Moise v. Commissioner

LEON L. MOISE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. GERALD F. SCHLESINGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. LE ROY SCHLESINGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Moise v. Commissioner Docket Nos. 7453-7455, 8036. United States Board of Tax Appeals 13 B.T.A. 525; 1928 BTA LEXIS 3230; September 25, 1928, Promulgated *3230 1. Written consents filed with the Commissioner but approved by the Commissioner subsequent to the expiration of the statutory period of limitation are effectual in preventing a bar to the assessment and/or collection of taxes. Joy Floral Co.,7 B.T.A. 800, followed. 2. The evidence is insufficient to warrant deduction for obsolescence of tangible property. 3. The Commissioner erred in allowing a deduction for obsolescence of good will and his affirmative allegations to that effect in amended answers to the petitions constitute a claim for an increased deficiency under section 274(e) of the Revenue Act of 1926. Jerome H. Bayer, Esq., for the petitioners. T. M. Mather, Esq. for the respondent. LITTLETON *525 The Commissioner determined deficiencies in income tax as follows: Docket No. — 1918 — — 1919 — — 1920 — Leon L. Moise — 7453 — $561.86 $4,320.62 $149,81 Gerald F. Schlesinger — 7454 — 409.02 4,248.94 LeRoy Schlesinger — 7455 — 153.08 Do — 8036 — 414.99 *526 The proceedings were consolidated for hearing and decision. The issues involved, identical in all proceedings, are: (1) *3231 Whether or not the assessment and collection of the deficiencies herein alleged are barred by the statute of limitations. (2) Whether or not in determining the net income of the partnership of which the petitioners were members and consequently would be taxable on its distributive shares, obsolescence on leasehold improvements and equipment is an allowable deduction from gross income. (3) Whether or not the Commissioner has made a valid assertion of a claim for an increase in the deficiencies under section 274(e). (4) Whether or not in determining the net income of the partnership of which the petitioners were members obsolescence of good will is an allowable deduction from gross income. The Commissioner originally allowed deduction for obsolescence of good will, but now claims he erred in so doing. FINDINGS OF FACT. Leon L. Moise, Gerald F. Schlesinger and Le Roy Schlesinger were equal partners in the firm of Schlesinger and Bender of San Francisco, Calif., which was engaged in the wholesale liquor business from the time of its formation, July 1, 1918, until January 16, 1920, the date of its dissolution and termination of business. For many years prior to the formation*3232 of the partnership, the liquor business of the three individuals had been conducted in the same location as a corporation. The premises and plant occupied by the partnership in the conduct of its wholesale liquor business were acquired under the terms of a lease entered into in 1910 between H. Levi & Co., a California corporation, lessor, and Schlesinger & Bender, Inc., a California corporation, lessee. The principal terms of the lease provided for the use of certain land and buildings thereon by the lessee or its assigns at a fixed monthly rental for the period of 15 years. The lease also provided that all additions such as improvements and fixtures should be made at the lessee's expense and at the cancellation or termination of the lease should revert to the lessor. The lease further provided that no business other than that of the lessee should be conducted on the premises. Believing that it would be compelled to terminate its business in 1920 by reason of national prohibition legislation, and believing that its leasehold improvements and equipment would be wholly obsolete at that time, the partnership charged off its books as a loss on December 31, 1918, the amounts of $7,200, *3233 the balance remaining in its "Building" account, and $13,965.03, the balance remaining in its "Furniture and "Fixtures" account. *527 Upon closing its affairs early in 1920 the partnership sold its furniture and equipment, but no entries of such sales were made on its books. The lease by virtue of which the partnership occupied its business property was terminated about April 1, 1920, and shortly therafter the premises were vacated. The partnership filed returns for the period July 1, 1918, to December 31, 1918, and for the years 1919 and 1920. In its return for the 6-month period July 1, 1918, to December 31, 1918, the partnership claimed as a deduction from gross income the sum of $21,848.60 as exhaustion, wear and tear (including obsolescence) of its tangible properties. The Commissioner disallowed this sum as a deduction and refused to allow any amount as a deduction for the obsolescence of tangible property of the partnership. In its return for the year 1920 the partnership included in its gross income that year the sum of $7,801.18, representing the proceeds received from sales of cooperage, scrap, and office furniture. In its returns filed for the period*3234 July 1, 1918, to December 31, 1918, and for the years 1919 