United States v. Tillinghast

• Decision Date: 14 March 1934
• Docket Number: No. 2775.,2775.
• Citation: 69 F.2d 718
• Parties: UNITED STATES v. TILLINGHAST et al.
• Court: U.S. Court of Appeals — First Circuit

69 F.2d 718 (1934)

UNITED STATES v. TILLINGHAST et al.

No. 2775.

Circuit Court of Appeals, First Circuit.

March 14, 1934.

Helen R. Carloss, Sp. Asst. to Atty. Gen. (Sewall Key, J. Louis Monarch, and Frederick W. Dewart, Sp. Assts. to Atty. Gen., and Henry M. Boss, Jr., U. S. Atty., of Providence, R. I., on the brief), for the United States.

Frederick W. Tillinghast and Robert B. Dresser, both of Providence, R. I. (Robert E. Jacobson, Roger T. Clapp, Ronald B. Smith, Hinckley, Allen, Tillinghast, Phillips & Wheeler, and Edwards & Angell, all of Providence, R. I., on the brief), for appellees.

Before WILSON, and MORTON, Circuit Judges, and MORRIS, District Judge.

MORTON, Circuit Judge.

This is a bill in equity brought by the United States against individual defendants to recover excess profits taxes assessed for 1917 against the Crefeld Company, a corporation which was liquidated and all its assets distributed, before the end of 1918, and which was legally dissolved in November, 1923. The defendants were shareholders in the corporation and as such received proportionate parts of the distributed assets. The present suit is, in effect, one to collect a tax by following these assets into the hands of the distributees. In the District Court the bill was dismissed on final hearing, and the government has appealed. The complicated facts are, except on one important point, not in dispute.

The Crefeld Company was a Rhode Island corporation which dealt in cotton and woolen wastes. In 1905, presumably for the purpose of extending its business in the Southern States, it caused the South Atlantic Waste Company to be organized under the laws of North Carolina. The new company issued at par ($100) 1,000 shares of its capital stock, of which the Crefeld Company took 788 shares, paying therefor $78,800. The remaining 212 shares were taken and paid for by other persons. From time to time the Crefeld Company made loans to the South Atlantic Company; and in 1911 these loans for which the Crefeld Company held the South Atlantic Company's notes aggregated about $365,000.

In May of that year it was arranged that, of the 212 outside shares all but 5 or 6 should be turned over to the Crefeld Company, thereby making it the sole stockholder, practically speaking, in the South Atlantic Company; and that the Crefeld Company would cancel the notes which it held against the other company. This arrangement was carried out; the South Atlantic Company stock was turned over to the Crefeld Company, except a few qualifying shares for officers, and the Crefeld Company surrendered to the South Atlantic Company the notes referred to. In its income return for the year 1911, under the corporation excise tax law then in force, the Crefeld Company charged off this $365,000 as a loss.

Some six years later, in 1917, the Commissioner on examination of the Crefeld Company's return for 1911, disallowed this item as a loss and, by reason of such disallowance, imposed an additional excise tax which was duly paid by the Crefeld Company. Following this action by the Commissioner, the Crefeld Company amended its books of account and re-credited itself with these notes as an asset; and it brought action on them against the South Atlantic Company in the Rhode Island courts. In that action judgment was entered for the defendant on the ground that the notes were barred by the statute of limitations. At the end of 1917 following this decision, the Crefeld Company again charged off these notes as a loss occurring during that year.

During 1917 and 1918 the Crefeld Company was being liquidated; and in December, 1917, it sold all its stock in the South Atlantic Company, i. e., practically the entire stock of that corporation, for $49,700, or at the rate of $50 per share. In making up its income tax return for 1917, the Crefeld Company deducted its losses on the South Atlantic Company investment. This deduction overbalanced all gains and profits, and the return showed a substantial loss for the year. No income tax, therefore, appeared to be due, and none was paid.

The income tax return which the Crefeld Company made for 1917, and duly filed in March, 1918, was on the regular government form 1031. It was full and accurate. The government concedes that no fraud is involved. The return stated and claimed the loss on the South Atlantic Company investment. As no profit was shown, no excess profits tax return on form 1103 was understood to be called for; and none was filed. There the matter lay for nearly five years.

