39 F.2d 645 | W.D. Pa. | 1930
This suit has been brought by the plaintiff against the defendant to recover alleged overpayments of 1918 and 1920 income taxes which were made over protest and pursuant to threats of distraint. A jury trial was waived by both parties.
The claim of the plaintiff asserts improper assessment and collection from it of taxes for the years 1918 and 1920. First, it is alleged that the Commissioner of Internal Revenue assessed against the plaintiff, and the defendant wrongfully collected from it, a sum which should have been credited to
"We shall discuss each of these four contentions of plaintiff at greater length, but before doing so will notice another claim whieh relates to the entire amounts of 1918 and 1920 taxes for whieh suit has been brought. Such amounts were assessed on November 1,1927, and paid under protest on November 15,1927, after rejection of refund claims. The plaintiff’s returns for 1918 and 1920 were filed on June 16, 1919, and May 31, 1921, respectively, considerably more than five years before the assessment and collection of the amounts in question, and plaintiff has based upon this fact its contention that the collection was illegal because the statutory period therefor had expired.
Section 250(d) of the Revenue Act of 1921 (42 Stat. 265) required a determination and assessment of the 1918 and 1920 taxes within five years after the return; and section 1106(a) of the Revenue Act of 1926 (26 USCA § 1249 note) provided that “the bar of the statute of limitations against the United States in respect of any internal-revenue tax shall not only operate to bar the remedy but shall extinguish the liability.” However, section 250(d) of the Act of 1921 and subsequent Revenue Acts have provided that the limitation shall not apply where the Commissioner and the taxpayer have agreed in writing to a later determination, assessment, and collection of the tax, and defendant justifies the collections in the instant action under this provision. As appears from the findings of fact, while plaintiff’s petition for refund was pending, and prior to the expiration of the collection period, the Commissioner demanded the execution of a waiver by the plaintiff, whieh executed and returned the agreement required and in due time received an acknowledgment of its receipt by the Commissioner and information from him to the effect that it was in force and on file in his office. Prior to the expiration of the waiver period, other like agreements extending the limitation period were executed by plaintiff and filed with the Commissioner. The plaintiff denies the sufficiency of these waivers as a bar to the statute on the ground that they were not personally signed by the Commissioner, nor even by one specifically authorized to do so. The testimony does not disclose the actual signer of the waivers, but does make it plain that they were not signed by the Commissioner in person. However, it would seem that the circumstances require the application of the presumption in favor of the regularity and validity of the acts of a public official. Personal signature of all such waivers on the part of the Commissioner would be practically impossible and, we think, is Unnecessary; and due authorization of another to sign for him is to be inferred from the Commissioner’s demands for the waivers, his acknowledgment of their receipt, the filing of them in his office, and his reliance upon them in passing upon plaintiff’s application for refunds. The waivers offered in evidence by the defendant were sufficient, in our opinion, to toll the statute of limitations.
Amortization Claim.
In this phase of plaintiff’s claim, also, a question of limitation arises. One Griffith, an engineer in the Amortization Section of the Bureau of Internal Revenue, pursuant to a prior investigation, on October 23, 1921, filed a report wherein he recommended an allowance to plaintiff of $1,344,465.15' on account of amortization of its war facilities, of which amount $1,245,448.21 was to be deducted from 1918 gross income, and $99,016.94 from 1919 gross income. On December 1, 1921, this report was approved by the Chief
The plaintiff contends that the Griffith recommendation, when approved by the Chief of Engineers and the Chief of the Amortization Section on December 1, 1921, was a determination of plaintiff’s amortization deduction, and that the Commissioner was prohibited from re-examining it at any time subsequent to March 3, 1924, by sections 234(a) (8) of the Revenue Acts of 1918 and 1921. That section of the Act of 1921 after providing for a “reasonable deduction” for amortization of war-time facilities, further provided: “At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the income, war-profits, and excess-profits taxes for the * * *' years affected shall be redetermined. * * * ”
Just exactly' what Congress had in mind, when the above-quoted part of section 234(a) (8) was enacted, we do not undertake to surmise; but it plainly did not intend to prevent any examination of an amortization claim after March 3, 1924, on the part of the Commissioner. To hold otherwise would be to ignore the proviso of section 250(d) of the Revenue Act of 1921, which asserts: “Provided further, That in cases coming within the scope of * * * or of paragraph (8) of subdivision (a) of section 234 * * * the amount of tax or deficiency in tax due may be determined, assessed, and collected at any time; but prior to the assessment thereof the taxpayer shall be notified and given a period of not less than thirty days in which to file an appeal and be heard as hereinafter provided in this subdivision.”
