Zuanich v. Comm'r of Internal Revenue

• Decision Date: 20 August 1981
• Docket Number: Docket No. 594-78.
• Parties: PETER ZUANICH and MARY ANN ZUANICH, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

77 T.C. 428

PETER ZUANICH and MARY ANN ZUANICH, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 594-78.

United States Tax Court

Filed August 20, 1981.

Petitioner-husband discussed with respondent's agents the availability of the foreign tax credit on account of Canadian taxes paid by a corporation of which petitioner-husband was majority shareholder. Held, the doctrine of equitable estoppel does not bar respondent from disallowing this credit ( Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957)); this credit is not allowable.

Petitioner-husband purchased and placed into service on his commercial fishing vessel a hydraulic fishing reel. He purchased the reel entirely with funds withdrawn from a capital construction fund ordinary income account which he established under the provisions of the Merchant Marine Act, 1936. Held, since the basis of the reel is zero (sec. 607(g)(2), Merchant Marine Act, 1936), petitioner-husband's “qualified investment” is zero (sec. 46(c)(1), I.R.C. 1954), and so his investment credit is zero (sec. 46(a)(1)(A), I.R.C. 1954). Peter Zuanich, pro se.

Matthew W. Stanley, for the respondent.

CHABOT , Judge:

Respondent determined a deficiency in Federal individual income tax against petitioners for 1975 in the amount of $7,736.85. The issues for decision are as follows:

(1) Whether respondent should be equitably estopped from disallowing a portion of petitioners' claimed foreign tax credit because of petitioner-husband's asserted reliance on advice understood by petitioner-husband as having been given to him by respondent's agents; and

(2) Whether “basis” for purposes of the investment credit under section 38 ¹ is greater than “basis” for depreciation and capital gain purposes, in the case of property purchased with tax-deferred funds withdrawn from petitioner-husband's capital construction fund ordinary income account established under the Merchant Marine Act, 1936.²

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.

When the petition in this case was filed, petitioners Peter Zuanich (hereinafter sometimes referred to as Zuanich) and Mary Ann Zuanich, husband and wife, resided in Bellingham, Wash.

I. Foreign Tax Credit

During 1975: Zuanich owned a majority of the stock of Armstrong Paper Products, Ltd. (hereinafter referred to as Armstrong), a corporation formed and incorporated under the laws of Canada; Armstrong had an unknown amount of income which resulted in Armstrong's tax payment to the Canadian Government in 1975 of at least $6,986.94; Zuanich received $9,966.60 in interest, $4,500 in rents, and $14,396.95 in capital gain, as to all of which tax of $5,768.90 was withheld and paid over to the Canadian Government; and Zuanich received $3,500 in director's fees from Armstrong on which no tax was paid to the Canadian Government.

At some time before the filing of petitioners' 1975 return, Zuanich spoke with several of respondent's revenue agents who worked in Bellingham, Wash., about the tax consequences of his dealings with Armstrong. Zuanich understood those people to say that he would be entitled to a foreign tax credit for the $6,986.94 in taxes paid by Armstrong to the Canadian Government. He structured his business dealings in reliance on that understanding.

On Form 1116 (Computation of Foreign Tax Credit) attached to petitioners' 1975 joint Federal individual income tax return, petitioners claimed a foreign tax credit of $12,755.84. Of this amount, respondent allowed the $5,768.90 withheld amount and disallowed the remaining $6,986.94.

II. Investment Credit

During 1975, Zuanich was active as a commercial fisherman and wastepaper dealer; he conducted these businesses under the name “Puget Sound Salvage Co.”

In 1974, as a commercial fisherman, Zuanich deposited $30,000 into a “capital construction fund ordinary income account” under section 607(e) of the Merchant Marine Act, 1936. For tax purposes, Zuanich deducted the $30,000 from his gross fishing receipts for 1974.

In 1975, Zuanich made a “qualified withdrawal”³ of $7,616.58 from the account and purchased a new hydraulic fishing reel assembly (hereinafter referred to as the reel) for his commercial fishing boat. The reel, which he placed into service in the spring of 1975, was used to retrieve a fishing net. The reel had a useful life of 7 or more years when placed into service.

Zuanich did not add the purchase price of the reel to his adjusted cost basis in his commercial fishing boat for purposes of claiming depreciation. He did claim an investment credit of $761.66 with respect to the reel; respondent disallowed this credit.

