Opinion
No. 46658.
April 7, 1947.
Thomas N. Tarleau, of New York City (Sandow Homan and Wilkie, Otis, Farr Gallagher, all of New York City, on the brief), for plaintiff.
J.W. Hussey, of Washington, D.C., and Sewall Key, Asst. Atty. Gen. (Robert N. Anderson and Andrew D. Sharpe, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Suit by the Canister Company against the United States to recover the amount of an alleged overpayment of income taxes.
Petition dismissed.
The facts necessary to a decision of the case are set out in the opinion; they are set out more in detail in the following:
Special Findings of Fact.
1. The plaintiff is, and was during the taxable year of 1941 in issue herein, a corporation, having been organized under the laws of the State of New Jersey April 19, 1924, with authorized capital of $250,000. It commenced business April 21, 1924. The Certificate of Incorporation was received by the County Clerk on April 21, 1924, and filed and recorded the following day in Warren County, New Jersey. Raphael T. Garfein was the president and sole stockholder of the plaintiff corporation, except for qualifying shares, from the date it commenced business through the taxable year 1941. His name was legally changed to Raphael T. Gwathmey in 1943.
2. On July 15, 1941, plaintiff filed with the Collector of Internal Revenue for the Fifth Collection District of New Jersey its tentative income tax return for its fiscal year ending April 30, 1941. On August 14, 1941, plaintiff filed its final income tax and excess profits tax returns for the same year, showing income tax of $7,735.99 and excess profits tax of $1,823.96. The said amounts were assessed and duly paid to the collector in the amounts and dates as follows:
Income Excess profits taxes taxes
July 15, 1941 .......... $2,544.01 $ 455.99 October 16, 1941 ....... 1,730.66 49.32 January 23, 1942 ....... 1,730.66 659.33 April 15, 1942 ......... 1,730.66 659.32 _________ _________ Total ............... 7,735.99 1,823.96
3. On February 27, 1943, the examining revenue agent issued a report covering his examination of plaintiff's records for the fiscal years 1941 and 1942, in which he computed an overassessment of income tax for 1941 of $3,351.99, and a deficiency of excess profits tax for the same year in the amount of $3,011.88.
4. On June 16, 1944, the plaintiff was notified by the Commissioner of Internal Revenue that the determination of its tax liability for 1941 disclosed an overassessment of income tax of $3,351.99, and a deficiency in excess profits tax of $3,011.88; and for the fiscal year 1942, a deficiency in both income tax and excess profits tax. Plaintiff was advised that a petition might be filed with the Tax Court of the United States within 90 days for a redetermination of the deficiencies.
Within 90 days from the date of the Commissioner's letter plaintiff filed a petition with the United States Tax Court seeking a redetermination of its tax liabilities for 1942, only.
5. The plaintiff's income tax overassessment for 1941 resulted from adjustments of normal tax net income from $34,447.11, as reported by plaintiff, to $25,604.43 as determined by the Bureau of Internal Revenue. The principal items for deduction from income were $14,386.20 profit on sales reported for the taxable year 1941, which were completed in the taxable year 1942 and transferred to the latter year; $1,487 increase for accrued capital stock tax reported by plaintiff at $2,263, and allowed at $3,750; $740.13 of allowable expense items which the plaintiff had capitalized. As partial offsets against these deductions, plaintiff's income was increased by a reduction in allowable depreciation of $5,915.14, which had been reported at $22,888.35, and determined to be $16,973.21; also a reduction in loss on sale of securities of $1,839.39, and profit on sale of machinery of $112.50. There were other minor adjustments.
The determination of a deficiency of $3,011.88 in excess profits tax for 1941 resulted from a reduction in plaintiff's invested capital from $680,052.64, as reported by plaintiff, to $436,506.17 as determined by the Commissioner of Internal Revenue, which, in turn reduced the eight percent credit allowance against excess profit net income from $54,404.21, as reported by plaintiff, to $34,920.49.
6. Plaintiff entered no appeal from the determination made by the Commissioner of Internal Revenue for the taxable year 1941, but on July 11, 1944, filed a claim for refund of the overassessment of $3,351.99 for that year.
7. The defendant does not contest the items of adjustment resulting in the determination of excess profits tax liability and the overassessment of income tax for the taxable year 1941, as reported to plaintiff June 16, 1944, other than the item of depreciation.