We are unable to accede to plaintiff’s assertion that the approval of the Griffith report by the Chief of Engineers and the Chief of the Amortization Section was a determination of plaintiff’s amortization allowance. It is undoubtedly true that employees in the. Amortization Section regarded and spoke of such approved reports as “determinations,” despite the fact that they were still subject to audit, but the fact remains that the power of determination had not yet passed from the Commissioner, and did not pass from him prior to his issue of the thirty-day letter when the taxpayer was notified of his decision and given opportunity to appeal.
Plaintiff’s amortization claim is not finally concluded by the failure of its contention in respect to the limitation of the Commissioner’s power to pass upon amortization deductions. It may, by the fair weight of the evidence, show that the Commissioner’s decision in respect to the proper amount of its amortization deduction was elearly wrong, and that it was compelled by the collector, the defendant, pursuant to that erroneous decision, to pay an amount not properly due the United States as a part of the amount of its 1918 taxes. If plaintiff so shows that it was entitled to an amortization allowance in excess of the amount determined by the Commissioner, it is entitled in the instant action to a judgment for at least the amount of the excess.
The Commissioner’s determination of the amount of the amortization allowance was based entirely upon the recommendations of the second Luce report. Mr. Luce, in arriving at his conclusions, considered individ
The plaintiff asserts that Luce’s calculation of its amortization allowance, adopted by the Commissioner, was incorrect. While insisting that the Griffith report, approved as it was by his immediate superiors, and not having been overturned prior to March 3, 1924, was a final determination of its amortization deduction, it contends that if the matter were now open for consideration, an allowance of $1,245,448.21 would be correct. First, plaintiff attacks Mr. Luce’s treatment of its plant as composed of several distinct departments, and his consequent exclusion from consideration for amortiza
Considering the issue in respect to the disallowance of costs for facilities in. the caustic soda and bicarbonate sections of the plant, we find no error in Mr. Luce’s method in classifying the expenditures for such war facilities, and in excluding from the amortization equation such sums as went to purchase equipment which was in greater use in the post-war period than it had been in the war period. The statute prescribes no method for the determination of the proper amortization allowance. A general rule, such as adopted by the Commissioner, is doubtless necessary as a matter of practice; but the Commissioner might, if he saw fit, subject each separate facility to appraisal and specieific determination of residual value, rather than apply a general formula to part or all of the equipment of the plant under consideration for amortization. In our opinion, the action of the Commissioner in approving the exclusion from the equation of the caustic soda and bicarbonate expenditures was justified by the testimony; whieh, with the exception later mentioned, also justifies the exclusion of the costs of the machine shop building, the cooper shop, the oil storage building, and certain miscellaneous equipment, mentioned in Luce’s schedule of costs upon which amortization was disallowed. All of such buildings and equipment were found to be no more than adequate for a plant having a production equal to that of the plaintiff during the post-war period.
The Commissioner, by his approval of the Luce report, has excluded from the costs for which amortization was allowed an expense of $340,000 incurred in the purchase of a limestone dock and equipment. The exclusion was upon the ground that the dock was a necessity to the plant as a whole, and was only sufficient in size for the plaintiff’s requirements. The testimony does not justify this exclusion, but fairly shows that, the dock was approximately one-third larger than was required by plaintiff in the post-war period. We have therefore added this cost to those for whieh amortization has been allowed.
The Commissioner, through Luce, to determine the residual value of plaintiff’s 1917-18 facilities, used plaintiff’s average monthly production of soda ash for 1923 as a numerator, and its monthly average per furnace for the last ten months of 1918, multiplied by the number of furnaces under construction or completed, as a denominator, and multiplied the fraction so obtained, 26163/33250 (which equals 79 per cent.) by the allowed costs of the war-time facilities installed in 1917 and 1918. Plaintiff points to the fact that its production for 1923 was in excess of that of any other year of the post-war period, and contends that it was entitled to have its production for that period determined in accordance with the ordinary usage
The contention of the plaintiff in respect to the war-period production is justified, we think. In the interest of uniformity of practice and correct conclusion, the monthly average output during the entire post-war period should be taken, rather than the average of the year of highest production. As to the capacity of the plant at the end of the war, we have not been satisfied that the examiner was in error. The capacity claimed was attained only for a single month, and that after the close of the post-war period. The plant never exceeded the production of the last ten months of 1918 for any extended period. True, labor conditions were bad in those months and tended to reduce production; but, on the other hand, plaintiff was then straining tó produce all the soda ash possible, and this effort undoubtedly offset the labor deficiencies to a large extent.
