Coley v. Pickering

• Court: U.S. District Court — Southern District of Illinois
• Writing for the Court: FITZHENRY
• Citation: Coley v. Pickering, 21 F.2d 247 (S.D. Ill. 1927)
• Decision Date: 21 February 1927
• Docket Number: No. 17225.,17225.
• Parties: COLEY v. PICKERING, Collector of Internal Revenue.

21 F.2d 247 (1927)

COLEY v. PICKERING, Collector of Internal Revenue.

No. 17225.

District Court, S. D. Illinois, S. D.

February 21, 1927.

Oliver Blackinton, of St. Louis, Mo., for plaintiff.

Walter M. Provine, U. S. Atty., of Springfield, Ill., for defendant.

FITZHENRY, District Judge.

This is an action brought by the receiver and trustee in bankruptcy of the estate of the Red Bud Shoe Company, bankrupt, against John L. Pickering, collector of internal revenue for the Eighth revenue district of Illinois, to recover income and excess profit taxes alleged to have been erroneously assessed and collected for the year 1917, in the sum of $13,492.19, together with interest thereon from July 17, 1920, at the rate of 6 per cent. per annum. The cause was submitted to the court without the intervention of a jury.

During the year 1917, and for some years prior, the Red Bud Shoe Company, an Illinois corporation, was engaged in the business of manufacturing and selling shoes at Red Bud, Ill. On March 11, 1918, the corporation was adjudicated a bankrupt in the Eastern district of Illinois. W. L. Coley was appointed receiver of the company February 22, and trustee on March 11, 1918. Under the provisions of an Act of Congress of September 8, 1916, entitled "An act to increase the revenue and for other purposes," as amended (Comp. St. § 6336a et seq.), and an Act approved October 3, 1917, entitled "An act to provide revenue to defray war expenses and for other purposes" (Comp. St. § 6336 3/8a et seq.), the corporation, by its president and treasurer, on March 30, 1918, filed with the collector of internal revenue a corporation income tax return for the calendar year 1917, showing a gross income of $104,361.05, total deductions, $102,830.12, and a net income of $1,530.93. The tax shown to be due, $91.86, was paid on June 24, 1918, by the receiver. The return contained a statement to the effect that it was made on the basis of actual receipts and disbursements.

The Commissioner of Internal Revenue directed an investigation of the books and records of the corporation in May, 1918, with a view to determining the correct tax liability of the company for the calendar year 1917. Two revenue agents made an investigation, and a third made a special investigation in the case under date of February 10, 1922. The two revenue agents determined that the basis upon which the company kept its books reflected clearly the company's true gross and net incomes for the calendar year, 1917, and consequently prepared an amended income tax return, showing a gross income of $109,067.96, deductions of $93,099.03, and a net profit of $15,969.93. As a result of the investigation so made, an additional income tax of $491.19 and an excess profit tax of $6,251.37 were assessed against the company in the month of June, 1918, together with 100 per cent. penalty added to the entire income tax assessment of $583.05, and a 50 per cent. penalty added to the excess profits tax of $3,125.69, or a total tax and penalty of $10,451.30.

The tax not having been paid upon demand, there was added to this item certain penalties and interest in the sum of $3,040.89, and the total of the two amounts, namely, $13,492.19, was paid under protest, July 22, 1920, by the plaintiff to the defendant. In April, 1923, the Commissioner of Internal Revenue refunded to plaintiff the amount of the 100 per cent. and the 50 per cent. penalties, shown above, or the sum of $3,708.74, leaving a balance claimed by the plaintiff of $9,783.45, with interest on the same at 6 per cent. per annum from July 17, 1920, to August 1, 1924, together with interest on the sum of $3,708.74, previously refunded, at 6 per cent. per annum from July 17, 1920, to April 28, 1923, less an item of $221.78 — additional tax, $162.16, plus interest, $59.62 — alleged by plaintiff to be due the government in addition to the original tax of $91.86.