8. On October 19, 1944, the Collector of Internal Revenue at Newark, New Jersey, transmitted to plaintiff a "corrected" notice and demand for income tax assessment for the taxable year 1941. This notice and demand set forth the deficiency of excess profits tax determined by the Internal Revenue agent in the amount of $3,011.88, plus interest thereon of $586.12, totaling $3,598, with an offset of $3,351.99 for the overassessment of income tax, leaving a balance due of $246.01. Payment of the balance was demanded.
On January 17, 1945, the plaintiff issued its check in the amount of $3,598.00, in payment of the excess profits tax and interest shown thereon, which was duly collected by the Collector of Internal Revenue for the fifth district of New Jersey. At this time plaintiff's claim for refund of the income tax overassessment was still pending, and unpaid.
9. On March 12, 1945, a "30-day letter" was transmitted to the plaintiff by the Internal Revenue Agent in Charge of the Newark Division, proposing to disallow plaintiff's claim for refund of $3,351.99 for the taxable year 1941. There was also transmitted with the 30-day letter a copy of a report of the examining Internal Revenue agent issued February 15, 1945, as a result of a further investigation, upon which the proposed disallowance was determined.
The report of February 15, 1945, was prepared by the same examining agent as the report of February 27, 1943, upon which the plaintiff relied for its claim for refund.
10. In the report of February 15, 1945, the Internal Revenue agent reduced the allowance for depreciation chargeable against income for the taxable year 1941 from $16,973.21, as reported by him February 27, 1943, to $9,505.53, or a difference of $7,467.68. This reduction was computed upon adjustments of original book valuations of assets acquired in 1924 and 1926 by the plaintiff which had not been fully depreciated prior to the taxable year 1941.
With the revision of depreciation, the Internal Revenue agent made a recomputation of excess profits tax for the taxable year 1941 in the total amount of $13,812.04, as against $4,835.84 previously determined, or an increase of $8,976.20. The income tax, as previously determined for 1941 was not changed, for the reason that the additional excess profits tax more than offset the overassessment of income tax previously determined. No additional assessment was made for excess profits tax because of the operations of the statutes of limitation.
The proof does not show bases upon which a reduction of $7,467.68 in depreciation was computed or the excess profits increased by $8,976.20 for the taxable year 1941.
11. By a bill of sale executed April 22, 1924 The Canister Company of New Jersey, a corporation wholly owned by the Bon Ami Company, sold and transferred to Raphael T. Garfein the fibre can business previously conducted by the said corporation, together with the good will thereof, and together with the equipment shown on a designated schedule "A" consisting of ten or twelve pages, listing the items being transferred and others excluded, with the right in buyer to take possession of assets transferred as of April 21, 1924. Schedule "A" was not attached to the certified copy of the bill of sale which was introduced in evidence.
The consideration of sale was $100,000, consisting of $25,000 in cash and ten promissory notes by the buyer to the seller of $7,500 each, at five percent, payable annually on September 1, 1925 to 1934, the notes being secured by a first lien upon the equipment transferred.
The bill of sale contains the following stipulation:
"The party of the second part (buyer) shall have the right to assign this agreement to a corporation organized by the party of the second part and known as The Canister Company, and upon the due and proper organization of such corporation, and the due and proper acceptance by such corporation of the obligations of this agreement, the party of the first part shall be released of any personal obligation hereunder."
12. The first entries in plaintiff's journal, for the period April 21 to May 31, 1924, record the issuance of stock to R.T. Garfein for the business formerly operated by The Canister Company of New Jersey. The following assets were recorded at appraised values as shown:
Machinery and equipment ............ $211,380.75 Factory furniture and fixtures ..... 5,242.72 Office furniture and fixtures ...... 5,003.17 Shipping crates .................... 1,736.12 Inventory .......................... 7,043.83 Equipment in process ............... 1,678.78 Patterns for machines and tools .... 6,000.00 ___________ Total ............................ 238,085.37
As against these assets, there was concurrently recorded in plaintiff's journal its liability on the $75,000 serial 5% note issue payable annually, with the first maturity September 1, 1925, and common stock issued to R.T. Garfein in the amount of $163,085.37. At the same time $20,000 in cash was recorded, against which plaintiff issued a like amount in common stock to Garfein.