In March, 1923, the Commissioner, on review and audit of the Crefeld Company's 1917 return, found that the company was not entitled to so large a deduction as it had taken on account of its loss on the South Atlantic Company transactions; and he cut down this deduction to about $35,000. This change resulted in setting up a large net income in place of the loss which had been returned. The income thus set up was subject to excess profits taxes. Such taxes were thereupon assessed against it in March, 1923, in the amount of $118,773. At that time, as has been said, the Crefeld Company had been completely liquidated and the last of its assets distributed, for more than four years. Some two years more went by with no other action by the government in the matter; then in 1925 a suit like the present one was brought by the government against the present defendants or their predecessors in interest, to collect the assessment from the distributees. In the meantime the distributees had included the sums received by them in their individual income tax returns; and some of them showed in the present case that they had been assessed and had paid taxes on their parts of the sums so received; and that their applications for refund had been denied. The suit brought in 1925 was dismissed for lack of prosecution in November, 1928. In February, 1929, the present suit was brought; it is substantially like the one which was dismissed.

The question naturally suggests itself how can the government sue in 1929 for a 1917 tax which would ordinarily have become outlawed in 1923? The answer made by counsel for the government is that there is no statute of limitations on this tax, because no excess profits tax return was filed by the Crefeld Company for 1917 and, by the terms of the statute, where no return was filed there is no limitation of time on the government's right to sue. The defendants contend that the Crefeld Company's return for 1917 was correct and met all legal requirements, that the change in the return made by the Commissioner was unjustified, and that the statute has run.

The statutory provisions as to such tax returns were that each corporation should "render a true and accurate return of its annual net income in the manner and form to be prescribed by the commissioner * * * and containing such facts, data, and information as are appropriate and in the opinion of the commissioner necessary to determine the correctness of the net income returned and to carry out the provisions of this title." Revenue Act 1916, § 13 (b) (39 Stat. 771), incorporated by reference into Revenue Act of 1917, § 212 (40 Stat. 307). The basic provision creating the excess profits tax reads as follows: "That in addition to the taxes under existing law and under this act there shall be levied, assessed, collected, and paid for each taxable year upon the income of every corporation * * * a tax * * * equal to the following percentages of the net income." Revenue Act 1917, § 201 (40 Stat. 303). This provision was apparently copied, mutatis mutandis, from that imposing the surtax. See Revenue Act of Sept. 8, 1916, § 1 (b), 39 Stat. 756. With regard to the excess profits tax, the Commissioner of Internal Revenue said: "It is an income tax in addition to the regular income tax of September 8, 1916, as amended, and the war income tax of October 3, 1917. It is more than a tax on `war profits'; it reaches all income in excess of a stipulated normal deduction." Corporation Trust Co., 1918 War Tax Service, Excess Profits Tax Letters, p. 1.

What returns were required under the excess profits tax was for the Commissioner to determine by regulations duly made. The regulations made under this statute were that: "Every domestic corporation which has for the taxable year a net income of $3,000 or more is * * * required to make a return and to pay the tax as named." Regulations 41, art. 10, relative to excess profits tax. "The net income of a corporation for the taxable year shall be determined by adding (1) the amount of the net income ascertained and returned (italics supplied) for income tax purposes," etc. Excess Profits Tax Regulations, art. 28. As to form 1103, the absence of which is said to make this a "no-return" case, to which the statute of limitations does not apply, the regulations provided and the form stated as follows: "Who must make a return on form 1103. — Every corporation having for the taxable year a net income of $3,000 or more (see form 1031) must make a return on this form" (1103), etc. (Italics supplied.) The first item on 1103 is: "(1) Net income taxable for year shown in item 8 form 1031."

Counsel for the government urge that, though no net income was shown on form 1031, but on the contrary a net loss, it was still the duty of the Crefeld Company under the statute and regulations to fill out and file form 1103; that if it failed to do so, it took the risk of finding itself in a "no-return" position on the excess profits tax, in case the Commissioner should amend the income tax return so as to show a taxable profit.

As has been said, the duty to make returns is defined by the regulations; and the question presented depends, in the first instance at least, on the correct interpretation of the regulations above referred. Speaking with reference to cases like the present one, not involving fraud, it seems to us very clear that the intention of the regulations was that only...