Ragan-Malone Co. v. United States

• Decision Date: 07 April 1941
• Docket Number: No. M-377.,M-377.
• Parties: RAGAN-MALONE CO. v. UNITED STATES.
• Court: U.S. Claims Court

38 F. Supp. 290

93 Ct. Cl. 316

RAGAN-MALONE CO. v. UNITED STATES.

No. M-377.

Court of Claims.

April 7, 1941.

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Charles B. McInnis, of Washington, D. C. (C. Leo DeOrsey, of Washington, D. C., on the brief), for plaintiff.

J. A. Rees, of Washington, D. C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D. C., on the brief), for defendant.

Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.

MADDEN, Judge.

Plaintiff, a corporation, was assessed income and profits taxes for each of the fiscal years ending November 30, 1918, and November 30, 1919.

Of the 1918 tax $98,384.60 was paid in installments during 1919, leaving a balance of $5,930.68, of which balance $1,706.26 was paid September 28, 1926, and $4,224.42 was paid November 26, 1926.

Of the 1919 tax $44,634.47 was paid in installments during 1920, leaving a balance of $12,286.37, and this sum, together with a deficiency assessment of $11,270.97, a total of $23,557.34 was paid September 28, 1926. Plaintiff also paid on September 28, 1926, $638.61 as delinquent interest for 1918, and $4,289.18 as delinquent interest for 1919, and paid on November 26, 1926, $1,634.85 as delinquent interest for 1918.

Beginning on December 13, 1926, plaintiff filed seven separate formal claims for refund for 1918, and eight for 1919. Only three of the claims for each of these years relied upon the ground which, as is hereinafter shown, is the only ground for refund asserted in the amended petition upon which this suit is founded, viz., that certain payments to employees should have been allowed to be deducted as compensation for services, and therefore, business expenses. Two such claims, one for each of the two years, were filed on December 13, 1926, and both were rejected by the Commissioner on August 3, 1927. Two such claims, one for each of the two years, were filed on October 11, 1929. The Commissioner treated these two claims as requests for reconsideration of his former rejection of the two claims of December 13, 1926, and closed a rather lengthy letter of April 11, 1930, with the statement "In view of the above facts, it is the opinion of this office that the request for reopening * * * cannot be allowed and the applications are accordingly denied."

On October 10, 1931, plaintiff filed its original petition in this case. In that petition plaintiff recited in paragraph 2 that it had a just claim for refund of $29,488.02 paid by it in 1926 as income taxes for 1918 and 1919. It recited in paragraph 9, that it had, on September 15, 1929, filed a claim for refund of the entire amount, $29,488.02, paid by it in 1926 for the years 1918 and 1919, on the ground that the assessment and collection of these taxes had been barred by the statute of limitations. It recited in paragraph 11 of the petition that it had, on October 11, 1929, filed the claims for refund, hereinabove mentioned, for the entire sum paid in 1926 for the years 1918 and 1919, on the ground of the refusal to allow as deductions payments made to employees and claimed by plaintiff to be compensation for services.

Paragraph 14 of the original petition is as follows:

"That said sum is erroneously, illegally and wrongfully withheld from the claimant for the reason that, the aforesaid additional tax was wrongfully assessed against the claimant after the expiration of the statutory period of limitation within which such tax could lawfully be assessed; and for the further reason that, the tax paid in the year 1926 as aforesaid, was erroneously, illegally, and wrongfully collected from the claimant subsequent to the expiration of the statutory period of limitation within which such collection lawfully could be made, as provided by Sections 250 (d) of the Revenue Act of 1918 (40 Stat. 1057, 1083, c. 18), 250 (d) of the Revenue Act of 1921 (42 Stat. 227, 265, c. 136) and 277 (a) (2) of the Revenue Act of 1924 (43 Stat. 299, c. 234 26 U.S.C.A. Int.Rev. Acts, page 59); and Sections 277 (a) (3) and 1106 (a) of the Revenue Act of 1926 (44 Stat. 58, 113, c. 27 26 U.S.C.A. Int. Rev.Acts, pages 207, 318); and for the further reason that, such sum was collected under duress and without due process of law, the latter in violation of Sections 274 (a) and 283 of the Revenue Act of 1926 (44 Stat. 55, 63, c. 27 26 U.S.C.A. Int.Rev. Acts, pages 203, 216) and the Fifth (Vth) Amendment to the Constitution of these United States."