Plaintiff contends that the total merchandise sales, less discounts, made by the Red Bud Shoe Company in the calendar year 1917, as shown by the books, amounted to $109,461.28 ($393.32 in excess of the gross income determined by the revenue agents). Plaintiff also contends that the sum should be reduced by several items, aggregating $15,062.43, because these items were not received nor receivable in the calendar year 1917. Plaintiff also contends that the books show items aggregating $93,109.34 deductible from the gross income (a sum of $10.31 in excess of that shown by the revenue agents); also that of the amount of $98,109.54 there was unpaid within the calendar year 1917 items in the total amount of $2,944.10, and that the figure $93,109.34 should be reduced by that amount, and, taking into consideration this adjustment, the taxable net income of the company would be $4,233.61.

The items making up the $15,062.43, the amount which plaintiff wishes to have the gross income, as shown by the books, reduced, are as follows:

  1. Merchandise sold to Clark Leather
                      Company December 31, 1917 ...... $8,446.85
                  2. Iroquois Coal Mining Company ....    138.00
                  3. Schuette Bros. ..................      2.00
                  4. D. Weller .......................     65.40
                  5. Mobile & Ohio Railroad Company ..     98.70
                  6. Merchandise sold in 1917 and paid
                      in 1918 ........................  6,299.48
                

Item 1 was a conditional sale, subject to acceptance by the purchaser. The shipment which was made the last day of the year, was afterward only partially accepted; the remainder of the goods being returned. The price for those goods which were accepted was paid to the receiver.

Items 2, 3, and 4 represent alleged shipments, the receipt of which was denied by the purchasers, and the receiver was never able to trace nor to collect for them.

Item 5 represents a claim for merchandise lost in transit, which was never collected by the company.

Item 6 represents amounts received by the company in 1918 for sales of merchandise shipped in 1917, but payable in 1918. All of the items are absolute sales or conditional sales made in the year 1917, which were paid for, if at all, in 1918.

The items making up the figure $2,944.10, the amount which the plaintiff admits should be subtracted from total deductions, as shown by the books, are as follows: Findings, auto, bottom stock, repairs, light and power, miscellaneous factory expenses, office expense, and upper leather, all of which were incurred in 1917, but not paid, if paid at all, until 1918. In the stipulation of facts agreed upon in this case it is stated:

"The report and audit made by Mr. Buckingham employed by Mr. Muderig, the manager of the company, with the close of the year 1917, covering the period beginning December 7, 1916, and ending December 30, 1917, and the audit made by Mr. Jackson, representing the Internal Revenue Department, made in May, 1918, were taken from the books, and they substantially agree and they do clearly reflect what the books show."

It was contended on behalf of the government that the Red Bud Shoe Company, in keeping its books and accounts during the year 1917, accrued and set up on its books its gross income and business expenses; that deductions were taken in the year 1917, representing such expense, regardless of whether they were paid in the year 1917 or in subsequent years; that plaintiff's contention in seeking to obtain the deductions of $15,062.43 and $2,944.19 from gross income and total deductions, as shown by the books, respectively, show conclusively that the books of the Red Bud Shoe Company were kept on an accrual basis, and that therefore the plaintiff cannot now be heard to claim that it made its return on the cash receipts and disbursements basis, and should not be permitted to recover.

The issues involved in this case are:

(1) Did the Red Bud Shoe Company keep its books of account on an accrual basis, and, if so, was it compelled, under section 13 (d) of the Revenue Act of September 8, 1916, as amended in 1917, and the regulations of the bureau, to make out a return computing its taxable net income for the calendar year 1917, the gross income and deductions as shown by its books by those items of gross income and business expenses, or any part of the same, accrued and set up in its books in 1917, but alleged to have been received or paid in 1918, if received at all? And,

(2) By the acceptance of the return of the penalty collected by the Commissioner in the sum of $3,708.74 is plaintiff precluded from suing for interest on said sum?

It must be borne in mind that, under former revenue laws, for several years, the Red Bud Shoe Company had made its returns upon the actual receipts and disbursements basis, and the return here involved contains the statement that it was made on the basis of actual receipts and disbursements. Indeed, that was the only basis under the revenue laws existing prior to the act of 1916 upon which a taxpayer might make his return....