The journal entry is thus explained:
"Stock issued for the business formerly owned by The Canister Co. of N.J. and sold to The Canister Company by R.T. Garfein. Note issue payable equal yearly maturities — First maturity Sept. 1, 1925."
In the following period of June 1924, plaintiff's journal, page 11, contains entries for additional assets consisting of patents at a value of $24,081.87 and good will at a value of $42,832.76, against which plaintiff issued additional common stock in the amount of $66,914.63 to R.T. Garfein, thereby completing the entire issue of the authorized capital stock of $250,000.
13. On April 22, 1924, a lease was executed by The Canister Company of New Jersey to Raphael T. Garfein, for a period of five years from the 21st day of April 1924, to terminate on the 30th day of April 1929, at the annual rental of $5,000. This lease covered the manufacturing plant formerly operated by the lessor at Phillipsburg, New Jersey, shown on a designated schedule "A", "but only so much thereof as is enclosed in red lines, together with the buildings, improvements and appurtenances, structures and sidings located thereon, together with a right of way over Broad Street, as shown upon schedule." Schedule A was not attached to the certified copy of the lease introduced in evidence.
It contained an option to Garfein to purchase the premises so leased and enclosed in red lines on the description schedule, at any time during five years from the date thereof for $100,000, and to purchase the property not enclosed in red lines for $50,000.00.
The lease contains a provision granting Garfein the right to assign the lease to the plaintiff corporation; such an assignment was executed April 24, 1924, and recorded along with the lease in Warren County, New Jersey.
14. In the period of March 1926, the plaintiff recorded in its journal, page 111 thereof, property purchased by R.T. Garfein personally and turned over by him to the plaintiff corporation, the title thereto to be acquired in April. This entry lists the following assets at values as recorded:
Land ............................. $25,000.00 Buildings ........................ 300,957.35 Equipment ........................ 16,027.62 __________ Total .......................... 341,984.97
15. On April 12, 1926, The Canister Company of New Jersey conveyed certain of its lands and buildings described by metes and bounds, in Phillipsburg, New Jersey, to the plaintiff herein, subject to the lease granted to R.T. Garfein and other restrictions of record. The proof does not show whether the property conveyed consisted only of that on which Garfein had been granted a lease.
16. The plaintiff included the depreciable assets at the values recorded in its books in 1924 and 1926, as described in findings 12 and 14, as the bases for depreciation deductions for all taxable years from the dates of acquisition up to and including the taxable year 1941, insofar as any depreciable values thereof remained.
Conclusion of Law.
Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover and its petition is therefore dismissed.
Judgment is rendered against the plaintiff for the cost of printing the record herein, the amount thereof to be entered by the clerk and collected by him according to law.
We are confronted with several odd things in this case. In the first place, the taxpayer paid more taxes than the Collector demanded that he pay.
On February 27, 1943, a revenue agent made a report on plaintiff's income and excess profits tax liability, showing an overassessment of income taxes of $3,351.99 and a deficiency in excess profits tax of $3,011.88. A so-called "90-day letter," or deficiency letter, from the Commissioner of Internal Revenue followed on June 16, 1944, notifying plaintiff of the deficiency and overassessment as found by the revenue agent. This was followed on October 19, 1944, by the issuance of a notice and demand on plaintiff for the payment of the deficiency in excess profits tax, which with interest amounted to $3,598.00, less the overpayment in income tax of $3,351.99, leaving a balance due of $246.01, payment of which was demanded. Instead of paying the balance alleged to be due, the taxpayer paid the amount of the asserted deficiency in excess profits tax, with interest, and filed a claim for refund of the stated overpayment of income taxes.
This unusual behavior aroused the interest of the Bureau of Internal Revenue. It had one of its agents investigate further the taxpayer's right to a refund of the income taxes.
This agent came back with the assertion that it was not entitled to the refund, because for the year in question it had used the wrong basis for its depreciation deduction, and that if it had used the correct basis, it would have owed a much larger excess profits tax which would have more than offset the overpayment in income tax as previously found by the Commissioner.
The Commissioner of Internal Revenue, however, did not formally reject plaintiff's claim for refund, and six months having elapsed without any action upon it, the taxpayer brought this suit to recover the amount of the overpayment in income taxes stated by the Collector of Internal Revenue in his notice and demand.
