Bateman v. Commissioner of Internal Revenue

• Decision Date: 17 April 1936
• Docket Number: Docket No. 47772.
• Citation: 34 BTA 351
• Parties: F. L. BATEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

34 B.T.A. 351 (1936)

F. L. BATEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 47772.

Board of Tax Appeals.

Promulgated April 17, 1936.

John E. Hughes, Esq., for the petitioner.

Harold Allen, Esq., and R. H. Transue, Esq., for the respondent.

OPINION.

McMAHON:

This is a proceeding for the redetermination of deficiencies in income tax as follows:

                      1918 ____________________________________ $20,019.98
                      1919 ____________________________________  14,911.70
                      1920 ____________________________________  26,295.02
                

It is admitted by the respondent that he erred in the computation of the deficiencies for 1918 and 1919 in crediting as taxes previously assessed and paid the amounts of $4,797.49 and $5,014.70, respectively, whereas there should have been credited the amounts of $15,520.18 and $14,563.38, respectively. Crediting such amounts to the total tax liability of petitioner as computed by respondent, the deficiencies now claimed by respondent for the years 1918 and 1919 are $9,297.29 and $5,363.02, respectively.

This proceeding was consolidated with the proceeding of William L. Taylor, Docket No. 47773, for hearing only.

In the interest of brevity we set forth the issues, make our findings of fact and render our opinion in this proceeding as to each issue separately. The statement, the order, the numbering and grouping are ours.

I.

It is alleged in the petition that the assessment and/or collection of the deficiencies herein are barred by the statute of limitations. The respondent affirmatively alleged that the petitioner executed waivers of the statute of limitations, unlimited as to time, and that therefore the assessment and collection of such deficiencies are not barred. The petitioner, in reply, admits the signing of such waivers, but denies that such waivers extend the statutory period of limitation.

Findings of Fact. — The petitioner is an individual whose address is No. 7 South Dearborn Street, Chicago, Illinois. The petitioner originated the freight forwarding business. This in general consisted of collecting and combining less than carload shipments into carload shipments so as to secure carload rates, which service substantially reduced the cost of shipping to the less than carload shippers.

For the years in question here and some years prior thereto the petitioner and W. L. Taylor were the principal stockholders and owners of the Trans-Continental Freight Co., hereinafter referred to as the Trans-Continental Co., and the Bekins Household Shipping Co., hereinafter referred to as the Bekins Co., both being corporations. During the years in question the petitioner was president of both corporations. These corporations were engaged in the freight forwarding business. The petitioner and W. L. Taylor built up this business over a period of years beginning about 1900. Prior to the time that they started this business they were in the railroad service. In May 1925 the Trans-Continental Co. sold all of its assets for a million dollars and distributed the same to its stockholders.

The petitioner filed his personal income tax returns upon the following dates:

                   For 1918 _______________________________ April 24, 1919
                       1919 _______________________________ March 13, 1920
                       1920 _______________________________ March 15, 1921
                

The Commissioner determined deficiencies in income and profits taxes against the Bekins Co. for the years 1918 and 1920 in the amounts of $2,984.32, and $2,808.24, respectively. On October 30, 1925, the Bekins Co. appealed to this Board from such determination covering the year 1918, Docket No. 8618, and on December 18, 1926, appealed to this Board from such determination covering the year 1920, Docket No. 21981. The proceedings were consolidated, hearing had, and the Board, in its report promulgated September 13, 1928, upheld the contentions of the Bekins Co., that it was entitled to personal service classification for the years 1918 and 1920 under section 200 of the Revenue Act of 1918. On January 17, 1929, in accordance with such opinion, decision of no deficiency in tax for the year 1918, and overpayment of $7,437.91 for the year 1920, was entered.

