Kauai R. Co. v. Commissioner

KAUAI RAILWAY CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MCBRYDE SUGAR CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Kauai R. Co. v. Commissioner Docket Nos. 11101, 11102. United States Board of Tax Appeals 13 B.T.A. 686; 1928 BTA LEXIS 3201; October 1, 1928, Promulgated *3201 1. Collection of amounts assessed within five years after the return was filed held not to be barred. Art Metal Works,9 B.T.A. 491, followed. 2. Taxes not assessed within five years after return was filed may not thereafter be assessed or collected, New York & Albany Lighterage Co. v. Bowers,273 U.S. 346. 3. Filing of a return by a corporation is sufficient to start running the period of limitations, although it may later be determined that petitioner is affiliated with another corporation and that taxes are to be computed on basis of consolidated income of the two. Mabel Elevator Co.,2 B.T.A. 517, and 17 Fed.(2d) 605. 4. Amounts paid to a railroad company to induce it to construct a warehouse upon its right of way to provide storage held not taxable income. 5. In the absence of any agreement to the contrary, tax due from an affiliated group is to be apportioned among its members according to their net income. W. W. Spalding, Esq., for petitioners. M. N. Fisher, Esq., and L. C Mitchell, Esq., for the respondent. PHILLIPS *687 These proceedings, *3202 which have been duly consolidated, are for redeterminations of deficiencies in income and profits taxes. In the case of Kauai Railway Co., Ltd., the amounts of such deficiencies are as follows: [1918] $2,178.84 [1919] 742.94 [1920] 3,179.49 In the case of McBryde Sugar Co., Ltd., the amounts of such deficiencies are as follows: [1918] $1,534.69 [1919] 4,839.21 [1920] 161,432.52 The petitioner, Kauai Railway Co., Ltd., alleged that collection of the taxes asserted against it for 1918 and 1919 is barred by the statutes, that an excessive portion of the total tax liability for 1918 of an affiliated group, of which it was a member, was asserted against it, and that its income for 1918 and 1919 has been overstated by the amount of the cost of a warehouse constructed on its right of way. The petitioner, McBryde Sugar Co., Ltd., alleges that assessment and collection of the proposed deficiencies for 1918 and 1919 are barred by statute, that the income of an affiliated group, of which is was a member, was overstated for 1918 and 1919 by the amount of the cost of a warehouse, and that for 1920 the Commissioner erroneously disallowed territorial income taxes*3203 which accrued in that year. FINDINGS OF FACT. Petitioners are corporations organized under the laws of Hawaii, with their principal offices at Honolulu. The petitioner, McBryde Sugar Co., Ltd., is engaged in the business of raising sugar cane and manufacturing sugar therefrom on the Island of Kauai, Hawaii. The petitioner, Kauai Railway Co., Ltd., owns and operates a short line railroad on the same island. The McBryde Sugar Co., Ltd., owned 93 per cent of the stock of Kauai Railway Co., Ltd., in 1918. The petitioner, Kauai Railway Co., Ltd., filed its income-tax return for 1918 on May 14, 1919, and filed its income-tax return for 1919 on March 15, 1920. In January, 1924, jeopardy assessments of additional income taxes were assessed against said petitioner as follows: $2,178.84 for 1918, $742.94 for 1919, and $3,179.49 for 1920. Upon receipt of notice and demand from the Honolulu collector for the payment for said alleged deficiencies for 1918 and 1919, petitioner filed seasonably with said collector its abatement claim covering said *688 alleged deficiencies for 1918 and 1919, which claim was duly accepted by said collector and forwarded by him to the Bureau of*3204 Internal Revenue in Washington, D.C. Under date of December 11, 1925, the Commissioner notified said petitioner that its claim for abatement had been rejected. Petitioner duly appealed to this Board from the determination evidenced by such notice of December 11, 1925. No. consent extending the time fixed by statute for the determination, assessment, or collection of such taxes has been signed by said petitioner for either of such years. The petitioner, McBryde Sugar Co., Ltd., filed its income-tax return for 1918 on May 14, 1919, and filed its income-tax return for 1919 on March 15, 1920. Under date of November 25, 1925, the Commissioner notified said petitioner that he had determined the deficiencies for said year which are here in question. Petitioner duly appealed to the Board from the determination evidenced by such notice. No consent extending the time fixed by the statute for the assessment of such taxes has been signed by said petitioner for either of such years. For 1918, 1919, and 1920 the McBryde Sugar Co., Ltd., filed consolidated income-tax returns with the Kauai Electric Co. The Kauai Railway Co., Ltd., filed separate returns. The Commissioner subsequently*3205 determined that the three companies named were affiliated and computed the total tax liability of the affiliated group upon the basis of consolidated income and invested capital. The Commissioner determined the net incomes