Steele v. Commissioner , 34 B.T.A. 173 ( 1936 )

ESTATE OF WILLIAM STEELE, JOSEPH M. STEELE, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Steele v. Commissioner

Docket No. 73347.

United States Board of Tax Appeals

34 B.T.A. 173; 1936 BTA LEXIS 741;

March 20, 1936, Promulgated

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Taxpayer is not estopped to deny liability in 1931 on income realized in 1923 where a representative of the respondent was fully apprised of the facts and both the taxpayer and respondent's representative relied on a ruling of the respondent's office to the effect that the transaction resulted in no income in 1923.

A. E. James, Esq., and D. Hays Solis-Cohen, Esq., for the petitioner.

Isador Graff, Esq., for the respondent.

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ARUNDELL

This proceeding is for the redetermination of a deficiency of $3,130 in income tax for the year 1931. The sole issue is whether the tax payer, who failed to pay income tax in 1923 on profits from a sale because under an innocent mistake of law he believed the transaction not to be a closed transaction at that time, is now estopped from setting up the correct view of law, namely, that it was a closed transaction and taxable in 1923, with the result that a payment received in 1931 escapes taxation altogether since the statute of limitations has run against assessment for 1923.

FINDINGS OF FACT.

Petitioner was the owner of an undivided one-half interest in the premises 712-14 Market Street, Philadelphia, Pennsylvania, which were sold on February 5, 1923, to Stern & Co., a Pennsylvania corporation. The property on that date had a basis to the coowners of $517,933.34 ($580,000, March 1, 1913, value, less accrued depreciation of $62,066.66). The sale price was $825,000, with expenses incidental to the amounting to $21,451.25, so that a profit of $285,615.41 resulted from the transaction. The terms of the sale were $225,000 cash and $600,000 to be paid by February 10, 1928. This $600,000 was to be in extinguishment or redemption of a ground rent of $28,500 reserved for each of the first two years and $31,500 annually thereafter, and the terms of the sale allowed partial payments of the redemption money at any time before February 10, 1928, in multiples of $50,000. The ground rent had a readily realizable market value in 1923 of $550,000. Payments in partial extinguishment of ground rent were made by Stern & Co., as follows: $300,000 in 1928; $150,000 in 1930; and $75,000 in 1931.

Petitioner included no capital gain from the transaction in its income tax return for 1923. Its books were examined in January 1927 by a revenue agent who proposed to treat the transaction as closed and taxalbe in 1923. At the time of the examination, petitioner's representative cited to the revenue agent O.D. 1089, 5 C.B. 98 (promulgated in 1921), which is to the effect that a sale with reservation of ground rent is not closed and does not result in gain or loss until the ground rents are extinguished. The revenue agent filed a report proposing to treat the transaction as closed in 1923 and resulting in a gain in that year. The petitioner in March 1927 filed with the revenue agent in charge at Philadelphia, a written protest against the proposed assessmentt, again citing O.D. 1089, supra, and requesting a conference. A conference was held in the office of the internal revenue agent in charge in Philadelphia, as a result of which it was decided by the conferees in the revenue agent's office that, based on O.D. 1089, the sale was not a closed transaction in 1923 and that no taxable income had been realized. A supplemental report to that effect was acquiesced in by the respondent. A copy of the supplemental report was furnished to the petitioner's counsel by letter of transmittal dated June 16, 1927.

In April 1930, this Board held in a Pennsylvania ground rent case that a sale like the present one was closed and the entire profit taxable in the year the deed was given and possession taken by the purchaser, the ground rent reserved having a fair market value. Pennsylvania Co. for Insurances on Lives & Granting Annuities,19 B.T.A. 699">19 B.T.A. 699. This was affirmed by the Third Circuit Court of Appeals on September 15, 1931, 52 Fed.(2d) 601. By 1930 the statute of limitations had run on the 1923 sale involved in the case at bar.

The respondent has included in petitioner's income for 1931 its one half of the $75,000 payment made by the purchaser in that year.

OPINION.

ARUNDELL: The question here is whether the petitioner's share of the payment of $75,000 in 1931 in partial extinguishment of ground rent reserved in the sale in 1923 is taxable as income in 1931. The Commissioner apparently concedes that the payment is not income in 1931 under the governing revenue act (Revenue Act of 1928) and the decision in Pennsylvania Co. for Insurances on Lives & Granting Annuities, supra, but sets up as an affirmative defense that the taxpayer is estopped to deny a present liability by reason of its failure to pay the tax on the profit when realized in 1923 and by its implied agreement to pay the tax at some later date. The Commissioner does not make it clear what later date was contemplated but evidently he expected the tax to be paid in the years of receipt of payments in excess of the basis.