The testimony fairly establishes the postwar production of plaintiff as 22,597 tons of soda ash per month, and the capacity of the plant as 33,250 tons per month. Applying the Commissioner’s equation, the residual value of the plant was 68 per cent., and the plaintiff was entitled to- an amortization allowance of 32 per cent, of the proper costs of its war-time facilities. The 1917 and 1918 costs for which amortization should properly be allowed amount to $2,108,361.40, after deduction of the 1917 depreciation. From this amount is to be deducted the costs of the boiler house equipment, for which specific amortization allowance was fixed. The 1918 boiler-house equipment costs, less depreciation for 1917, amounted to $196,599.45, and the cost of the flaking machine, six tank ears, an Oliver filter, and one ash pit, less depredation, amounted to $39,889.46. Deducting these amounts from $2,108,361.46, we have $1,871,872.49 as the sum of the costs upon which plaintiff, in addition to the Commissioner’s specific amortization allowance, is entitled to receive an allowance of 32 per cent., or $598,999.68, which, with the total of the special allowances, amounts to $646,996.01, the total amount of the amortization allowance to which plaintiff was entitled upon its 1918 returh.
It is correct procedure to “spread” the deduction for amortization over the entire period the amortized facilities were in use as war-time facilities, and not credited only to the year in which the costs were incurred. The war-time period use, for the present purpose, was from January 1, 1918, to March 31, 1919. The income of plaintiff for 1918 was 85.62 per cent, of its total income for that period, and therefore that percentage of the amortization of 1918 costs has been allocated to 1918 income, and 14.38 per cent, of such costs to 1919 income. By this allocation the sum of $553,957.98 is deductible from 1918 gross income, and $93,-038.03 from 1919 income. The Commissioner having allowed an amortization deduction (allocated in the same proportions herein adopted) from 1918 income of $315,956.89, in arriving at plaintiff’s correct tax for that year, a further deduction! of $288,001.09' from the income of that year must be made. Such a deduction has been made in the schedule, attached hereto, showing a computation of plaintiff’s 1918 tax.
EXHIBIT I
SCHEDULE
19-18 Taxes
Net income ................................$3,821,143 63
Deduct additional amortization.......... 238,001 09
$3,583,142 64
Excess Profits Tax at 54.54%..............$1,964,245 94
Income Tax:
Net income ............................... $3,583,142 64
Less:
Profit Tax ...................$1,954,245 94
Liberty Bond Interest...... 17,819 46
Exemption .................. 2,000 00 1,974,065 40
Balance taxable at 12%.................. $1,009,077 14
Excfess Profits Tax.........................$1,954,245 94
Balance at 12% Tax....................... 193,089 26
Total Income and Profits Tax............$2,147,335 20
Tax Payments:
With return ..............................$1,074,749 11
November 15, 1927.......................... 1,215,615 14
Total payments ...........................$2,280,364 25
Total due .................................. 2,147,335 20
Overpayment Tax .........................$ 143,029 05
Interest overpaid..........................$ 13,852 37
(Interest at .09685 on $143,029.05)
1918 Tax overpaid..........................$ 142,029 05
Interest overpaid ..................... 13,852 37
Total overpayment ................... $ 156,881 42
*653 Calculation of Tax Based on Court’s Decision for 1916, 1918, 1919, and 1920.
1920
Invested Capital Commissioner’s letter—
Exhibit 5 .............................$7,346,041 07
Add:
(a) Additional tax assessed by Commissioner for 1917 — admitted to * have been deducted from Invested Capital in error................ 304,920 97
(b) Additional tax assessed by Commissioner for 1917 in addition to (a) above, decided by the Court to be refundable................... 269,451 93
(c) Refund of tax allowed by Court for 1916 ................................ 6,325 77
(d) Refund of tax allowed by Court for 1918 ................................ 143,029 05
(e) Proration of refund of tax allowed by Court for 1919 — 13,106.40 x .4214 5,523 04
$8,075,291 83
Deduct:
Additional amortization allowed for 1918.............$238,001 09
Additional amortization allowed for 1919............. 49,525 73
Total deduction......................... 287,526 82
Corrected Invested Capital...............$7,787,765 01
Net Income .............................. 1,529,710 37
Excess Profits Tax Credit
($7,787,705.01 x -08 + $3,000) ............ 624,021 20
Excess Profits Tax:
Net income ................$1,529,710 37
Less credit ............... 624,021 20
Taxable at 20%........... 905,689 17 $ 181,137 83
Income Tax:'
Net income ...............$1,529,710 37
Less:
Excess Prof-
fits tax.....$181,137 83
Liberty Bond
Int......... 80,253 71
Exemption .. 2,000 00 263,391 54
Taxable at 10%............. $1,266,318 83 126,631 88
Total Tax................................. $ 307,769 71
Tax Payments:
With return.................$263,891 89
November 15, 1927........... 60,769 03
- $ 324,660 92
Total Tax ................................ 307,769 71
Overpayment Taxes ..................... $ 16,891 21
Interest overpaid ........................ 1,637 97
$ 18,529 18
Interest paid Nov. 15, 1927, or .096972 of $60,769.03............$5,892 93
Interest at .096972 on $16,891.21.. 1,637 97
Depreciation.