of the McBryde Sugar Co., Ltd., and of the Kauai Railway Co., Ltd., for 1918 as $316,992.20 and $13,400.73, respectively, and determined that Kauai Electric Co. had a loss of $1,689.45 for that year. The net income of the affiliated group for 1918 was determined as $328,703.48 and the tax as $52,460.82. Such tax was allocated by the Commissioner as follows: McBryde Sugar Co., Ltd $49,324.18 Kauai Railway Co., Ltd 3,136.64 The amount allocated to the Kauai Railway Co., Ltd., equaled the tax shown upon its return plus the amount of the additional assessment made in January, 1924. The amount asserted against the McBryde Sugar Co., Ltd., represented the balance of the tax liability of the affiliated group. No agreement was executed by either petitioner consenting to a division of the total tax on any other basis than the net income properly assignable to each. In 1912, the McBryde Sugar Co., Ltd., and the Hawaiian Sugar Co. entered into contracts*3206 with the Kauai Railway Co., Ltd., wherein the railway company agreed to furnish storage space in its warehouse at Port Allen, a port on the south side of the Island of Kauai, for sugar produced by the said sugar companies. Said contracts provided *689 that the Hawaiian Sugar Co. should have space in such warehouse for 5,000 tons and the McBryde Sugar Co. for 4,000 tons. The railway company agreed to perform all services incident to storing the sugar and finally loading it on outgoing ships. The contracts were to expire on September 30, 1921. In 1917, the railway company agreed to build a 75-foot extension to its warehouse located on its right of way at Port Allen and to furnish to the McBryde Sugar Co., Ltd., and the Hawaiian Sugar Co., space in the new part of the warehouse in proportion to the space allotted to the sugar companies in the old part. The sugar companies agreed to reimburse the railway company for the cost of building the extension to the warehouse, in proportion to the storage space they were to have. The Hawaiian Sugar Co. agreed to pay five-ninths and the McBryde Sugar Co., Ltd., four-ninths of the cost of the extension. The addition to the warehouse*3207 was to become the property of the railway company when it should be completed. The extension to the warehouse was built by the railway company during 1918 and 1919. The railway company expended $6,418.03 in 1918 and $2,249.07 in 1919 for constructing the extension and were reimbursed those amounts in those years by the sugar companies. The extension to the warehouse became the property of the railway company as and when it was completed. The Commissioner has included the cost of the extension to the warehouse in the railway company's income for 1918 and 1919 in the following amounts: 1918, $6,418.03; 1919, $2,249.07. OPINION. PHILLIPS: The petitioner, McBryde Sugar Co., Ltd., is sustained in its contention that assessment and collection of the additional taxes asserted against it for 1918 and 1919 are barred by the period of limitations prescribed by statute. New York & Albany Lighterage co. v.. The respondent seeks to avoid the effect of this decision upon the ground that this petitioner filed a separate return when it should have filed a consolidated return with the Kauai Railway Co., Ltd. This is untenable. *3208 ; . The contention of the petitioner, Kauai Railway Co., Ltd., that collection of the taxes assessed in January, 1924, is barred by statute must be denied upon authority of our decision in . The petitioner, Kauai Railway Co., Ltd., asserts that the Commissioner has asserted against it more than its proper proportion of the total tax determined as due from the affiliated group of which it *690 was a member. It appears that before the Commissioner determined that this petitioner was one of an affiliated group, he had determined its tax liability upon the basis of its separate return and assessed tax accordingly. When it was determined that affiliation existed no change was made in the amount of this petitioner's tax liability, although the effect of the ruling was to reduce its tax if the total tax of the affiliated group was apportioned among the members of the group on the basis of their net income, as provided in section 240(a), Revenue Act of 1918. *3209 No other basis for an apportionment of the tax existed. The liability of this petitioner for 1918 taxes should be recomputed on that basis, after adjusting its income and the income of the affiliated group in accordance with this decision. . We are of the opinion that the amounts by which petitioner railway company was reimbursed for warehouses erected on its right of way do not constitute taxable income to it. The record discloses that this was done more as a matter of convenience to the shippers than for the benefit of this petitioner. See ; ; ; . Proper adjustment should be made in the consolidated income and in the net income of the taxpayer. The Commissioner has confessed error in disallowing $9,980.12 of the amount claimed in 1920 as a deduction for territorial income taxes accrued in that year. The deficiencies should be recomputed accordingly. Decision will be entered under Rule 50.