Edwards v. Malley

• Decision Date: 07 February 1940
• Docket Number: No. 3397-3400.,3397-3400.
• Citation: 109 F.2d 640
• Parties: EDWARDS v. MALLEY, former Collector, and three other cases.
• Court: U.S. Court of Appeals — First Circuit

109 F.2d 640 (1940)

EDWARDS v. MALLEY, former Collector, and three other cases.

Nos. 3397-3400.

Circuit Court of Appeals, First Circuit.

February 7, 1940.

Claude R. Branch, of Boston, Mass. (Edmund S. Kochersperger, of Washington, D. C., and Charles Ryan, of Boston, Mass., on the brief), for appellants.

Wm. B. Waldo, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Norman D. Keller, Sp. Assts. to Atty. Gen., and Edmund J. Brandon, U. S. Atty., and C. Keefe Hurley, Asst. U. S. Atty., both of Boston, Mass., on the brief), for appellee.

Before WILSON and MAGRUDER, Circuit Judges, and McLELLAN, District Judge.

MAGRUDER, Circuit Judge.

These suits were begun at various times in 1935 and 1936 to recover alleged overpayments of individual income taxes for the year 1917, resulting from the failure of defendant to credit against the net income of each of four partners his proportionate share of the excess profits tax imposed upon the partnership for that year (Section 1211, Revenue Act of 1917, 40 Stat. 337). On the face of it, this lapse of time would be expected to put some strain on the statute of limitations. We hold, with the District Judge, that the strain is more than the statute will bear.

By stipulation the cases were consolidated for trial, which was had before Sweeney, J., without a jury; and in each case judgment was entered for defendant. For the sake of simplicity we shall refer only to the facts in No. 3397, the separate cases containing no significant variation of facts.

On June 12, 1918, Francis Willey & Company, a partnership composed of Harold S. Edwards, F. Vernon Willey, Francis Willey, and John Wilcock, paid its excess profits tax for the calendar year 1917, in the sum of $737,251.75. On June 6, 1918, Harold S. Edwards paid his individual income tax for the year 1917 in the sum of $79,651.80. The partnership income return for 1917 gave $220,283.45 as the distributive share of each partner in the firm net income. This figure was arrived at by deducting from the firm net income the excess profits tax payable for that year and prorating the balance equally among the partners. Edwards carried over into his individual income tax return the figure of $220,283.45 as his share of the firm income. But it is to be noted that on this return Edwards did not also deduct from his individual net income his share of the partnership excess profits tax. Not until 1929 did Edwards claim to be entitled to the benefit of this double deduction.

After filing his income tax return for 1918, Edwards filed an amended 1917 return, and a claim for credit which he asked to be applied on his unpaid assessment for the year 1918. This claim for credit stated:

"The amount of overpayment of $12,902.50 is shown by the amended return I have filed for the calendar year 1917. The amount of interest I received on my share of capital in Francis Willey & Co. was included twice in the original return. The amended return makes the proper correction and shows that I made an overpayment in 1918 for the return of the calendar year 1917 of the above amount mentioned $12,902.50."

The claim of duplication as to interest was meritorious. Before the determination of the equal shares of the four partners in the partnership income a deduction should have been made for an item of over $100,000 for interest paid in various amounts to the partners on their respective capital contributions. The returns disclose that this was not done; and that at the same time each partner charged himself with an additional item of income denominated "interest" received by him on account of his capital contribution to the firm.

Meanwhile, the partnership in May, 1918, filed an amended excess profits tax return for 1917 and in November, 1920, a large additional excess profits tax was assessed against it for the year 1917. The partnership thereupon, on January 13, 1921, filed a claim for abatement on the ground that certain salary deductions had been erroneously disallowed by the Commissioner. The amount of the partnership net income for 1917, and of its excess profits tax due thereon, was thus thrown open for recalculation, which would call for reciprocal corrections on the individual returns of the partners in respect of their distributive shares of the partnership income. Accordingly, Edwards on December 12, 1922, filed a timely claim for refund, from which the following is quoted:

"Harold S. Edwards, the above named taxpayer, was a member of the copartnership of Francis Willey & Company during the taxable year 1917, and filed a return which included his share of the partnership profits for that year.