The Commissioner also determined a deficiency in income and profit taxes against the Trans-Continental Co. in the amount of $79,676.41 for the years 1917, 1918, and 1919. On October 30, 1925, the Trans-Continental Co. appealed from such determination to this Board, Docket No. 8617, alleging in substance as to the years 1918 and 1919 that the Commissioner erred in not granting personal service classification and in not exempting it from payment of income and profit taxes for the years 1918 and 1919 as provided in sections 200 and 231, Revenue Act of 1918, and in the alternative that the Commissioner erred in denying it the full benefit of the relief afforded by sections 327 and 328 of the Revenue Act of 1918 by using improper comparatives in determining the excess profits tax for 1918 and 1919. No hearing was had. Under date of October 31, 1928, the attorney for the Trans-Continental Co. entered into an agreement to stipulate in Docket Nos. 8617 and 21901 over his signature as follows:

Subject to the approval of the Commissioner of Internal Revenue the following adjustments (together with such other adjustments as arise as a proper and necessary incident thereto) are agreed to as a basis for closing the case of the above-named corporation:

1. Determine the profits tax for the year 1917 under the provisions of Section 209 of the Revenue Act of 1917.

2. Classify the corporation as a personal service corporation under the provisions of Section 200 of the Revenue Act of 1918.

All other issues raised in the appeals to the United States Board of Tax Appeals are hereby specifically waived.

It is understood and agreed that for and in consideration of the above adjustments of the corporation's income and excess profits tax returns for the years 1917 to 1920, inclusive, waivers of any and all limitations for assessment and collection of any tax which may be found due against the individual stockholders will be filed upon request.

On March 11, 1929, upon stipulation, signed by one of the attorneys of record in behalf of the Trans-Continental Co. and filed February 28, 1929, a decision of no deficiency in tax for the years 1918 and 1919 was entered by the Board. The Commissioner also determined a deficiency against the Trans-Continental Co. in income and excess profits taxes for 1920 in the amount of $47,060.02. On December 20, 1926, the Trans-Continental Co. appealed to this Board, Docket No. 21901, upon the grounds that the Commissioner erred in holding that the corporation was not entitled to personal service classification, in reducing the amount of invested capital, and in using improper comparatives in computing the taxes under sections 327 and 328 of the Revenue Act of 1918. No hearing was had. On March 11, 1929, upon stipulation signed by one of the attorneys of record on behalf of the Trans-Continental Co., a decision of no deficiency for 1920 was entered by the Board.

The petitioner, with the advice of his counsel, and the respondent duly signed an agreement (Treasury Department form 8723) under date of December 22, 1928, wherein the petitioner agreed to waive the time prescribed by law for making any assessment of the amount of taxes due under any return of the petitioner for the years 1917, 1918, and 1919:

* * * provided that such assessment shall be attributable to the allowance of a personal service classification to the Trans-Continental Freight Company, a corporation organized under the laws of Illinois, from which the undersigned received dividends or other income.

The petitioner and the respondent duly signed an agreement under date of October 15, 1925 (Treasury Department form 8728) waiving the time prescribed by law for making any assessment of the amount of taxes due under any return of the petitioner for the year 1920:

* * * provided that such assessment shall be attributable to the allowance of a personal service classification to any corporation from which the undersigned received dividends or other income.

The notice of deficiencies for the years 1918, 1919, and 1920 was mailed to the petitioner on January 7, 1930.

Opinion. — The petitioner's returns for the years 1918 and 1919 were filed on April 24, 1919, and March 13, 1920, respectively. The five-year period of limitations under the applicable statutes had expired before December 22, 1928, the date of the waiver for 1918 and 1919. Sec. 250 (d), Acts of 1918 and 1921, sec. 277 (a) (2), Act of 1924, and sec. 277 (a) (3), Act of 1926. However, it is well settled, and conceded by petitioner on brief, that ordinarily a waiver executed after the statutory period of limitations has run is valid.¹ Furthermore, this waiver was executed prior to January 1, 1929, and therefore is excepted from the provisions of section 278 (c) of the Revenue Act of 1926, as amended by section 506 of the Revenue Act of 1928,² under the provisions of subdivision (f), added to section 278 of the 1926 Act by section 506 of the 1928 Act, which provides that any agreement consenting to the assessment after the expiration of the statutory period therefor, executed after the expiration of such period "shall be valid and effective according to its terms if entered into after the enactment of the Revenue Act of 1928 May 29, 1928 and before January 1, 1929."³ The waiver for 1918 and 1919, executed after the enactment of the Revenue Act of 1928 but before January 1, 1929, is therefore not invalid on the ground that it was executed after the five-year period for assessment had expired.⁴

The petitioner contends that the waiver for 1918 and 1919 is invalid as the uncontradicted testimony of the petitioner shows that he signed the waiver under a mistake of law. The petitioner testified that he did not know that the statute of...