Carpenter v. Comm'r of Internal Revenue

• Decision Date: 13 January 1948
• Docket Number: Docket No. 12872.
• Parties: LAWRENCE W. CARPENTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

10 T.C. 64

LAWRENCE W. CARPENTER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12872.

Tax Court of the United States.

Promulgated January 13, 1948.

1. The Commissioner is not prevented by the three-year limitation set forth in section 275(a), I.R.C., from making adjustments in a 1942 income tax return and adding 25 per cent of the 1942 income tax, after said adjustments are made, to the 1943 income tax for the purpose of a deficiency determination therein after the lapse of three years from the filing of the 1942 return.

2. Under the facts petitioner is entitled to an exemption as the head of a family during the time petitioner's adult daughter resided with petitioner's wife in a household maintained by petitioner in which petitioner himself did not reside. Lee Loevinger, Esq., for the petitioner.

T. A. Steele, Jr., Esq., for the respondent.

The respondent determined a deficiency in Federal income and victory tax for the taxable year ended December 31, 1943, in the amount of $4,526.26. Two questions are involved:

(1) Under the provisions of the Current Tax Payment Act of 1943, for the purpose of determining the correct income and victory tax liability for the calendar year 1943, does section 275(a) of the Internal Revenue Code prevent the Commissioner from adjusting petitioner's income tax liability for the calendar year 1942 where the deficiency notice was sent more than three years after the 1942 income tax return was filed, but within three years after the 1943 income and victory tax return was filed?

(2) Is the petitioner entitled to the personal exemption of a head of the family as a credit against net income?

OPINION.

HARLAN, Judge:

The facts in this case pertaining to the first issue are adopted as stipulated.

The income tax return of petitioner for the taxable year 1942 was filed with the collector of internal revenue at St. Paul, Minnesota on March 15, 1943. It disclosed a gross income of $45,985.89 and claimed deductions of $10,217.37.

The income tax return of petitioner for the taxable year 1943 was filed with the collector of internal revenue at St. Paul, Minnesota, on March 15, 1944. It disclosed a total income of $54,959.92 and claimed deductions of $7,361.75.

On September 11, 1946, the Commissioner of Internal Revenue mailed his ‘preliminary statement‘ to petitioner and on October 28, 1946, he mailed a notice of deficiency to the petitioner.

These two documents pertained to a determination of deficiency by the Commissioner in petitioner's 1943 income tax, but a part of this deficiency resulted from a disallowance by the Commissioner of certain deductions which the petitioner had claimed in his 1942 return. The deficiency notice sets up these adjustments to the 1943 income tax return as follows:

+--------------------------+
                ¦Adjustments to Net Income ¦
                +--------------------------¦
                ¦        ¦        ¦        ¦
                +--------------------------+
                

Year ended December 31, 1942  
                Net income as disclosed by return                       $35,068.52
                Unallowable deductions and additional income
                (a) Disallowance of deduction for depreciation $350.00
                (b) Disallowance of deduction for separate
                maintenance payments                           4,200.00
                (c) Disallowance of promotional expense        1,000.00
                Total additions                                         5,550.00
                Net income, adjusted                                    $40,618.52
                

From the above statements it is obvious that the return for the calendar year 1943, even if all claimed deductions were allowed by the Commissioner, would disclose a larger income than would the return for the calendar year 1942, even if the Commissioner were to reject all its claimed deductions. Therefore, in the absence of fraud in the return of gross income by the petitioner for 1942 (and such a claim has not been intimated in this case), it becomes evident that this case falls under section 6(a) of the Current Tax Payment Act of 1943, the pertinent parts of which read as follows:

In case the tax imposed by Chapter 1 of the Internal Revenue Code upon any individual * * * for the taxable year 1942 (determined without regard to this section * * * ) is not greater than the tax for the taxable year 1943 (similarly determined), the liability of such individual for the tax imposed by such chapter for the taxable year 1942 shall be discharged as of September 1, 1943 * * * . In such case if the tax for the taxable year 1942 (determined without regard to this section * * * ) is more than $50, the tax under such chapter for the taxable year 1943 shall be increased by an amount equal to 25 per centum of the tax for the taxable year 1942 (so determined) or the excess of such tax (so determined) over $50, whichever is the lesser.

