Blenheim Co. v. Commissioner of Internal Revenue, No. 4830.

• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)
• Writing for the Court: PARKER, SOPER, and DOBIE, Circuit
• Citation: 125 F.2d 906
• Parties: BLENHEIM CO., Ltd., v. COMMISSIONER OF INTERNAL REVENUE.
• Docket Number: No. 4830.
• Decision Date: 25 February 1942

125 F.2d 906 (1942)

BLENHEIM CO., Ltd.,
v.
COMMISSIONER OF INTERNAL REVENUE.

No. 4830.

Circuit Court of Appeals, Fourth Circuit.

February 25, 1942.

125 F.2d 907

Richard H. Wilmer, of New York City (Joseph C. White and Thomas F. Boyle, both of New York City, on the brief), for petitioner.

Hubert L. Will, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

DOBIE, Circuit Judge:

This is a petition for the review of a decision of the United States Board of Tax Appeals determining a deficiency in petitioner's income tax liability for the calendar year 1934 in the sum of $1,691.77, and a penalty in the sum of $422.94. The decision of the Board is reported in 1940, 42 B.T.A. 1248.

Petitioner is a foreign corporation organized under the laws of the Colony of Newfoundland. On June 15, 1935, it filed a personal holding company surtax return on Form 1120H, for the calendar year 1934, with the Commissioner of Internal Revenue, at Baltimore, Maryland. This return showed the following items:

 1. Net income (as defined in
                 Title I of the Revenue
                 Act of 1934) ............... $( 1,445.37)
                 2. Dividends on stock of
                 domestic corporations
                 subject to taxation under
                 Title I of the Revenue
                 Act of 1934
                 (from Schedule A) .......... 11,626.12
                 ____________
                 3. Total of Items 1 and 2 ...... $ 10,180.75
                 Less
                 6. Losses from sale or exchange
                 of capital assets
                 (disallowed by section
                 117(d) of the Revenue
                 Act of 1934) ............... $ 144,594.24
                 ____________
                 8. Total of Items 4 to 7 ....... $ 144,594.24
                 9. Adjusted Net Income
                 (Item 3 minus Item 8) $(134,413.49)
                

Thereafter, the Commissioner sent numerous letters to the petitioner and to its representatives both in the United States and in Canada, requesting that a normal income tax return (Form 1120) be prepared and filed, from which the total net income figure of $1,445.37 reported in the surtax return could be independently computed by the Commissioner. Harold P. Cornell was the petitioner's secretary resident in the United States. It was his duty to prepare and file Federal income tax returns on petitioner's behalf, and he did prepare and filed the above mentioned Form 1120H. However, he believed that no normal tax return on Form 1120 was required under the Internal Revenue Laws, because he thought Form 1120H contained all the information which would have been set forth on Form 1120, and because he also thought that the return on Form 1120 would show that petitioner did not have any net income subject to tax for the calendar year 1934.

For these reasons, Cornell did not file a timely return on Form 1120. However, it is not without note that Cornell had prepared other returns for domestic corporate taxpayers on Form 1120 for 1934, even though he had not prepared any such returns for a foreign corporation for that year. Moreover, he had prepared Form 1120 returns for foreign and domestic corporations for years prior to 1934, including returns for the petitioner.

After having received no response whatever to his numerous letters, the Commissioner

125 F.2d 908

of Internal Revenue, on April 28, 1938, prepared a normal tax return on Form 1120 for the petitioner. This was done pursuant to the authority granted in section 3176 of the Revised Statutes, as amended 26 U.S.C.A. Int.Rev.Code § 3612. The return showed gross income of $11,626.12, consisting of dividends on stock of domestic corporations subject to taxation under Title I of the Internal Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 664 et seq., no deductions, net income of $11,626.12, and a tax due of $1,598.59. A notice of this deficiency was duly mailed to petitioner on May 18, 1938

The petitioner prepared and filed a normal tax return on Form 1120 for 1934 on August 9, 1938, at which time it did not know that the Commissioner had filed a return for it under § 3176 of the Revised Statutes. We pause to note that the return was filed four years after the date on which the return was due. In any event, the return was filled out in full in the usual fashion and showed a deficiency in income of $1,445.37, and no tax due. The attached schedules contained breakdowns of dividends and interest, petitioner's securities transactions, and other detailed information.

The items of gross income received by petitioner from sources within the United States were as follows: dividends received from domestic corporations, $11,626.12; and gain derived from the sale of 2,500 shares of Pacific Gas & Electric Company common stock, $677.65. During the calendar year 1934, petitioner sustained losses on sales of securities which were capital assets within the meaning of Section 117(b) of the Internal Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, page 707, in the amount of $167,437.18. Petitioner's ordinary and necessary expenses incurred in connection with earning income from sources within the United States during the calendar year 1934 totaled $1,283.77.

The Board of Tax Appeals held that petitioner's failure to file its normal income tax return (Form 1120) until after the Commissioner had filed a return for it under the authorization of section 3176 of the Revised Statutes, deprived petitioner of any deductions it might ordinarily be entitled to claim in the computation of its normal income tax; and that the 25% penalty imposed by section 291 of the Internal Revenue Act of 1934, 26 U.S.C.A. Int.Rev. Acts, page 750, for a late filing was also applicable.

Accordingly, and pursuant to a computation by the Commissioner of Internal Revenue which was accepted by petitioner, the Board of Tax Appeals found (1) a deficiency in income tax for the year 1934 in the sum of $1,691.77; (2) a penalty thereon in the sum of $422.94 and (3) no deficiency in personal holding company surtax for the year 1934.

Petitioner has duly appealed from the first two determinations of the Board. We are of the opinion that the Board was correct in each instance.

Petitioner is a foreign corporation and therefore subject to the special provisions of the Internal Revenue Act of 1934 applicable to such corporations. Of particular significance is section 233 of that Act which conditions the legislative grant of deductions and provides:

"Allowance of deductions and credits

"A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this title chapter only by filing or causing to be filed with the collector a true and accurate return of its total income received from all sources in the United States, in the manner prescribed in this title chapter; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits." (Italics ours.)

26 U.S.C.A. Int.Rev.Code, § 233.

It is true that this section contains no reference to a time element. Nevertheless, we feel that the so-called normal tax return filed by petitioner on Form 1120 was not a sufficient or timely compliance with Section 233 to entitle the petitioner to the deductions claimed therein. See, decided by this Court, Boone County Coal Corporation v. United States, 4 Cir., 1941, 121 F.2d 988.

Let us review the chronology and effect of petitioner's acts. On June 15, 1935, petitioner filed its personal holding company surtax return on Form 1120H. Examination of this return reveals that the first figure there reported is "Net income (as defined in Title I of the Revenue Act of 1934)", which is the last or final figure on the regular corporate income and excess profits tax return, Form 1120. Since dividends from domestic corporations were subject to surtax, although not subject to

125 F.2d 909

normal tax, the second income figure called for in the surtax return is the total of such dividends

In petitioner's Form 1120H return, its net income was stated to be a red figure of $1,445.37. The Commissioner was, consequently, without any information as to the manner in which this amount was computed since the petitioner had not...