Commissioner of Internal Revenue v. Erie Forge Co.

• Decision Date: 09 March 1948
• Docket Number: No. 9177.,9177.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. ERIE FORGE CO.
• Court: U.S. Court of Appeals — Third Circuit

167 F.2d 71 (1948)

COMMISSIONER OF INTERNAL REVENUE v. ERIE FORGE CO.

No. 9177.

Circuit Court of Appeals, Third Circuit.

Argued December 17, 1946.

Decided March 9, 1948.

Rehearing Denied April 5, 1948.

Harry Marselli, of Washington, D. C. (Douglas W. McGregor, Asst. Atty. Gen. and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for appellant.

W. Pitt Gifford, of Erie, Pa. (Gifford, Graham, MacDonald & Illig, of Erie, Pa., on the brief), for appellee.

Before GOODRICH and McLAUGHLIN, Circuit Judges, and MURPHY, District Judge.

MURPHY, District Judge.

The Commissioner asks reversal of the decision of the Tax Court¹ and remand with directions to allow an amendment to his answer to claim an increased deficiency as to penalties.

The Commissioner determined a deficiency in excess profits liability for the fiscal years 1935 to 1940 inclusive on Navy contracts and sub-contracts under Section 3 of the Vinson Act,² and additions for delinquency in filing returns, and sent notice thereof to the taxpayer by registered mail.

The taxpayer petitioned the Board of Tax Appeals, now the Tax Court, for a redetermination of the deficiency. December 29, 1945, the Tax Court made findings of fact and entered an opinion and, two days later, a decision sustaining in toto the determination of the Commissioner.

Taking of testimony was concluded March 30, 1945; July 19, 1945, the taxpayer's brief filed and a copy served on the Commissioner. September 19, 1945, the day before filing his brief, the Commissioner's counsel presented a motion stating that prior to the issuance of the notice of deficiency he had assessed, and not included in the deficiency notice, penalties for the six income tax years here involved, that the amended petition asserted and the answer denied those penalties were in controversy. However, "on further consideration", the Commissioner sought to admit such controversy and asked leave under Section 272(e)³ to amend his answer to include the additional penalties, stating the proposed amendment would conform to the proof already presented, and that there was no need of submission of further proof. The motion was denied.

The Tax Court confined its decision to the issues raised by the pleadings and refused to consider and decide the issue in regard to additional penalties because in its opinion the issue had not been properly raised as required by the statute and the rules of the Tax Court, and because the facts upon which to base a decision of such an issue were not properly presented.

January 25, 1946, the Commissioner, for the same reason previously given, presented motions to vacate the decision and for a rehearing. The motions were denied.

The facts disclosed by the record will not be here considered except insofar as they are pertinent to a complete understanding of the procedural questions here presented for decision.

The findings of fact show that the Erie Forge Company, a Pennsylvania Corporation, did not file its annual reports of profits on its Vinson Act contracts and subcontracts within the time prescribed by law or prescribed by the Commissioner in pursuance of law, but on the contrary filed for the first time for the six fiscal years ending April 30, 1935 to April 30, 1940 inclusive, on April 30, 1941, with the Collector of Internal Revenue at Pittsburgh, Pennsylvania.

The returns as filed reported excess profits liability of $307,321.19, which was later assessed and paid. Thereafter the Commissioner computed an additional liability for excess profits of $68,613.60 and $17,245.22 additions for delinquency in filing the returns. Notice of the deficiency, the ninety-day letter, was mailed to the taxpayer March 31, 1943.

The taxpayer's amended petition challenged the deficiency penalty in the ninety-day letter and asserted that penalties previously assessed and notice thereof sent on September 9, 1941 by the Collector of Internal Revenue to the taxpayer ($68,517.63 penalties for delinquency in filing the returns April 30, 1941) had not been paid and were also in controversy in the redetermination proceeding, and that such original penalties were erroneously asserted.⁴ The answer admitted the original penalties were erroneously asserted and denied that they were in controversy.

In his opening statement to the Tax Court, taxpayer's counsel reiterated his position. The Court advised Commissioner's counsel as to the taxpayer's position as to the original penalties and inquired if counsel admitted controversy. The Commissioner's counsel's position was that whether the delinquency penalties were properly asserted was a question of fact upon which the Commissioner called for proof. Taxpayer's counsel suggested the question could be best handled in the briefs.

