Dortch v. Commissioner

J. B. DORTCH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dortch v. Commissioner Docket No. 13806. United States Board of Tax Appeals 19 B.T.A. 159; 1930 BTA LEXIS 2459; February 28, 1930, Promulgated *2459 1. FRAUD. - In 1918 petitioner sold at a profit certain stock in a Norwegian steamship corporation. In making his 1918 tax return petitioner reserved 20 per cent of the sale price for Norwegian taxes which might be assessed against the corporation for the period prior to the sale and also upon the sale of the stock. Held that petitioner did not file a false and fraudulent return with intent to evade tax. 2. STATUTE OF LIMITATIONS - WAIVER. - After the lapse of the 5-year statutory period and pursuant to the provisions of the Revenue Act of 1924, the petitioner and respondent executed a waiver extending the period for assessment and collection until March 8, 1925, held that such waiver is valid. 3. Id. - BOND TO STAY COLLECTION UPON JEOPARDY ASSESSMENT. - Held not to effect an extension of the period of limitations. 4. Id. - PROOF OF ASSESSMENT. - Petitioner filed his 1918 return on March 8, 1919, a valid waiver extended the period for assessment and collection until March 8, 1925, the deficiency letter was mailed on January 9, 1926, and a jeopardy assessment was made subsequent to January 9, 1926, but no proof adduced as to any assessment prior to*2460 March 8, 1925. Held that, there being no fraud, petitioner has made prima facie showing that assessment and collection was barred prior to January 9, 1926, and that the burden of proof as to the date of a timely assessment is upon respondent. Held, further, that the assessment and collection being barred, there is no deficiency. 5. OVERPAYMENT. - After the assessment and collection of the deficiency was barred, petitioner paid $14,585.82 thereof. Held, that such payment constitutes an overpayment of tax for 1918 within the meaning of section 607 of the Revenue Act of 1928. George E. H. Goodner, Esq., and Walter K. Smith, Esq., for the petitioner. J. E. Marshall, Esq., for the respondent. TRUSSELL *160 This proceeding has been initiated from respondent's 60-day deficiency notice dated January 9, 1926, which asserted a deficiency in the amount of $17,772.06 and a fraud penalty in the amount of $8,886.03 for the calendar year 1918. The total amount is in controversy. Petitioner alleges that he did not file a false and fraudulent return with intent to evade tax; that respondent has erroneously assessed additional taxes*2461 after the statute of limitations barred such assessment and without any valid waiver having been filed; and that assessment and collection being barred, there is no deficiency and the amount of $14,585.82 paid subsequent to January 9, 1926, is an overpayment and should be refunded. FINDINGS OF FACT. Petitioner is a resident of Mobile, Ala. Prior to 1918 petitioner purchased 50 per cent of the stock of the Fort Gaines Steamship Corporation, a Norwegian corporation, at a cost of $57,000. One A. B. Orr, of New Orleans, La., owned the other half of the stock except for one share nominally held by a resident in Norway. The corporation owned one steamship, the Fort Gaines. In 1918 petitioner and Orr sold all of their stock in the said corporation for $360,000, each receiving one-half thereof, or $180,000, and they paid a total commissioner of $18,000. The contract of sale provided that petitioner and Orr should pay all taxes and claims of any kind assessed by the Norwegian Government against the said corporation or its ship, up to the date of the sale. The amount of such taxes or claims could not be determined at that time and petitioner and Orr executed a surety bond*2462 in the penal sum of $50,000 as a guarantee. At the time petitioner filed his return for 1918 he was not able to determine the amount of Norwegian taxes which might be assessed *161 against him on the sale of the Fort Gaines Steamship Co. stock and he did not know the exact amount of profit derived from the sale. Orr had managed the corporation's affairs and kept its books of account, and petitioner sought his advice as to how he should report the profit on the transaction. Orr wrote petitioner that the return was so complicated he was enclosing a copy of his own return which was represented as made out with the aid of a Government revenue agent and suggested that petitioner make out his return in the same manner. Orr advised petitioner that the profit to be reported was computed in