The Commissioner allowed plaintiff a depreciation of $437,252.55 for 1918. This was based upon a 10.4 per cent, allowance, whieh in turn was founded upon an estimate that the average life of the facilities in plaintiff’s plant was 9.6 years. The plaintiff does not attack 9.6 years as an unreasonable composite estimate of the probable useful' existence of its plant for the years for whieh it was granted (1917 — 1920, each inclusive), but asserts that its machinery, largely by reason of its necessity to use inexperienced and inefficient laborers, wore out twice or three times as rapidly in 1918 as in other years. We are entirely satisfied that the labor situation did reduce the useful life of plaintiff’s machinery more rapidly in 1918 than in other years, but that conclusion does not enable us to say that the Commissioner’s allowance for exhaustion, wear and tear, and obsolescence for that year was inadequate; nor does it furnish any reason for an increase of the allowed amount which is based upon any proper theory. The plaintiff’s contention, reduced to its essentials, is that the wear and tear upon its machinery was more than twicers great in 1918 as in 1917 or 1920, and that the Commissioner, having allowed a composite rate of 10.4 per cent, for 1917 and 1920, should have fixed for 1918 a rate more than twice as large upon all of plaintiff’s property upon whieh no amortization had been allqwed. But tangible proof to establish the contention is lacking. Officers of the company have testified to the labor conditions and have expressed their estimate of its effect upon their plant; and they have also stated that much of their machinery was obsolescent. But there has been little, if any, testimony to specify the machinery replaced on account of wear and tear or obsolescence, or the cost of such machinery so replaced. On the other hand, there is evidence to the effect that much of the machinery subject to the hard usage of 1918 was still in use at the time of trial, and that the same was true in respect to the machinery alleged to be obsolescent in 1918. It also appeared that plaintiff had taken large credits against gross income for repairs upon machinery, and specific credits for particular machines abandoned. Such credits have the direct effect of reducing the allowance whieh plaintiff may rightfully demand for depreciation.
The plaintiff has the burden of proving that the Commissioner’s allowance was inadequate, and having failed to group its facilities, which vary in respect to length of existence, and to show the machinery replaced in use subsequent to 1918, and when replaced, or the amount 'expended for repair of such machinery whieh was charged against capital rather than gross income, we feel that it has failed to furnish such proof as would justify the court in finding that the Commissioner was in error in his allowance.
Deduction from Invested Capital for 1929.
The Commissioner, in determining plaintiff’s 1920 taxes, deducted from its invested capital $574,372.90. This amount was its
Tbe present action was tried at tbe same time as tbe case between tbe same parties at No. 5613. 39 F.(2d) 643. In that case the plaintiff seeks to recover $269',451.93, taxes for tbe year 1917 paid under protest, with $50,023.75, interest paid thereon, or a total of $319,475.68, with interest from thd date of payment.; also $6,325.77,' with $1,166.66 interest, 1916 tax overpaid under tbe same circumstances. Upon consideration of tbe testimony in that case, we have determined that plaintiff is entitled to recover, as tbe payments were enforced after tbe expiration of tbe statutory period bad both barred tbe remedy and extinguished tbe liability. This conclusion carries with it a finding that tbe deduction from invested capital for tbe year 1920 was incorrect, both as to tbe sum of $304,920.97, concerning which error bas been confessed, and $269,451.93* which defendant ^maintains was properly deducted. Tbe latter sum should therefore have been added to plaintiff’s invested capital for 1920’ in determining its tax for that year.
In addition to tbe case at No. 5613, another at No. 5761
Excess-Profits Tax Rate.
Tbe plaintiff, in addition to tbe amortization and depreciation claims in respect to tbe 1918 taxes, bas sought a review of the Commissioner’s determination of its excess profits tax rate for 1918. We feel that this court does not have jurisdiction to review the Commissioner’s ruling in this respeet. See Williamsport Wire Rope Co. v. United States, 275 U. S. 520, 48 S. Ct. 140, 72 L. Ed. 404.
Decided on memorandum of statement of facts and conclusions of law. No opinion filed.