Rieck v. Commissioner

EDWARD E. RIECK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Rieck v. Commissioner

Docket No. 79157.

United States Board of Tax Appeals

35 B.T.A. 1178; 1937 BTA LEXIS 789;

May 28, 1937, Promulgated

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Petitioner paid income taxes for 1932 on March 15, 1933, and an additional payment on September 5, 1934. Thereafter, respondent determined a deficiency for that year. On April 19, 1935 (which was less than two years after September 5, 1934), a petition was filed alleging a specific assignment of error which, if considered alone, could not have resulted in any overpayment of tax. More than two years after September 5, 1934, petitioner was permitted to amend his petition and assign an additional error entirely different from the one originally assigned, which error the respondent admitted, and which alone resulted in no tax liability whatever for 1932 and therefore an overpayment of all taxes paid for that year. Held, that the portion of the overpayment which petitioner paid on September 5, 1934, was paid within two years before the filing of the "petition" as that term is used in section 504(a) of the Revenue Act of 1934. Held, further, that the amendment in question, which was filed more than two years after the payment of the tax, did not set up a new cause of action, but related back and became effective as of the date of the filing of the original petition.

W. W. Booth, Esq., W. A. Seifert, Esq., and A. G. Wallerstedt, Esq., for the petitioner.

E. M. Woolf, Esq., and F. R. Shearer, Esq., for the respondent.

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BLACK

This proceeding involves petitioner's income tax liability for 1932, for which year the respondent determined a deficiency of $3,764.37. A hearing was held and on June 30, 1936, the Board entered a memorandum opinion holding in favor of respondent upon the only issue then before the Board, but not sustaining him entirely in his contention. On August 21, 1936, decision was entered in pursuance of this memorandum opinion that there is a deficiency in income tax of the petitioner for the year 1932 of $3,173.50.

Thereafter, on September 10, 1936, petitioner filed with the Board a motion asking that the decision which was entered August 21, 1936, be vacated and set aside and that the proceeding be reopened and that petitioner be permitted to file an amendment to the petition raising a new and additional issue which was not raised in the original petition. In this motion to reopen and amend the petition, petitioner did not contest the correctness of the Board's holding on the only point covered by the memorandum opinion. He concedes that the Board's holding on that point is correct and that issue is no longer before us. The Board, after hearing and considering said motion to reopen and amend, granted it for what was considered good cause shown. The decision entered on August 2, 1936, was thereupon vacated and set aside and a further hearing was held to permit the parties to introduce evidence relating to the assignment of error contained in the amendment to the petition. At this further hearing the parties stipulated that petitioner's income tax liability for 1932 is nil; that there is no deficiency; and that there is an overpayment of tax in the entire amount previously paid by petitioner of $2,057.98. The respondent contends that the refund of this admitted overpayment of $2,057.98 is barred by the statute of limitations. Petitioner concedes that $388.06 of the overpayment is barred, but contends that the balance of the overpayment in the amount of $1,669.92 is refundable, together with interest thereon as provided by law, because it was paid within two years before the filing of the petition. The sole remaining issue, therefore, is whether, in entering our decision that there was an overpayment in petitioner's income tax for the year 1932 of $2,057.98, we should further determine as part of our decision, in accordance with section 504(a) of the Revenue Act of 1934, that $1,669.92 of that amount was paid within two years before the filing of the petition.

FINDINGS OF FACT.

Petitioner is an individual, residing at 5665 Bartlett Street, Pittsburgh, Pennsylvania.

A stipulation has been filed, which we adopt as part of our findings of fact, as follows:

1. It is hereby stipulated that the following statement shows this petitioner's Federal income tax liability for the taxable year 1932:

Income shown on return	$19,546.05
Net adjustments to income disclosed in deficiency notice dated
Jan. 23, 1935	34,261.67
	$53,807.72
Income adjustment resulting from the Board's memorandum opinion
entered June 30, 1936, representing income of life insurance
trust not used for payment of premiums during 1932	2,490.41
	$51,317.31
Deductible loss equal to the amount of the taxpayer's
investment in 129 shares of the capital stock of Diamond
National Bank, such stock having become worthless in the year
1932	$56,517.00
Taxable net income as adjusted	None
Income tax liability	None
Tax assessed (Original)	$388.06
Additional, Aug. 1934 #4, page 2, line 6	1,669.92
	$2,057.98
Tax paid (Original #806760, March 15, 1933)	$388.06
Additional, Sept. 5, 1934	1,669.92
	$2,057.98
Overpayment of tax	$2,057.98

2. It is further stipulated and agreed as follows:

(a) No claim for refund has been filed by the taxpayer in respect of his income tax liability for the year 1932.

(b) A computation in accordance with the Board's memorandum opinion of June 30, 1936, discloses a tax liability (after credit for tax paid at source) amounting to $5,231.48 and a deficiency amounting to $3,173.50.

(c) The overpayment of $2,057.98, as well as the elimination of the deficiency of $3,173.50, is due entirely to the allowance of the aforesaid loss in respect of the taxpayer's investment in 129 shares of the capital stock of Diamond National Bank.

(d) The original petition in this proceeding was filed April 19, 1935, more than two years after the aforesaid payment of March 15, 1933, and less than two years after the aforesaid payment of September 5, 1934. The original petition contains no assignments of error and no allegations of fact pertaining to a claim of loss in respect of said 129 shares of capital stock of the Diamond National Bank. The only issue presented in the original petition had to do with the inclusion in the taxpayer's income of the sum of $19,421.21 representing the 1932 income of said life insurance trust.