The taxpayer proved that upon receipt of the notice and demand of September 9, 1941, he was advised upon inquiry, by the Collector that it had been sent in error; that conferences were held with the Revenue Agent and explanation offered to explain the delay in filing the returns; receipt of a letter from the Revenue Agent July 14, 1942, and a report which included the penalties of September 9, 1941, and those of the deficiency notice. Further that with the exception of the deficiency notice of March 31, 1941, no other communication was received from the Commissioner. The Commissioner has not made the proposed amended answer a part of the record before us, advising that it was not available. He contends the matter can, however, be reviewed because the record "clearly shows" what the amendment proposed and the purposes for which the amendment was sought, citing Electric Management & Engineering Corp. v. United P. & L. Corp., 8 Cir., 1927, 19 F.2d 311, 316; National Bank v. Carpenter, 101 U.S. 567, 25 L.Ed. 815.

Nowhere in the record or in the brief do we find any explanation of the original position or the basis for the change in attitude of the Commissioner except that "on further consideration", apparently after reading the brief of the taxpayer, he decided the original penalties were in controversy and that he should make claim for them. His statement that the amendment conformed to the proof and that no additional proof need be offered does not meet the burden which was upon him to prove the incorrectness of the deficiency notice and the propriety of the penalties not asserted. The proof therein was to the contrary. The evidence not objected to by the Commissioner was that the notice and demand had been sent in error. The amendment offered asserted a new issue in the nature of an affirmative claim upon which the Commissioner would have the burden of proof.⁵ Further, whether the amendment did conform to the proof would be a fact question for the judgment of the Tax Court under the statute, Revenue Act of 1926, Section 1003(b), 44 Stat. 9, 110, now Internal Revenue Code, § 1141(c) (1), 26 U.S.C.A. Int.Rev.Code, § 1141(c) (1), and under the doctrine of the Dobson case, discussed infra, not for our consideration in the present state of the record. See Anthony P. Miller, Inc., v. Commissioner, 3 Cir., 1947, 164 F.2d 268.

The question for decision is, therefore, where abundant notice has been given to Commissioner's counsel that the notice of deficiency does not include penalties previously assessed and instead of moving to amend and extend his claim, he admits they were erroneously assessed and insists that the burden of proving the penalties not included were properly asserted is upon the taxpayer, did the Tax Court abuse its discretion in denying leave to amend the answer when the request is first made after the testimony has been concluded and the taxpayer's brief pointing to Commissioner's error has been served upon him, and the only reason given for the delay is that the Commissioner upon further consideration decided the original penalties were in controversy and should be included? Under similar circumstances, did the Tax Court abuse its discretion in denying the motion to vacate the decision and the motion for a rehearing?

As to the scope of review of decisions of the Tax Court, under the Revenue Act of 1926, Section 1003(b), 44 Stat. 9, 110, now Internal Revenue Code, Section 1141(c) (1), 26 U.S.C.A. Int.Rev.Code, § 1141(c) (1); Dobson v. Commissioner, 1943, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248; Trust of Bingham v. Commissioner, 1945, 325 U.S. 365, 65 S.Ct. 1232, 89 L.Ed. 1670, 163 A.L.R. 1175; John Kelley Co. v. Commissioner, 1946, 326 U.S. 521, 66 S.Ct. 299, 90 L.Ed. 278, we examine the record to determine if the decision of the Tax Court has "warrant in the record" and a reasonable basis in the law. If we find there is a "rational basis for the conclusion" approved by the Tax Court and "no clear cut mistake of law", the decision of the Tax Court must stand. Freihofer Baking Co. v. Commissioner, 3 Cir., 1945, 151 F.2d 383; Cooperstown Corp. v. Commissioner, 3 Cir., 1944, 144 F.2d 693, certiorari denied 323 U.S. 772, 65 S.Ct. 131, 89 L.Ed. 618; Supplee-Biddle Hardware Co. v. Commissioner, 3 Cir., 1944, 144 F.2d 711, at page 714. Matters of procedure are proper subject of review. Maxfield v. Commissioner, 9 Cir., 1946, 153 F.2d 325; Fisher v. Commissioner, 7 Cir., 1945, 149 F.2d 540; Fifth Avenue-Fourteenth Street Corp. v. Commissioner, 2 Cir., 1945, 147 F.2d 453.

Disposition of applications for permission to amend pleadings, motions to vacate decisions or to grant a rehearing are within the sound discretion of the Tax Court, and where the denial of such an application or motion did not amount to an abuse of discretion appellate courts will not interfere.⁶

Where the Tax Court's action works a clear injustice or is so clearly unfair or arbitrary relief may be had on review. Hormel v. Helvering, 312 U.S. 552, 557, 61 S.Ct. 719, 85 L.Ed. 1037; Chatham Phenix National Bank & Trust Co. v. Helvering, 1936, 66 App.D.C. 330, 87 F.2d 547. A review of situations which have been held to belong in this category would serve no...