"The Department, through Revenue Agent Costello, in the year 1920 examined the partnership returns and filed a report with the Commissioner in Washington on the result of his examination. The Revenue Agent's report was audited in Washington and certain controversies have arisen between the partnership and the government relative to the amount of the net income of the partnership and the amount of the excess profits tax.

"Until these controversies are determined, it is impossible for said Harold S. Edwards to determine the exact amount of over-payment of the 1917 tax which he believes has been made. In order, however, to preserve his rights and secure the benefits granted to him by Sections 252 and 1318 of the Revenue Act of 1921, this claim for refund is filed and claim is made for the refund of the entire amount of the tax paid for the calendar year 1917.

"It is respectfully submitted that no action should be taken on this claim until the Department has determined the excess profits tax of Francis Willey & Company, for the reason that Harold S. Edward's share of the partnership profit is directly dependent upon the determination of the excess profits tax of the partnership."

Though this claim for refund is now described by counsel for the taxpayer as "general and protective", it is clear that the legal basis for the claim is very specific. The partnership was facing an additional assessment for excess profits taxes; whatever that additional assessment might prove to be would presumably be excluded from the partnership income distributable to the partners (as had been done on the original return); hence Edwards asks that his claim for refund remain in abeyance until the partnership excess profits tax had been determined, for his "share of the partnership profit is directly dependent upon the determination of the excess profits tax of the partnership." No intimation was conveyed that Edwards was entitled to the benefit of a double deduction on account of this item.

Thus, at this time Edwards had two claims pending — one in form a claim for credit and the other in form a claim for refund — but both claims asked for adjustment of the same item, the distributive share of Edwards in the partnership net income.

On March 6, 1923, the Internal Revenue Agent at Boston sent to the partnership a copy of a report dated January 6, 1923, dealing with the partnership's tax liability. This report recomputed the excess profits tax for 1917 in the sum of $734,703.02, which was $2,548.73 less than the original assessment. Also, the report recomputed the partnership's net income at $4,247.87 less than the original figure. Schedule 3-a of the report makes the reciprocal corrections in the distributive shares of the partners called for by these minor alterations in the partnership figures. The same agent on March 6, 1923, also sent to Edwards a copy of a report dated January 9, 1923, explaining adjustments recommended to the Commissioner in respect to the individual income tax liability of Edwards. The biggest item was a reduction of $28,861.47 in his distributive share of the partnership income, which reduction, the report said, "results from the adjustments made by the Department and examining officer to the net income and to the excess profits tax of the partnership. See Schedule 3a of the report of Francis Willey & Co. dated Jan. 6, 1923." Referring again to that Schedule 3-a of the report sent to the partnership, it appears that $28,436.69 of this reduction was attributable to the deduction from the partnership income (before calculating the equal distributive shares of the partners therein) of an item of $113,746.75, representing interest paid on the capital contributions of the partners. The overassessment of the income tax of Edwards for 1917 was fixed at $11,783.58.

The Acting Deputy Commissioner of Internal Revenue wrote to Edwards on July 16, 1923, as follows:

"Sir: Your claim for the credit of $12,902.50, individual income tax for the year ended December 31, 1917, to be applied against an unpaid assessment for 1918, has been examined.

"On the basis of evidence now before the Bureau, as disclosed by the report of the Internal Revenue Agent in Charge at Boston, Massachusetts, dated March 6, 1923, your correct tax liability for the year 1917 is found to be $67,868.22, and as $79,651.80 has been assessed, there has been an overassessment of $11,783.58.

"The claim will, therefore, be rejected for $1,118.92.

"The Collector of Internal Revenue for your District will be officially notified of the adjustment at the expiration of thirty days from the date of this letter, unless prior to that date evidence is furnished showing the adjustment is incorrect.

"Under no circumstances should payment of the amount rejected be made until a bill is received from the Collector of Internal Revenue for your district and remittance should then be made to him."

Subsequently, the Commissioner signed a Schedule of Overassessment in the amount of $11,783.58 authorizing the Collector to make the adjustment, and a Certificate of Overassessment under the name of the Deputy Commissioner was delivered to Edwards. This certificate states that "the report of the Internal Revenue Agent in Charge at Boston, Massachusetts, dated March 6, 1923, has been...