the following manner: Sale price of Fort Gaines Steamship Co. stock $180,000 Less: Commissions $9,000 Expenses 1,274 10,274 169,726 Cost of stock 57,000 112,726 Reserve for Norwegian taxes on sale of stock (20 per cent of $180,000) 36,000 76,726 Loss on Orr-Laubenheimer stock 50,000 Net profit reported 26,726 The Orr-Laubenheimer*2463 Co. was engaged in the business of transporting tropical fruits and it leased the ship owned by the Fort Gaines Steamship Co. Orr and petitioner each owned 50 per cent of the stock of the Orr-Laubenheimer Co. but in 1918 they were still indebted to the United Fruit Co., from which they had purchased the controlling interest at $1,000 per share. When Orr and petitioner sold their stock in the Fort Gaines Steamship Co. the Orr-Laubenheimer Co. lost the use of the steamship Fort Gaines, and not being able to charter another ship, due to war-time conditions, it discontinued business and was liquidated. Petitioner and Orr sustained a loss upon their stock in the Orr-Laubenheimer Co. Petitioner accepted and acted upon the advice of Orr, and in making out his income-tax return for 1918 he reported the amount of $26,726 under the heading "Other Income (2) Interest on Bonds of Foreign Countries and Corporations and Dividends on Stock of Foreign Corporations." In 1922 petitioner paid $2,534.71 as his half of certain Norwegian taxes assessed for 1917. No further assessment has been made by that Government, either as to the corporation tax or the profit derived upon sale of the stock. *2464 *162 In 1924 a revenue agent examined petitioner's books and in his report computed a profit on the sale of the Fort Gaines Steamship Co. stock as follows: Sale price $180,000.00 Less: Cost $57,000.00 Commissions 9,000.00 Norwegian taxes paid 1922 2,534.71 68,534.71 Net profit 111,465.29 Petitioner willingly furnished the revenue agent with all the data and information pertaining to his income for the year 1918, and after the examination was completed, he expressed his willingness to pay any additional tax due to the inclusion in income of the amount of $36,000 reserved for Norwegian taxes. In determining the deficiency of $17,772.06 as set forth in the 60-day deficiency letter, respondent included in gross income the amount of $111,465.29 as the profit from the said sale of stock and he allowed as a deduction from gross income the loss sustained on the stock of the Orr-Laubenheimer Co. Respondent also included in gross income an additional amount of $7,000, but he has admitted that the fraud penalty asserted is not based upon petitioner's failure to report that amount. Petitioner admits that the respondent's final determination*2465 of January 9, 1926, of the amount of income tax due for the year 1918 is correct. Petitioner's 1918 tax return was filed on March 8, 1919. After the revenue agent completed his examination of petitioner's books in 1924 and reported that additional taxes were due, petitioner executed the following waiver: MARCH 13, 1925. INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of existing Internal Revenue Laws, J. B. Dortch a taxpayer, of Mobile, Ala., and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for 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 said taxpayer for the years 1918 and 1919 under the Revenue Act of 1924, 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*2466 period of limitation within which assessments of taxes may be made for the year or years mentioned, *163 or the statutory period of limitations as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau. J. B. DORTCH, Taxpayer. By D. H. BLAIR, Commissioner. Respondent's final determination of petitioner's tax liability for 1918 was set forth in the deficiency letter dated January 9, 1926, which asserts the deficiency and penalty in controversy, and also states that petitioner might appeal to this Board pursuant to section 274 of the Revenue Act of 1924. Subsequent to January 9, 1926, respondent made a jeopardy assessment, and within 10 days thereof petitioner paid the amount of $14,585.82 and filed with the collector a bond to stay the collection of the balance of the deficiency in the amount of $3,186.24, and the penalty of $8,886.03. Petitioner's appeal was filed on April 21, 1926. OPINION. TRUSSELL: The respondent, proceeding under section 601 of the Revenue Act of 1928, produced testimony showing that the return made by the petitioner for the year 1918 was erroneous in respect to both the deduction*2467 claimed for the