Leach Corporation v. Blacklidge, 44612.

• Decision Date: 07 June 1938
• Docket Number: No. 44612.,44612.
• Citation: 23 F. Supp. 622
• Parties: LEACH CORPORATION v. BLACKLIDGE.
• Court: U.S. District Court — Northern District of Illinois

23 F. Supp. 622

LEACH CORPORATION v. BLACKLIDGE.

No. 44612.

District Court, N. D. Illinois, E. D.

June 7, 1938.

Bank & Scribner, of Chicago, Ill., for plaintiff.

Michael L. Igoe, of Chicago, Ill., for defendant.

HOLLY, District Judge.

This is an action to recover the sum of $17,493.57, which, plaintiff avers, it erroneously paid as income tax for the five month period from July 19, 1929, to December 31, 1929. The tax was paid in four installments, three of $4,373.39 each, paid respectively on the 15th day of the months March, June and September, 1930, and one of $4,373.40 paid December 15, 1930.

Plaintiff avers that in its return it erroneously determined its income tax for that period upon inventory at cost basis, whereas, as a dealer in securities, it was entitled to report its income or loss on the basis of inventory at cost or market, whichever was lower. On September 17, 1931, plaintiff filed its claim for refund. On January 19, 1932, plaintiff was advised by the Commissioner that the claim for refund would be rejected, and thereafter on April 22, 1932, the claim was rejected by the Commissioner and plaintiff notified thereof. Plaintiff, however, sets forth in its complaint certain proceedings which, it asserts, amounted to a reconsideration of the claim by the Commissioner, and that said claim was not finally rejected until November 20, 1934.

Defendant in its answers denies that plaintiff is entitled to recover, denies that after April 22, 1932, the Commissioner reopened and reconsidered plaintiff's claim for refund, denies that plaintiff was a dealer in securities and asserts that the action, as to the installments paid in March and June, 1930, was not commenced within the statutory period.

The jury was waived and the cause submitted upon evidence heard by the court. Several questions are presented by the pleadings.

First, as to the timeliness of the suit with respect to payments made on March 15, and June 15, 1930, respectively. Suit was commenced July 13, 1935. Section 3226 of the Revised Statutes as amended by Section 1113(a) of the Revenue Act of 1926, 44 Stat. 116, provides that no suit for the recovery of internal revenue tax shall be begun after the expiration of five years from the date of the payment of such tax unless such suit is begun within two years after the disallowance by the Commissioner of Internal Revenue of the part of such claim to which such suit relates.

More than five years had elapsed from the dates of the payments above mentioned to the date of beginning suit. But plaintiff contends that the suit was begun within two years after the rejection of the claim for refund by the Commissioner.

To obtain a clear understanding of plaintiff's contention it will be necessary to give a history of the proceedings before the Commissioner upon plaintiff's 1930 return as well as upon the return for the year 1929.

On or about March 15, 1930, plaintiff filed its income tax return for the five months' period above mentioned disclosing a net income of $159,032.41 and an alleged tax liability of $17,493.57. On May 15, 1931, an extension of time having been secured, plaintiff filed its corporate income tax return for the calendar year, 1930, disclosing a net loss of $1,403,137.65.

In this return plaintiff based its report on an inventory of its securities at market or cost, whichever was lower, and on or about the same date it filed an amended return for the said five months' period of 1929, disclosing a net loss of $1,443,930.08. In arriving at the net loss for the year 1930 of $1,403,137.65, plaintiff deducted from gross and net income the net loss sustained by it in said 1929 period of $1,443,930.08.

On September 17, 1931, plaintiff filed a claim for refund of $17,493.57, the tax paid by it for the 1929 period. The basis of the claim was stated to be "Inventory of securities at December 31, 1939, was reported at $5,442,138.99, whereas correct inventory figure priced at lower of cost or market was $3,839,176.50. The assets as at December 31, 1929, include stocks in companies then desperate and of no value." On April 22, 1932, the Commissioner rejected the claim for refund, and plaintiff was notified thereof on that date.

On January 10, 1933, plaintiff was advised that an examination of its books for the year 1930 disclosed a proposed deficiency in tax of $39,753.37, due to disallowance from gross and net income for 1930 of plaintiff's net loss of $1,443,930.08 for the 1929 period, and disallowance of plaintiff's use of inventories for 1930 at cost or market, whichever was lower, as allowed dealers in securities, resulting in a determination of an additional income of $290,485.68.

In a letter dated April 11, 1933, plaintiff was advised that the recommendations of the Revenue Agent as contained in his report for 1930, disclosing a proposed deficiency in tax of $39,783.37, had been approved. Shortly thereafter plaintiff filed a protest against the agent's determination as approved by the Commissioner. During the latter part of April, 1933, plaintiff filed with the Commissioner a waiver, on form 872, consenting to the assessment of the income and profits for the year 1930 at any time on or prior to June 30, 1934. The consent was accepted by the Commissioner.

On May 1, 1933, plaintiff's attorney called upon "one of the Commissioner's representatives" and requested a reopening and reconsideration of plaintiff's claim for refund for the five month period of 1929 because, as stated by plaintiff, both the 1929 period and the year 1930 involved the same facts. The Commissioner's representative advised plaintiff's attorney that no formal request for consolidation would be necessary inasmuch as consideration would be given to both at the same time. On September 7, 1933, the "Commissioner's representative" advised plaintiff's counsel that as the claim for the 1929 refund had been rejected, he could not take up the claim for 1930 until the 1929 case had been disposed of. As a consequence of this statement a letter was addressed to the Commissioner by plaintiff's counsel on the same day, requesting that the claim for refund be reopened and reconsidered by the Commissioner, and that the matter be referred to a Mr. Wilson for consideration in connection with the protest filed with respect to the proposed deficiency tax of 1930. (Plaintiff's Ex. 8). On October 6, 1933, the Commissioner advised plaintiff's counsel by letter that his request for the reopening of the claim for refund would be denied, basing the refusal upon his opinion that the evidence in the record did not show that the taxpayer was a dealer in securities. (Plaintiff's Ex. 10).

On December 1, 1933, plaintiff's counsel was advised that 1929 and 1930 had been consolidated for a joint hearing before the Commissioner's representatives, Jones and Wilson, Jones being the conferee as to 1930 and Wilson as to 1929. A joint hearing was held, December 6, 1933, and plaintiff's attorney was told that the information on file was not sufficient to dispose of "the dealer" question. The next day plaintiff's attorney addressed a letter to "Mr. Ralph R. Reed, Technical Advisor, Deputy Commissioner," stating that the time for the deficiency assessment for 1930 did not expire until June, 1934, and he understood that it would be satisfactory if the whole matter could be held in status quo until evidence on the question could be collected and briefs submitted. No additional evidence was furnished and on April 14, 1934, a letter was sent to and received by plaintiff's attorney in which, after referring to the letter of September 7, above mentioned, and the conference of December 6, 1933, it was stated that, no additional evidence having been furnished, the office had concluded, after a careful review of the whole record in the case, that the action expressed in the letter of October 6, 1933, should not be modified.

From the above statement of facts it appears that plaintiff filed its claim for refund on September 7, 1931, and the claim was rejected on April 22, 1932, more than two years prior to the filing of plaintiff's suit. But plaintiff contends that the subsequent dealings amounted to a reopening and reconsideration of its...