OPINION

I. Foreign Tax Credit

Petitioners have no legal right to the foreign tax credit under sections 33 ⁴ and 901⁵ on account of Armstrong's payment of the Canadian tax. Biddle v. Commissioner, 302 U.S. 573 (1938); sec. 1.901-2(a), Income Tax Regs. (26 C.F.R. sec. 4.901-2(a)(1), Temporary Income Tax Regs.). See Gleason Works v. Commissioner, 58 T.C. 464, 474 (1972).

Petitioners do not claim that they are legally entitled to the foreign tax credit under sections 33 and 901; instead, they make an equitable claim that they relied to their detriment on respondent's agents' advice and respondent should be estopped or otherwise prohibited from disallowing the claimed credit. Petitioners describe their detrimental reliance as follows:

(1) Under the advice they received from respondent's agents (that petitioners would be allowed a foreign tax credit for income tax paid to Canada by Armstrong), petitioners would have netted about $10,500 after tax from Armstrong.

(2) Because of this advice, Zuanich did not cause Armstrong to pay out its profit to Zuanich as director's fees. If Zuanich would have caused the payout, petitioners say, they would have netted about $7,000 after tax from Armstrong.

(3) Under respondent's current position, petitioners would net about $3,500 after tax from Armstrong.

Respondent argues that (1) petitioners are not entitled to the foreign tax credit under sections 33 and 901 for amounts paid by Armstrong, (2) there is a factual dispute as to what Zuanich and respondent's personnel said to each other, and (3) even had respondent's personnel given erroneous advice to Zuanich, that would not result in petitioners' being entitled to the credit.

We agree with respondent.

Firstly, petitioners have failed to prove the facts which would give rise to an estoppel. The record fails to show that Zuanich completely explained the relevant facts to the revenue agents and fails to show that they definitively advised him as to the tax consequences of structuring the transaction as he did. At most, there appears to have been a discussion and a misunderstanding. On this record, we would not invoke the doctrine of equitable estoppel, even were we allowed to do so. See Boulez v. Commissioner, 76 T.C. 209, 214-215 (1981); Underwood v. Commissioner, 63 T.C. 468 (1975), affd. 535 F.2d 309 (5th Cir. 1976); Schwartz v. Commissioner, 40 T.C. 191, 193 (1963).

Secondly, even were we able to find that respondent's agents misled Zuanich about the tax consequences of structuring the transaction as he did, we would be unable to grant petitioners the relief they ask. The doctrine of equitable estoppel does not bar respondent from correcting a mistake of law. Automobile Club of Michigan v. Commissioner, 353 U.S. 180 (1957).

Petitioners cite several cases in support of their argument that “an estoppel in fact will run against the government on tax matters.” The matter about which petitioners claim to have been misled appears to be a matter of law. The cases cited by petitioners all predate the opinion of the Supreme Court in Automobile Club of Michigan v. Commissioner, supra . These cases do not detract from the sweeping rule enunciated therein, that “The doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law”⁶ ( 353 U.S. at 183), nor from the elaboration in Dixon v. United States, 381 U.S. 68, 73 (1965), that “He may do so even where a taxpayer may have relied to his detriment on the Commissioner's mistake.”

Petitioners cite Schuster v. Commissioner, 312 F.2d 311, 316 (9th Cir. 1962), affg. in part and revg. in part 32 T.C. 998 (1959), and First Western Bank & Trust Co. v. Commissioner, 32 T.C. 1017 (1959), in conceding a point. The only aspect of Schuster which might arguably have supported petitioners' position relates to a governmental determination forcing a disinterested third party to take an irreversible action. That is not the situation in the instant case. Schuster is distinguishable. See Puls v. United States, 387 F. Supp. 760, 764 (N.D. Cal. 1974).

On this issue, we hold for respondent.

II. Investment Credit

Petitioners argue that Zuanich's investment in the reel “qualifies for the investment tax credit irrespective of the source of the funds invested.” Respondent argues that petitioners are entitled to no investment credit because Zuanich made no “qualified investment” in the reel, since all the funds used to purchase the reel were withdrawn tax free from Zuanich's ordinary income account under the Merchant Marine Act, 1936.

We agree with respondent.

Under section 607(g)(2) of the Merchant Marine Act, 1936 (46 U.S.C. 1177(g)(2)),⁷ Zuanich's basis in the reel is reduced to the extent that the reel was purchased with funds he withdrew tax free from his capital construction fund ordinary income account (hereinafter referred to as ordinary income account).⁸ In this case, the investment credit is 10 percent of Zuanich's basis in the reel. Since all the funds Zuanich used to buy the reel had been withdrawn by him tax free from his ordinary income account, his basis in the reel is zero. Consequently, his investment credit is zero.

We have found no evidence that the Congress focused specifically on the interrelationships...