purpose of meeting unknown demands for foreign taxes and the amount of losses sustained in connection with the disposition of stock of the Orr-Laubenheimer Co. These errors, however, appear to be in no way inconsistent with a purpose on the part of the petitioner to make a true return for income-tax purposes. The petitioner admits that the respondent's final computation is correct, but denies that he omitted any items from his return with the intent to evade tax. The respondent has agreed that petitioner's failure to include the amount of $7,000 in income is not the basis for asserting fraud. It appears that the respondent has determined fraud for the reason that petitioner reserved $36,000 for Norwegian taxes without so stating in his return and that the profit which was reported was entered in the wrong place on the return. The record in this proceeding convinces us that petitioner acted in good faith and conscientiously made his return in a manner which he believed reflected his taxable income. Petitioner reserved $36,000, or 20 per cent of $180,000, for Norwegian taxes which might be assessed upon the sale of the stock and upon the corporation for any*2468 taxes due prior to the sale of the stock. Petitioner did not know the exact amount of taxable income derived from the said sale and be merely sought to protect himself from making an overpayment *164 of tax which any reasonable and prudent business man would do. The fact that the profits as computed by him were reported in the wrong place on the return is immaterial, and while petitioner made a mistake in taking the loss deduction without setting it up in the return, such mistake does not show any intent to evade tax, for the loss was not fictitious and respondent has allowed a loss deduction in his final computation. We are of the opinion that petitioner did not file a false and fraudulent return with the intent to evade tax for the year 1918, and that respondent erred in asserting a fraud penalty in the amount of $8,886.03 for that year. The second issue is whether the assessment and collection of the deficiency is now barred by the statute of limitations. Petitioner filed his 1918 tax return on March 8, 1919, and pursuant to section 250(d) of the Revenue Acts of 1918 and 1921 and sections 277 and 278 of the Revenue Act of 1924, the respondent had five years from*2469 that date or until March 8, 1824, to determine, assess and collect the tax due. One year and five days after the assessment and collection of any additional tax for 1918 had been barred by the statute of limitations, and, pursuant to the provisions of the Revenue Act of 1924, the petitioner and the respondent executed a waiver dated March 13, 1925, extending the period for assessment and collection of taxes for 1918 until March 8, 1925. The said waiver was executed prior to the enactment of the Revenue Act of 1926, and at a date when although the assessment and collection of the tax was barred the liability was not extinguished. The Board has previously held that such a waiver is valid and operates to extend the statute of limitations for the period agreed upon. Panther Rubber Mfg. Co.,17 B.T.A. 310; Merchants Transfer & Storage Co.,17 B.T.A. 290; Thiel Service Co.,17 B.T.A. 1114; Wells Brothers Co. of Illinois,16 B.T.A. 79; and Friend M. Aiken,10 B.T.A. 553, affd., *2470 Aiken v. Commissioner of Internal Revenue, 35 Fed.(2d) 620. The filing of a bond to stay collection upon the jeopardy assessment in 1926 did not effect a further extension of the period of limitation for assessment and collection. See Guardian Trust Co. et el.,15 B.T.A. 1256; H. W. Lieber et al.,13 B.T.A. 1175. The said waiver being valid, the respondent had until March 8, 1925, to assess the additional tax for 1918, and if the assessment had been made prior to the enactment of the Revenue Act of 1924, the period for collection extended only until March 8, 1925, the six-year collection period provided for in that act not being retroactive. Russell v. United States,278 U.S. 181. On the other hand, if the assessment had been made subsequent to the enactment of the Revenue Act of 1924, and prior to the expiration of the waiver, *165 respondent would have six years from date of such assessment within which to collect the tax pursuant to section 278(d) of the 1924 Act. S. A. Apple,17 B.T.A. 1047; *2471 T. B. Floyd,11 B.T.A. 903. The record establishes that the return was filed on March 8, 1919, that a waiver extended the period for assessment and collection until