1. On the trial the plaintiff in proof of its case contented itself with the introduction of the Reveune Agent's report, the deficiency letter of the Commissioner of Internal Revenue, and the notice and demand of the Collector of Internal Revenue showing the overpayment of income taxes, and with proof of its payment of the asserted deficiency in excess profits tax.
Defendant then undertook to show that the Revenue Agent and the Commissioner of Internal Revenue in his deficiency letter had used an incorrect basis for the depreciation deduction and, hence, that these letters did not establish that a refund was due plaintiff.
For twenty years the taxpayer had been deducting depreciation on the valuation of its assets as carried on its books, and this had been acquiesced in by the Bureau of Internal Revenue. But the Revenue Agent assigned to report on plaintiff's claim for refund said this was wrong; he said these assets had been entered on the books at an inflated value. Whether on not this has been proven is the issue presented.
The burden of proving that the deficiency letter of the Commissioner and the notice and demand based on it were incorrect is on the defendant. The introduction of the statement in the deficiency letter and in the notice and demand that plaintiff had overpaid its income taxes, unexplained, was sufficient proof of that fact. The burden of proving that the Commissioner of Internal Revenue was in error in making that statement was on the defendant. The issue is, whether or not the defendant has carried that burden.
Raphael T. Garfein, who later changed his name to Gwathmey, was the president of the plaintiff and its sole stockholder, except for qualifying shares. This company was organized on April 19, 1924, and conmenced business on April 21, 1924. On April 22, 1924, The Canister Company of New Jersey executed to Garfein a bill of sale of its fiber can business together with the equipment shown on a schedule attached thereto. The consideration was $100,000. Twenty-five thousand dollars was paid in cash. The balance was evidenced by ten promissory notes of $7,500.00 each, due annually on the first of September, beginning September 1, 1925.
It was provided that the agreement might be assigned to a corporation organized by Garfein, upon the happening of which Garfein would be released from personal obligation on the notes. Garfein assigned the bill of sale to plaintiff.
The opening entry on plaintiff's journal shows assets of $238,085.37 for "machinery, equipment, and inventory as per appraisal," and cash of $20,000. Against this R.T. Garfein was credited with $258,085.37. Then he was charged with the $258,085.37, against which a credit was set up of notes assumed by the company of $75,000 and common stock issued Garfein of $183,085.37 This was explained as follows: "Stock issued for the business formerly owned by The Canister Co. of N.J. and sold to The Canister Company by R.T. Garfein. Note issue payable equal yearly maturities — First maturity Sept. 1, 1925." [Italics supplied.] The bill of sale from The Canister Company of New Jersey to Garfein transferred "the fibre can business conducted by the party of the first part [The Canister Company of New Jersey], together with the good-will thereof, and together with the equipment shown upon Schedule `A' hereto attached."
It would seem to follow that this company set up on its books at $238,085.37 assets Garfein had purchased for $100,000.
They entered them not at cost to Garfein, but at a value at which they had been appraised. Depreciation had been deducted and allowed on this appraised value. This was improper, since they had been acquired from a person who was in control of the corporation immediately after the transfer. In such case depreciation must be computed on the cost to the transferor. Sections 203(b)(4) and 204(a)(8) of the Revenue Acts of 1924 and 1926, 26 U.S.C.A.Int.Rev. Acts, pages 5, 9, 149, 153. This is what the Revenue Agent did when he investigated plaintiff's claim for refund.
Plaintiff, however, says that the certified copy of the bill of sale was improperly admitted in evidence because it was not complete, in that Schedule "A," which listed the equipment purchased, was not attached to the certified copy.
The decisions are not in harmony on whether or not the entire document relied upon must be introduced in evidence. 4 Wigmore on Evidence, sec. 2102; cases cited in 20 Am.Jur. 770. It is certainly the better practice to do so. Whether or not a part only may be introduced depends to some extent on the facts. It is improper, we think, to receive in evidence only a part of a document unless the remainder of it is available or is made available to the other party. It is well settled, at least, that where a party introduces only a part of a document, the other party may introduce so much of the remainder as is competent. Tappan v. Beardsley, 10 Wall. 427, 435, 19 L.Ed. 974; and authorities cited supra. Hence, if the remainder is not available to the other party, a part only of the document should not be received.
The original of the bill of sale, a copy of which was introduced, was in plaintiff's possession. If plaintiff thought the omitted portion material to the issue, it was available to it and could have been introduced by it. Under such circumstances we do not think it was erroneous to have received the bill of sale without the schedule.
