency without in fact denying it in whole or in part. It was what he actually did, and not what he said he did, that conferred jurisdiction. By his act, he denied the claim in part and this, in our opinion, conferred jurisdiction on the Board. Next, petitioner contends that both the assessment and collection of the taxes involved are barred by the statute of limitations. In this connection, he asserts that the waiver of February 5, 1921, extended the time for assessment only and then only as to taxes imposed by the Revenue Act of 1916, as amended by the Revenue Act of 1917, and therefore did not relate to profits taxes imposed *561 by the latter Act; that by such waiver petitioner waived only rights under the then existing statutes and not rights under any subsequent statute; that the waiver of March 3, 1924, being an entirely new agreement, and containing provisions which were not in the waiver of February 5, 1921, superseded that waiver and therefore the time within which assessment and collection might be made should be computed from March 3, 1924; that such being the case, the jeopardy assessments were made 9 days after such agreed period had expired; that if*4086 this is not true, then the period within which collection of the 1918 taxes could be made expired April 28, 1925; that since there were no further agreements extending the time for collection, the collection of the taxes for both 1917 and 1918 is now barred; and that the agreement of February 5, 1926, and the agreements of February 17, 1926, are not sufficient to extend the time for collection, even if effective for any purpose. Assuming, but not deciding, that on the date the jeopardy assessments were made the time within which the taxes could be assessed and collected had expired, there remains the question, What was the effect on these assessments of the agreements between petitioner and respondent, entered into in February, 1926? In , we held that section 1106(a) of the Revenue Act of 1926 was not retrospective, and, therefore, has no application unless the bar of the statute of limitations was in effect on the date of its enactment, or has arisen subsequently; and that the statute of limitations, as it existed prior to the enactment of that Act, barred only the remedy and did not affect the liability. Applying*4087 this rule, we held that although both assessment and collection were barred by the statute, the liability for the tax remained, and that the remedy could be revived by a subsequent agreement, made pursuant to subdivision (c) of section 278 of the Revenue Act of 1924. This subdivision provided solely for agreements to extend the period within which assessments could be made and contained no provision for an agreement extending the period within which the tax could be collected. We are of opinion that the rule laid down in , is applicable here. It is true that in that case no assessment had been made prior to the date of the agreement for the extension of the statutory period, and that in this proceeding, the assessments had been made nearly a year prior to the date of the agreements. This fact we do not deem material. Although at the date the assessments were made, all remedies were barred, the liability was still in existence. Under these circumstances, petitioner and respondent agreed to "waive the time prescribed by law for making *562 any assessment" and that such period should continue until December 31, 1926, with*4088 further provisions relative to notice of deficiency and appeal to the Board. It is clear that these agreements would have validated any assessments made after their effective date and prior to the expiration of the agreed period, and we perceive no reason why they did not give equal validity to the assessments which were then in existence. The liability for the taxes remained and they could have been reassessed. This would have been a duplication of what had been done and obviously a work of supererogation. All that was necessary to revive the remedies was an agreement made pursuant to section 278(c). Such an agreement was executed and since the effect of the agreement was to revive the remedies, it follows that the prior assessments, although dormant, were revived and made effective by the agreements. Petitioner, however, insists that although the agreements entered into in February, 1926, extended the time for assessment (this is all that the then existing statute provided for), the time within which the collection could be made was not affected. This question was also present in *4089 , and decided adversely to petitioner's contentions. The assessments herein involved were made while the Revenue Act of 1924 was in force, and that Act, which is the only Act that can apply, provided in section 278(d) that the period within which the assessments could be collected should be six years from the date of the assessment. We are, therefore, of opinion that neither the assessment nor the collection of these taxes is barred by the statute of limitations. Respondent's action in attributing the gain arising from the sale of stock of the Peerless Refining Co. to Henry L. Doherty & Co. to the year 1917 rather than the year 1916 must be approved. The contract of November 10, 1916, was not a contract of sale but merely gave to Henry L. Doherty & Co. an option to purchase, before a specified date, the stock of the Peerless Refining Co. Under that agreement, petitioner had no right to sue Henry L. Doherty & Co. for the purchase price until that company had exercised their right to purchase. The agreement did not vest in Henry L. Doherty & Co. any title to the stock or any right thereto until the option was finally*4090 exercised. Petitioner, in his brief filed in this proceeding, contends that one-fourth of the profit on the completed sale contained in the cash payment made for the option in 1916, and which eventually became a part of the purchase price, is taxable in that year. Without passing on the merits of this question, it is sufficient to say that on this point the facts were stipulated, and the stipulation does not show what proportion of the stock of the Peerless Refining Co. was owned by petitioner. *563 We only know the total amount of the purchase price and the amount of petitioner's gain. In the absence of this factor, we are unable to determine his interest or the amount of the tax. Under these circumstances, the gain arising from the sale is attributable to the year in which the sale was made. That year was 1917. See . Reviewed by the Board. Judgment will be entered for the respondent.