Paragraph 15, the closing paragraph, contains formal recitals and a prayer for judgment for $29,488.02.

This court referred the case to a commissioner and a hearing was held in Atlanta, Georgia, October 19-20, 1933. At this hearing much evidence was presented relating to facts bearing on the question of whether the assessment and collection of the taxes paid by plaintiff in 1926 had been barred by the statute of limitations. Plaintiff also offered evidence intended to show that the payments made to employees, disallowed as deductions by the Commissioner of Internal Revenue, were compensation for services. Defendant objected on the ground that this evidence was not relevant to the claim stated in plaintiff's petition. The commissioner of this court ruled for defendant. Plaintiff stated that it intended to amend its petition to cover this issue. Defendant claimed that the petition could not be so amended, since to do so would not be merely amending the petition but stating a new cause of action on which the statute of limitations had run. The commissioner of this court, having no power over the question of amendment, in order to save the expense and inconvenience of a further hearing admitted the proffered evidence conditionally, the evidence to be considered if the amendment was made.

Plaintiff submitted no proposed findings of fact to the commissioner of this court, and did not amend its petition until after the commissioner had, on June 16, 1936, made his report to the court. Thereafter, on April 4, 1938, plaintiff filed its amended petition in which it asserted a claim against the defendant for $8,500, stating that it had filed the claims for refund hereinbefore mentioned of December 13, 1926, October 11, 1929, and September 27, 1930; and recited the action and failure to act of the Commissioner of Internal Revenue thereon.

Paragraph 23 of the amended petition is as follows:

"That said sum is erroneously, illegally and wrongfully withheld from the plaintiff for the reason (A) that the Commissioner erroneously failed, when computing the net income of the plaintiff for each of the taxable years 1918 and 1919, to allow as a deduction, as an ordinary and necessary expense paid or incurred during the respective taxable years in carrying on its trade and business, the amounts paid pursuant to the employees' stock profit sharing contracts, designated as dividends and bonuses to such employees, representing compensation for personal services actually rendered, which are allowed by paragraph (1) of subdivision (a) of section 234 of the Revenue Act of 1918; and (B) that the Commissioner, when computing the invested capital of plaintiff for the taxable year of 1919, erroneously reflected an amount for 1918 income and profits tax greater than the correct amount thereof, and contrary to article 845 (a) of Regulations 45."

Defendant demurred to the amended petition, one of its grounds being that the court was without jurisdiction because the amended petition was filed after the statute of limitations had run.

The demurrer was, on November 14, 1938, overruled, and the matter was again referred to the same commissioner of this court who, on April 11, 1940, filed a supplemental report relating to the evidence admitted conditionally at the 1933 hearing, and to the subject of an agreed statement of facts submitted by the parties.

The questions presented in the briefs and arguments of the parties are (1) whether the statute of limitations has run against plaintiff's claim, and (2) whether or not the payments made by the plaintiff to its employees were compensation for services and therefore deductible as business expenses, or were dividends paid to those employees as stockholders.

Our disposition of the first question makes it unnecessary to discuss the second.

In our opinion plaintiff did not bring its present suit until it had filed its amended petition on April 4, 1938. Its original petition filed in 1931, while it recited in an intermediate paragraph that claims for refund had been made on the grounds now relied on by plaintiff, was specific, in paragraph 14 which we have recited, in stating the grounds upon which it claimed "that said sum is erroneously, illegally and wrongfully withheld" from the plaintiff. Neither this paragraph nor the petition as a whole contained any general language which could include the ground asserted in the amended petition and now exclusively relied on by plaintiff. See United States v. Factors & Finance Co., 288 U.S. 89, 53 S.Ct. 287, 77 L.Ed. 633.

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