and 1920, the partnership claimed certain amounts therein as deductions from gross income for the obsolescence of good will. The Commissioner, in a letter dated October 22, 1924, signed by A. Lewis, head of division, and addressed to Schlesinger and Bender and received by it, informed the partnership that the correct amount of $52,814.70 was allowed the partnership as obsolescence of good will for prohibition purposes, and indicated its distribution over the three years 1918, 1919, and 1920. Each of the petitioners involved in these proceedings filed individual income-tax returns covering the years in which deficiencies have been asserted. The return of Leon L. Moise for the year 1918 was filed with the collector for the First District of California not later than March 15, 1919. His return for the year 1919 was filed with the collector in the same district of California not later than March 15, 1920. An undated income and surtax written consent covering 1918 and expiring March 1, 1925, bearing the purported signatures of Leon L. Moise and D. H. Blair, Commissioner, and acknowledged January 4, 1924, was filed with*3235 the Commissioner. An income and profits-tax consent for 1918 dated February 3, 1925, and expiring December 31, 1925, was executed and filed by the same petitioner. The said petitioner also signed a written consent covering 1919, dated February 3, 1925, and expiring December 31, 1925. Both of the two last-mentioned consents were stamped approved March 25, 1925, and signed by D. H. Blair, Commissioner of Internal Revenue. The return of Gerald F. Schlesinger for the year 1918 was filed with the collector at Chicago, Ill., not later than March 22, 1919. *528 This return bears the stamp "Collector of Internal Revenue, Paid March 15, 1919, Cashier - A, Chicago, Illinois." It also bears the stamp "Collector Int. Rev. March 22, 1919." This return was sworn to under date of March 20, 1919. The return for the year 1919 was filed with the collector for the First District of California, March 15, 1920. An income and surtax waiver dated February 25, 1924, covering 1918 and expiring March 1, 1925, and bearing the purported signatures of Gerald F. Schlesinger and D. H. Blair, Commissioner, was filed with the Commissioner. An income and profits-tax waiver for 1918, dated February 3, 1925, and*3236 expiring December 31, 1925, was signed by Gerald F. Schlesinger and filed on the said date. He likewise signed an income and profits-tax waiver covering 1919, dated January 30, 1925, and expiring December 31, 1925. Both of the two last-mentioned waivers were stamped approved March 25, 1925, and signed by D. H. Blair, Commissioner of Internal Revenue. The return of LeRoy Schlesinger for the year 1918 was filed with the collector for the first district of California not later than March 15, 1919. The petitioner, LeRoy Schlesinger, executed an undated income and surtax waiver for the year 1918 expiring March 1, 1925. This document was accepted on January 4, 1924, and bears on its reverse side the stamp "Personal Audit #4, September 19, 1924, Received." On July 29, 1925, the respondent issued 60-day letters to petitioners Moise and Gerald F. Schlesinger, notifying them of his final determination of the deficiencies hereinabove set forth. On September 4, 1925, the respondent notified petitioner LeRoy Schlesinger that his claim for abatement had been rejected. Petitioners allege in paragraph 5(c) of their petitions as follows: The Commissioner in his letter dated October 22, 1924, file*3237 IT:PAP4-GWF-406 allowed as a deduction to Schlesinger and Bender obsolescense of good will amounting to $52,814.70 apportionable between the years 1918, 1919 and 1920 as follows: - 1918 12/37 $17,129.09 1919 24/37 34,258.19 1920 1/37 1,427.42 As above 52,814.70 Upon motions made and duly granted by the Board, the Commissioner filed amended answers in each of these proceedings, in paragraph 4(a) of which he denies that he had erred in refusing to allow a deduction from gross income of the partnership of which the petitioners were members for obsolescence of tangible property and affirmatively alleged in Docket 8036, LeRoy Schlesinger, "that the Commissioner erred in not including in the petitioner's income for the year 1918, $5,709.70 and for the year 1919, $11,419.39, said *529 amounts being the petitioner's distributive interest in $52,814.70 deducted for the taxable years 1918 and 1919 by Schlesinger and Bender as obsolescence of good will." In paragraph 5(c) of his amended answer in this proceeding the Commissioner states as follows: Admits the allegations contained in subdivision (c) of paragraph 5 of the petition, and alleges that the obsolescence*3238 of good will amounting to $52,814.70 deducted by Schlesinger and Bender as alleged in subdivision (c) of paragraph 5 of the petition is not an allowable deduction to said co-partnership. In the amended answer in Docket No. 7453, Leon L. Moise, the Commissioner denied that he had erred as alleged in paragraph 4(a) of the petition and "alleged that the Commissioner erred by not including in the petitioner's income for