Under Treasury Regulations 62, articles 44, 46, and 1564, in force in 1923, and the Pennsylvania Co. case, supra, the entire profits of the sale were properly taxable in 1923 since the deferred payments for ground rent extinguishment had a readily realizable market value. However, at the time the Commissioner and taxpayer were negotiating about the matter in 1927, the Pennsylvania Co. case had not yet been decided and both the Commissioner and the taxpayer relied on O.D. 1089, 5 C.B. 98, as a correct interpretation of the law. It held that a sale reserving ground rents was not a closed transaction and no profit was realized thereon until the ground rents were extinguished. On this basis, the parties agreed that the sale was not taxable in 1923 and no deficiency was assessed. By the time the Pennsylvania Co. case finally determined the question to the contrary in 1930, the statute of limitations had run against any assessment for 1923. The Commissioner appeals to "broad principles of equity and fair dealing" to set up an estoppel against the taxpayer, alleging that the taxpayer induced him to refrain from an assessment in 1923 and impliedly agreed to pay the tax later when it should become due under the law as they then understood it.

We have found no misrepresentation whatever as to the facts of the transaction. The Commissioner was in possession of all the facts regarding it. The taxpayer invoked the Commissioner's own interpretation of the law and the Commissioner, believing it to be a correct interpretation, made no assessment for the year 1923. We have heretofore held that no estoppel can be predicated on a mistake of law in the absence of some misrepresentation of fact. Sugar Creek Coal Mining Co.,31 B.T.A. 344">31 B.T.A. 344; Tide Water Oil Co.,29 B.T.A. 1208">29 B.T.A. 1208; U.S. Trust Co. of New York,13 B.T.A. 1074">13 B.T.A. 1074. This rule has found support in United States v. Scott & Sons, 69 Fed.(2d) 728, and the dicata of the Second Circuit and the Supreme Court in the recent case of Salvage v. Commissioner, 76 Fed.(2d) 112; 297 U.S. 106">297 U.S. 106. The rationale of the rule is that everyone being presumed to know the law, the Commissioner is not justified in relying upon the taxpayer's interpretation thereof, and reliance is an essential element of estoppel. The Commissioner is duty bound to think and act for himself and make his own interpretations of the law. Tide Water Oil Co., supra.

The record discloses no agreement or understanding either expressed or implied in fact that petitioner would pay the tax in a later year if petitioner's interpretation of the law should ultimately prove erroneous - that eventuality was apparently not in the minds of the parties; both considered the Commissioner's interpretation correct. The taxpayer expected to obey the law if it remained unchanged but made no agreement to be bound by the current ruling if overruled by later authority. We see no justification for implying any such agreement as a matter of law. If the law were changed by act of Congress, the taxpayer would certainly be relieved of any obligation of following the former law. The result should be the same upon change of interpretation by judicial decision.

We have frequently pointed out that each year stands on a separate basis in the tax law and that an error made in computation of the tax for one year can not be corrected by making an erroneous computation under the law of a later year. Union Metal Manufacturing Co.,1 B.T.A. 395">1 B.T.A. 395; MacMillan Co.,4 B.T.A. 251">4 B.T.A. 251; Cooper-Brannan Naval Stores Co.,9 B.T.A. 105">9 B.T.A. 105; Bank of Commerce,10 B.T.A. 73">10 B.T.A. 73; Houston Baseball Association,24 B.T.A. 69">24 B.T.A. 69; Virginia-Lincoln Furniture Corporation v. Commissioner, 56 Fed.(2d) 1028.

We have been referred to no case where estoppel was founded on mutual mistake of law alone. In the cases which we have examined there were either representations of fact made to the Commissioner, on which he relied, Stearns v. United States,291 U.S. 54">291 U.S. 54; Ralston Purina Co. v. United States, 58 Fed.(2d) 1065; Naumkeag Steam Cotton Co. v. United States,2 Fed.Supp. 126; Mahoning Investment Co. v. United States,3 Fed.Supp. 322; a failure to disclose facts which amounts to a misrepresentation of facts, Crane v. Commissioner, 68 Fed.(2d) 640; or an election of methods of reporting income where the taxpayer, having chosen, is bound, Wheelock v. Commissioner, 77 Fed.(2d) 474; Moran v. Commissioner, 67 Fed.(2d) 601; Raleigh v. United States,5 Fed.Supp. 622. None of these situations existed here.

Reviewed by the Board.

Decision will be entered for the petitioner.