Indeed, the schedule would have added nothing that is material to the issue presented. In proof of its right to recover, plaintiff relied alone on the computation of its income tax liability by the Commissioner of Internal Revenue. Defendant, to rebut this, sought to show that that computation was incorrect because the cost basis had not been used in computing the depreciation deduction. Defendant showed the basis used and by the introduction of the bill of sale without the schedule showed that the cost was much less than this. Thus, it showed that the Commissioner's computation of plaintiff's income tax liability as set out in his deficiency letter was incorrect, and, therefore, afforded no basis for the rendition of a judgment in plaintiff's favor.
But plaintiff says there was no evidence to show that the assets transferred to plaintiff consisted alone of the assets it had purchased under the bill of sale. The entry on the journal, taken in connection with the bill of sale, clearly indicates that they were. It reads, "stock issued for the business formerly owned by The Canister Co. of N.J. and sold to The Canister Company by R.T. Garfein." [Italics supplied.] If other assets were included in those transferred, Garfein could have so testified. His silence lends support to the apparent meaning of the journal entry.
2. In the month of March 1926 plaintiff set up on its journal land at $25,000 and buildings at $300,957.35, and equipment at $16,027.62. Defendant seeks to show these cost but $70,000.00. To do so it introduces, first, a certified copy of a lease, dated April 22, 1924, from The Canister Company of New Jersey to Garfein, of "the premises * * * shown upon Schedule `A', but only so much thereof as is enclosed in red lines, together with the buildings, improvements and appurtenances, structures and sidings located thereon. * * *" Schedule A was not attached to the copy introduced in evidence. This lease contained an option to purchase the property enclosed in red lines on the schedule for $100,000, and the property not enclosed in red lines for $50,000. It also gave Garfein the right to assign the lease to plaintiff. Defendant then introduced a deed from The Canister Company of New Jersey to plaintiff, dated April 12, 1926, for certain premises described by metes and bounds.
It is impossible to tell from a comparison of these documents whether or not the premises conveyed are the same as those leased and, hence, the option in the lease, upon which defendant relies, gives no clew to the purchase price. The consideration stated in the deed is "$100.00 and other good and valuable consideration lawful money of the United States."
Defendant sought to bridge the gap by introducing copies of letters alleged to have passed between Garfein and The Canister Company of New Jersey. These letters were copied by the revenue agent from copies appearing in what he says were the minutes of the meetings of the Board of Directors. These minutes were not introduced nor identified by anyone competent to do so. The Commissioner properly sustained an objection to the introduction of these copies.
Without these letters in evidence there is not sufficient evidence to rebut the presumptive correctness of the entries on the books as to the amount paid for these assets.
However, defendant has demonstrated that the computation in the deficiency letter of the Commissioner of Internal Revenue was erroneous, so far as is concerned the machinery, equipment and inventory covered by the bill of sale of April 22, 1924. The computation, therefore, does not constitute a basis for the rendition of a judgment in plaintiff's favor, and this is plaintiff's sole proof. In just what amount plaintiff overpaid its taxes, if any, we do not know. The burden is on plaintiff to prove this.
3. No account stated resulted from the dealings between the parties. Plaintiff's action in not paying the net balance demanded by the Commissioner of Internal Revenue, but in paying, instead, the deficiency in excess profits taxes and in filing claim for refund of the overpayment of income tax shows that plaintiff did not acquiesce in the Commissioner's statement of the account. Without an agreement on the account by both parties an account stated does not arise.
In defendant's notice and demand interest was charged on the deficiency in excess profits tax, but no interest was allowed on the overpayment in income taxes. Presumably, for this reason, plaintiff refused to pay the balance demanded, but paid instead the deficiency in excess profits tax and filed claim for refund of the overpayment of income taxes. Had this claim been allowed the taxpayer would have been entitled under the law to interest on the amount to be refunded.
At any rate, it did not agree to the balance stated and, therefore, no account stated arose.
4. It is unnecessary for us to consider defendant's other defense, that plaintiff did not file a timely claim for refund.
It results that plaintiff has not proven that it has overpaid its taxes and, therefore, it is not entitled to recover. Its petition will be dismissed. It is so ordered.
MADDEN, JONES, and LITTLETON, Judges, concur.
WHALEY, Chief Justice, took no part in the decision of this case.