The petitioner contends that the above section requires a determination of the tax for 1942 by the Commissioner; that the word ‘determined‘ as used in this section is synonymous with the word ‘assessed‘ as used in section 275(a) of the Internal Revenue Code; and that, since there was no determination or assessment of the tax for 1942 by the Commissioner within three years after the filing of the return for 1942, the Commissioner is prevented by reason of the limitation provided by section 275(a) from basing the determination of any deficiency in petitioner's return for 1943 upon any adjustment or determination of his 1942 return. Section 275(a) of the code reads as follows:

The amount of income taxes imposed by this statute shall be assessed within three years after the return was filed and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

The respondent contends that the words ‘determined‘ used in section 6(a) of the Current Tax Payment Act, supra, is limited to the technical use of that term by the Bureau of Internal Revenue and is not synonymous with ‘assessed.‘ He contends that there is no statutory limitation upon the Bureau against a determination of a tax; that the collector of internal revenue has the right at any time to determine a tax or to examine and modify a tax return properly in his possession for the purpose of computing a tax on a subsequent year; and, finally, that the provision in section 6(a) that ‘the tax imposed * * * for the taxable year 1942 shall be discharged as of September 1, 1943,‘ in effect combined the taxes for these two years into an indivisible whole, so that the period allowed the Commissioner for the assessment of the tax for 1942 was the period of three years after the filing of the tax return for 1943.

Considerable clarity can be achieved in the disposition of the question before us by keeping in mind the income tax return under consideration. It is the 1943 return.

From the effective date of the Current Tax Payment Act of 1943 the petitioner no longer possessed the right to file a petition with the Tax Court for a redetermination of the 1942 income tax liability as such. That tax liability, with the operation of the Current Tax Payment Act, became discharged as of September 1, 1943. After that date there was no longer any purpose to be served by the statute of limitations controlling the assessment of the 1943 tax because the tax liability itself for that year was wiped out. Any taxpayer aggrieved by the Commissioner's computation of the amount equal to 25 per cent of the 1942 tax liability which the law directed should be added to the 1943 tax liability, retained his remedy for any error in the 1942 computation in the filing of a petition for a redetermination of the 1943 tax. In fact, that is just what the taxpayer herein has done. The amount which the Commissioner computed to be 25 per cent of the 1942 tax became an integral part of the 1943 tax liability and when the taxpayer would procure a redetermination of the 1943 tax he had an adequate and ample remedy.

Therefore, since the taxpayer had no right to a redetermination of the 1942 tax liability and since the Commissioner, after he had determined 25 per cent of the 1942 tax liability, could do nothing more towards the collection thereof than include such an amount in his determination and assessment of the 1943 tax, then there was obviously no purpose for the Commissioner or advantage for the taxpayer in the Commissioner making any assessment of the 1942 tax, even if he were empowered so to do. Hence, we can not agree with the petitioner that the word ‘determined‘ as used in section 6(a) of the Current Tax Payment Act was synonymous with ‘assessed.‘ It follows that the limitations provided in section 275(a) of the code, controlling the assessment of the tax, can not be extended as a control over the determination of 25 per cent of the 1942 tax liability.

We are impressed with the applicability of the reasoning in Lord Forres, 25 B.T.A. 154, to the facts in the case at bar. In that case the taxpayer's 1922 return reported a substantial loss which was carried forward as a deduction from the gross income for 1923. In determining the 1923 deficiency the Commissioner adjusted the loss claimed in the 1922 return after the statute of limitations had run against any determination of deficiency for 1922. The opinion says:

We are not impressed with the argument made on behalf of petitioner Lawson that respondent's action in redetermining the net loss for the year 1922, claimed as a deduction from petitioner's income for the year 1923, results in the indirect assessment of a deficiency against him for the year 1922, now barred by the statute of limitations. The statute has not run as to 1923, and it is for that year that respondent seeks to impose a tax. In computing petitioner's taxable income for the year 1923, it is respondent's duty to consider and determine all items and elements thereof, including the net loss carried forward from the preceding year. He is not limited by the 1922 return in determining the correct amount of that loss as it may affect the...