the year 1918, $5,709.70, for the year 1919, $11,419.39, and for the year 1920, $475.80, said amounts being the petitioner's distributive interest in $52,814.70, deducted for the taxable years 1918, 1919, and 1920, by Schlesinger and Bender as obsolescence of good will." And, in paragraph 5(c) of his amended answer in this proceeding, stated as set forth above by the amended answer in Docket No. 8036, LeRoy Schlesinger. The Commissioner alleged and admitted as set forth above in the proceeding of this taxpayer in Docket No. 7455. The amended answer in proceeding of Gerald F. Schlesinger, Docket No. 7454, contained the same admissions and allegations as first above set forth in the proceeding of LeRoy Schlesinger, Docket No. 7455. These amended answers, after specifically*3239 admitting and denying every allegation of the petition, conclude as follows - "Denies generally and specifically each and every other allegation contained in the petition of the above-named taxpayer not hereinbefore expressly admitted, qualified or denied. WHEREFORE, it prays that the appeal be denied." At the hearing of these proceedings counsel for the Commissioner contended for an increase of deficiencies upon the affirmative allegations in the amended answers in respect of the deduction of obsolescence for good will. OPINION. LITTLETON: The first contention of the petitioners is that the various written consents filed are ineffective for the reason that they were approved by the Commissioner after the expiration of the five-year period within which the Commissioner could make assessments for the respective years involved. The Board has previously held that a consent executed after the five-year period has expired is valid and that taxes may be assessed within the period of such consent. . *530 Upon the authority of that decision, the contentions of all petitioners with respect to the issue of the statute of limitations*3240 are denied. See also , and . At the hearing the petitioners Leon L. Moise and Gerald F. Schlesinger contended that the original written consents covering 1918 and expiring March 1, 1925, were neither signed nor authorized by them. However, the said petitioners admitted having filed consents for 1918, dated February 3, 1925, and January 30, 1925, respectively, and expiring December 31, 1925. Whatever may have been the fact as to the original consents, there is no question as to the validity of the later ones. These properly signed consents effectively extended the period fixed by law. The second issue presented for decision is whether or not in determining the net income of the partnership of which the petitioners were members, obsolescence of its tangible assets is allowable as a deduction from gross income. The first difficulty in granting the petitioners' contention on this point lies in the insufficiency of evidence as to the value of the tangible assets on account of which obsolescence is claimed. The principal evidence presented as to these values was the ledger*3241 of the partnership, which showed a balance in the "Building" account at December 31, 1918, of $7,200 and in the "Furniture & Fixtures" account a balance of $13,965.03. One of the petitioners testified that the $7,200 in the "Building" account represented money which had been expended "in building vats and fixtures and also building a cellar in the building which we had leased," but from an examination of the ledger account it appears that this statement does not mean more than that costs of the character referred to were entered in this account and that after adjustments for depreciation, and possibly for other reasons, the balance of $7,200 remained. In neither instance do we know how such book values were computed. We have no proof of costs or appropriate rates of depreciation, nor do we have a segregation or identification of the assets upon which the obsolescence was predicated. Neither have we the amount sold or salvaged from the furniture and equipment in 1920. Thus, we have no basis on which to determine the amount of obsolescence in either instance. In the absence of evidence the petitioners' contention under this issue must be denied. *3242 . The third issue is whether the Commissioner erred in allowing the partnership of Schlesinger and Bender a deduction for obsolescence of good will and whether by the affirmative allegations in his amended answers he has effectively asserted a claim for increased deficiencies. *531 Section 274(e) provides: The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing. Rule 14 of the Board's Rules of Practice provides in part that "the answer shall be so drawn as fully and completely to advise the petitioner and the Board of the nature of the defense. It shall contain a specific admission or denial of each material allegation of fact contained in the petition and shall set forth any new matters upon which the Commissioner relies for defense or affirmative relief." We are of opinion*3243 that the Commissioner has, by his amended answers, effectively asserted a claim for increased deficiencies within the meaning of section 274(e) of the Revenue