Gooch Milling & Elevator Co. v. United States

• Decision Date: 01 June 1948
• Docket Number: No. 47004.,47004.
• Citation: 78 F. Supp. 94,111 Ct. Cl. 576
• Parties: GOOCH MILLING & ELEVATOR CO. v. UNITED STATES.
• Court: U.S. Claims Court

78 F. Supp. 94

111 Ct. Cl. 576

GOOCH MILLING & ELEVATOR CO. v. UNITED STATES.

No. 47004.

Court of Claims.

June 1, 1948.

COPYRIGHT MATERIAL OMITTED

F. W. McReynolds, of Washington, D. C., for plaintiff.

John W. Hussey, of Washington, D. C., and Sewall Key, Acting Asst. Atty. Gen. (Robert N. Anderson and Andrew D. Sharpe, both of Washington, D. C., on the brief), for defendant.

Before JONES, Chief Justice, and LITTLETON, WHITAKER, MADDEN, and HOWELL, Judges.

LITTLETON, Judge.

By order entered May 3, 1948, plaintiff's motion for a new trial was allowed and the findings of fact, conclusion of law and opinion, filed February 2, 1948, 75 F.Supp. 474 were vacated and withdrawn.

Plaintiff sues under the provisions of Section 820 of the Revenue Act of 1938, 52 Stat. 447, 581-583, § 3801, Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 3801, to recover $7,935.58, with interest, overpayment of income tax for the fiscal year ending June 30, 1935. This overpayment, which is admitted, resulted from the erroneous valuation of inventories and the resulting computation of an excessive operating profit, by reason of the inclusion by plaintiff in its inventories of wheat and flour for 1935, of certain amounts representing the value of certain quantities of wheat (apparently on "option" or "call"), to which plaintiff did not have title during such year, and the subsequent exclusion of such amounts by defendant in May 1940, when determining and computing plaintiff's income and tax liability for the fiscal year ending June 30, 1936. At that time assessments and refunds for the fiscal year 1935 and all prior fiscal years in which the same error was made, were barred by the statute of limitation. An overpayment was computed for 1935, and a deficiency was determined and collected for 1936 by reason of adjustments in income due to the corrections and adjustments made in the inventories for these years. The determination became final in 1944 when the Supreme Court affirmed the decision of the Tax Court in a proceeding involving the deficiency for 1936. Commissioner of Internal Revenue v. Gooch Milling & Elevator Co., 320 U.S. 418, 64 S.Ct. 184, 88 L.Ed. 139. Within one year thereafter plaintiff filed a claim for refund of the overpayment for 1935, under Section 820, supra.

That section is a relief provision and was enacted to relieve both taxpayers and the Government from the unjust effects, in certain cases, resulting from the correction of errors where the operation of other provisions of the revenue laws ordinarily precludes correction of tax results, through refunds or credits or collection of deficiencies, flowing from an erroneously inconsistent position previously maintained (that is, for other years) by either or both parties. So far as here material, Section 820 provides, in subsection (b), that it shall be applicable —

"When a determination under the income tax laws —

"(1) Requires the inclusion in gross income of an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer; or

"(2) Allows a deduction or credit which was erroneously allowed to the taxpayer for another taxable year or to a related taxpayer; or

"(3) Requires the exclusion from gross income of an item with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year or from the gross income of a related taxpayer; or

* * * * * *

"(5) Determines the basis of property for depletion, exhaustion, wear and tear, or obsolescence, or for gain or loss on a sale or exchange, and in respect of any transaction upon which such basis depends there was an erroneous inclusion in or omission from the gross income of, or an erroneous recognition or nonrecognition of gain or loss to, the taxpayer or any person who acquired title to such property in such transaction and from whom mediately or immediately the taxpayer derived title subsequent to such transaction —

and, on the date the determination becomes final, correction of the effect of the error is prevented by the operation (whether before, on, or after the date of enactment of this Act) of any provision of the internal-revenue laws other than this section and other than section 3229 of the Revised Statutes, as amended (relating to compromises), then the effect of the error shall be corrected by an adjustment made under this section. Such adjustment shall be made only if there is adopted in the determination a position maintained by the Commissioner (in case the amount of the adjustment would be refunded or credited in the same manner as an overpayment under subsection (c)) or by the taxpayer with respect to whom the determination is made (in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under subsection (c)), which position is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be. * * *"

Subsection (c) provides for collection of deficiencies and for refunds or credits of overpayments as follows:

"(c) Method of adjustment. The adjustment authorized in subsection (b) shall be made by assessing and collecting, or refunding or crediting, the amount thereof, to be ascertained as provided in subsection, (d), in the same manner as if it were a deficiency determined by the Commissioner with respect to the taxpayer as to whom the error was made or an overpayment claimed by such taxpayer, as the case may be, for the taxable year with respect to which the error was made, and as if on the date of the determination specified in subsection (b) one year remained before the expiration of the periods of limitation upon assessment or filing claim for refund for such taxable year.

Plaintiff's return for 1935 was investigated and audited, and a deficiency of $10,854.98 was assessed and collected April 14, 1937. The return for 1936 was also audited and a deficiency of $8,912.78 was assessed and collected December 28, 1937. In these examinations and audits plaintiff's inventories and the operating profits determined and shown in connection therewith, were not changed or adjusted. Later, during 1938, a revenue agent made a further investigation and audit in connection with plaintiff's returns, and reexamined and reaudited plaintiff's books and records and its tax returns back to July 1, 1928, the beginning of its fiscal year 1929. He found that plaintiff's inventories of wheat and flour used in the returns for the fiscal years 1929 to 1936, inclusive, for the purpose of determining the amount of taxable income, had been overvalued by reason of the erroneous inclusion in the opening and closing inventories for each year of an amount as cost or value of wheat, to which plaintiff did not have title in such year. After excluding such amounts from the cost or value of the opening and closing inventories for each year, he recomputed plaintiff's operating profit, net income and tax for each year on the basis of the corrected inventories, and, on June 3, 1939, made a report of his investigation and audit to the Commissioner of Internal Revenue. The Commissioner examined and approved the report in a final determination mailed to plaintiff on May 7, 1940, demanding payment of a further deficiency of $6,663.42 for the fiscal year 1936. This deficiency, together with interest thereon of $2,983.84, was paid March 11, 1944, after an appeal to the Tax Court.

The stipulated facts do not show the amounts of the adjustments made in the inventories and the net income for any of the fiscal years except the fiscal years ending June 30, 1935 and 1936. It is stipulated, however, that for the fiscal years 1929 to 1934, inclusive, the overpayments resulting from the decreases in net income, by reason of the adjustments in the inventories and the taxable income, exceeded the deficiencies which were produced by the increases in net income resulting from such adjustments. In other words, there was a net overpayment of tax for this period.

Where inventories are used for the purpose of determining the income of a business, the cost or value of the opening inventory of a given year is added to the total purchases and labor...