March 8, 1925, that the deficiency letter was mailed on January 8, 1926, and that a jeopardy assessment was made subsequent to January 9, 1926, but no proof has been adduced as to whether any assessment was made prior to March 8, 1925. In the case of Frank E. Harris Co.,16 B.T.A. 469, the Board held that, where the taxpayer had shown that the return for 1917 was filed on a certain date, the five-year period had elapsed and that collection had not been made, a prima facie showing had been established that collection was barred and that the burden of proof was upon the Commissioner to establish the exception, namely, that assessment had been timely made. See also Carnation Milk Products Co.,15 B.T.A. 556; H. G. Stevens,14 B.T.A. 1120; Bonwit Teller & Co.,10 B.T.A. 1300. There being no fraud, petitioner has made a prima facie showing that assessment and collection was barred after March 8, 1925, and upon the record as established*2472 and upon authority of above-cited Board decisions, we must hold that assessment and collection of the deficiency in the amount of $17,772.06 was barred prior to the issuance of the deficiency letter dated January 9, 1926. Pursuant to section 906(e) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, there is no deficiency for the year 1918. The last issue is whether petitioner has made an overpayment of tax for 1918 in the amount of $14,585.82, that amount having been paid after assessment and collection thereof was barred. In the case at bar, the deficiency letter was issued pursuant to section 274 of the Revenue Act of 1924 and dated January 9, 1926. Within 60 days from that date the Revenue Act of 1926 was enacted, on February 26, 1926, and this proceeding was initiated subsequent thereto on April 21, 1926. Section 283(c) of the Revenue Act of 1926, provides: If before the enactment of this Act the Commissioner has mailed to any person a notice under subdivision (a) of section 274 of the Revenue Act of 1924 (whether in respect of a tax imposed by Title II of such Act or in respect of so much of an income, war-profits, or excess-profits*2473 tax imposed by any of the prior Acts enumerated in subdivision (a) of this section as was not assessed before June 3, 1924), and if the 60-day period referred to in such subdivision has not expired before the enactment of this Act and no appeal has been filed before the enactment of this Act, such person may file a petition with the Board in the same manner as if a notice of deficiency had been mailed after the enactment of this Act in respect of a deficiency in a tax imposed by this title. In such cases the 60-day period referred to in subdivision (a) of section 274 of *166 this Act shall begin on the date of the enactment of this Act, and the powers, duties, rights, and privileges of the Commissioner and of the person entitled to file the petition, and the jurisdiction of the Board and of the courts, shall, whether or not the petition is filed, be determined, and the computation of the tax shall be made, in the same manner as provided in subdivision (a) of this section. Section 284(e) of the Revenue Act of 1926, as amended by section 507 of the Revenue Act of 1928, provides: If the Board finds that there is no deficiency and further finds that the taxpayer has made an*2474 overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer as provided in subdivision (a). Unless claim for credit or refund, or the petition, was filed within the time prescribed in subdivision (g) for filing claims, no such credit or refund shall be made of any portion of the tax paid more than four years (or, in the case of a tax imposed by this title, more than three years) before the filing of the claim or the filing of the petition, whichever is earlier. Section 607 of the Revenue Act of 1928 provides: Any tax (or any interest, penalty, additional amount, or addition to such tax) assessed or paid (whether before or after the enactment of this Act) after the expiration of the period of limitation properly applicable thereto shall be considered an overpayment and shall be credited or refunded to the taxpayer if claim therefor is filed within the period of limitation for filing such claim. *2475 Petitioner paid the amount of $14,585.82 in 1926, after the period of limitation for the assessment and collection thereof, and that amount constitutes an overpayment within the meaning of section 607 of the Revenue Act of 1928. Cf. Morris Metcalf,16 B.T.A. 881. Judgment will be entered pursuant to Rule 50.