Act of 1926. The petitioners allege that the Commissioner allowed the partnership a deduction totaling $52,814.70 for obsolescence of good will. The Commissioner admits that he did this and affirmatively alleges that he erred in so doing and that he erred in not including in the income of each of the petitioners his distributive share of the profits of the partnership without any allowance for obsolescence of good will since obsolescence of good will is not an allowable deduction from gross income. It is clear from these allegations that the Commissioner is asserting a claim in each proceeding for a deficiency in excess of the amount originally determined by him. It is not necessary that the claim by the Commissioner for a deficiency in excess of the amount originally determined by him, or for a penalty, additional amount or addition in tax be asserted in any particular language. A sufficient claim has been made if the Commissioner affirmatively alleges error in his original determination, together with facts sufficient, *3244 if proved, to result in an increase of the net income and the tax of the petitioner over that originally determined by him. There is no dispute as to the facts relative to the deductions originally allowed by the Commissioner for obsolescence of good will. The claim of the Commissioner that he erroneously allowed the partnership deductions for obsolescence of good will for the years involved and that the distributive share of the petitioners of the net income of the partnership should be increased accordingly is well taken. ; ; . Reviewed by the Board. Judgment will be entered under Rule 50. VAN FOSSAN *532 VAN FOSSAN, dissenting: I am unable to agree with the prevailing opinion on the third issue of the case. This issue involved the determination of whether or not the Commissioner has effectively asserted the claim for the additional amount or addition to the tax beyond that set forth in the original notices of deficiencies. Section 274(e) provides: The Board shall have jurisdiction to redetermine the correct*3245 amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing. (Italics ours.) As I read this section, the assertion of a claim for the additional amount or addition to the tax is a prerequisite to the finding by the Board of such additional amount. There are sound considerations of justice and fairness back of such a provision. Petitioner, upon receipt of a notice of a specific deficiency prepares his petition in reliance on the representations as to the Government's contentions set forth in the notice. His petition is specifically addressed to those contentions and his preparations to contest the deficiency are confined thereto. Section 274(f) specifically forbids, in cases subsequently arising, the determination of an additional deficiency except in case of fraud or as provided in section 274(e), supra, or in case of a jeopardy assessment under section 279(c). By this prohibition Congress*3246 has indicated its disposition to protect the taxpayer from repeated deficiency notices covering the same year or from uncertainty in the issues which he is called on to meet. If the Government proposes a greater deficiency under section 274(e), I believe the taxpayer is entitled to demand that the statute be strictly complied with and that it be construed strictly against the Government. He should not be left to infer the asserting of a claim from the general tenor of affirmative allegations of the amended answer. In the proceedings under consideration the Commissioner has not asked directly for affirmative relief from his alleged error. He made no motion to increase the deficiency appealed from. Upon permission to amend the answers he incorporated affirmative allegations that he had erroneously allowed obsolescence. The prayer of his answer is that the proceedings be dismissed. He now asks us to hold that this allegation of error on his part constitutes the assertion of a claim for additional tax under the statute. With this I can not agree. In such a situation the taxpayer is entitled to shield himself behind every defense the law affords. The law has provided that a*3247 claim shall be asserted for the additional amount of tax. Considering the purpose and language of the statute, this provision would *533 seem to require an affirmative act of assertion. Nothing so vital to the rights of a taxpayer as the finding of a greater deficiency should be left to implication. The proper assertion of a claim is not a difficult task if directly essayed. A motion could have been made at any time during the hearing. On the other hand, to infer or imply the assertion of a claim in the instant cases will open the door to loose pleadings and place on the Board in other cases the burden of interpreting the mind of the Commissioner. The statute provides a simple procedure, and having failed to avail himself thereof, the Commissioner has no basis for complaint. In my opinion respondent has not effectively or properly asserted a claim for the additional amount or addition to the tax as required by law. LANSDON agrees with this dissent.