(e) The issue with respect to the deductibility of a loss of the taxpayer's investment in said stock of the Diamond National Bank was first presented in the Amendment to Petition lodged with the Board of Tax Appeals September 10, 1936, and filed pursuant to leave granted in the Board's order dated September 28, 1936. No portion of the tax for the year 1932 was paid within two years before the filing of said Amendment to Petition.

The amendment to the petition filed on September 28, 1936, by permission of the Board, omitting formal parts, reads as follows:

AND Now comes petitioner, Edward E. Rieck, by his counsel, W. A. Seifert, W. W. Booth and A. G. Wallerstedt, and amends the petition hereinbefore filed in the above entitled proceeding as follows:

1. Paragraph 3 is amended to read as follows:

The taxes in controversy are income taxes for the calendar year 1932 and for the amount of $5,822.35.

2. Paragraph 4 is amended by adding another paragraph thereto reading as follows:

(f) Respondent erroneously failed to allow and the petitioner erroneously failed to claim on his return a loss of $56,517.00, sustained by him in the year 1932, on account of the worthlessness of his investment in the capital stock of the Diamond National Bank, Pittsburgh, Pa.

3. Paragraph 5 is amended by adding the following paragraphs thereto:

(f-1) Prior to the taxable year 1932, petitioner acquired 129 shares of the capital stock of Diamond National Bank, Pittsburgh, Pa., at a cost to him of $56,517.00.

(f-2) In the year 1932, the Bank closed and his investment in said stock became totally worthless.

(f-3) Petitioner is entitled to the deduction because his investment in said stock became worthless in the year 1932.

(f-4) In his return for the year 1933, petitioner believing that his investment in said stock became worthless in that year claimed a deduction on his tax return for said year. The respondent, upon audit of said return, disallowed the deduction in 1933 and proposed a deficiency in tax as the result of said disallowance. The reason for the disallowance of said deduction in the year 1933 is stated in respondent's deficiency letter for said year 1933, to-wit:

"Loss claimed on account of 129 shares of Diamond National Bank stock has been disallowed for the reason that the stock became worthless in the year 1932, the year in which the bank closed."

WHEREFORE, the petitioner prays, in addition to his prayers set forth in the original petition, that the Board may hear the proceeding and find and adjudicate:

(6) That petitioner is entitled to a deduction of $56,517.00 in the year 1932 on account of the worthlessness of his investment in Diamond National Bank stock.

OPINION.

BLACK: The respondent concedes that petitioner is entitled to deduct from his gross income for 1932 the amount of $56,517 as a loss due to his investment in 129 shares of Diamond National Bank stock, which stock became worthless during the taxable year 1932; that after the allowance of this deduction petitioner had no net income subject to tax; that his tax liability for 1932 was nil; and that, therefore, petitioner overpaid his taxes for 1932 in the total amount of $2,057.98.

The respondent's position is that, notwithstanding the admitted fact that petitioner overpaid his taxes for 1932 in the amount of $2,057.98, the refund of such amount, or any portion thereof, is now barred by the statute of limitations, namely, section 322 of the Revenue Act of 1932, as amended by section 504(a) of the Revenue Act of 1934, the material part of which statute as amended is as follows:

(c) EFFECT OF PETITION TO BOARD. - If the Commissioner has mailed to the taxpayer a notice of deficiency under section 272(a) and if the taxpayer files a petition with the Board of Tax Appeals within the time prescribed in such subsection, no credit or refund in respect of the tax for the taxable year in respect of which the Commissioner has determined the deficiency shall be allowed or made and no suit by the taxpayer for the recovery of any part of such tax shall be instituted in any court except * * * [Exceptions not here material.]

(d) OVERPAYMENT FOUND BY BOARD. - If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer. No such credit or refund shall be made of any portion of the tax unless the Board determines as part of its decision that it was paid within two years before the filing of the claim or the filing of the petition, whichever is earlier. [Italics supplied.]

The part of paragraph (d) above, which is in italics, was added by section 504(a) of the Revenue Act of 1934.

The parties have stipulated that no claim for refund has been filed. Therefore, the question we have to decide is whether the $1,669.92 which petitioner paid September 5, 1934, was paid within two years before the filing of the petition.

The respondent contends that the "petition" referred to in the statute must in effect be interpreted, in so far as it affects this case, as meaning the "petition as amended" for the reason that the overpayment is due entirely to the allowance of the $56,517 loss and the petition as originally filed did not assign as error the failure of the respondent to allow that loss, and that, when so interpreted, the refund of the $1,669.92 is also barred as petitioner paid the amount more than two years before the filing of the amendment to the petition. The respondent proceeds to justify this contention on two principal grounds, namely, (1) that whenever a refund is involved in a proceeding before the Board the same rule regarding amendments to the petition filed with the Board should apply as applies to amendments to claims for refund filed with the Commissioner, and (2) that, aside from the rules governing claims for refund filed with the Commissioner, it is a general rule of law that no new and distinct cause of action which is barred by the statute of limitations can be asserted in a pending lawsuit by means of an amendment to the pleadings, and that the amendment to the petition in the instant case raised a new and distinct cause of action.

Regarding claims for refund, the Supreme Court has held in several cases that if a taxpayer corporation files a timely general claim for refund with the Commissioner without stating the specific grounds relied upon, it may amend its claim and state the specific grounds relied upon at any time before the claim is finally rejected, even though the time has expired within which a new claim might be filed, ; ; ; , but where a taxpayer corporation files a timely specific claim for refund based upon a specific request for special assessment and abandons the position that there had been any error of fact or law in the assessment of the tax according to the normal method, it can not, after the statute has run for filing a new claim, amend the claim and allege that its profits taxes should be determined according to the normal method. .

For reasons given later in this opinion, we do not think that petitions before the Board are subject to the same rules regarding amendment as are applied to claims for refund filed with the Commissioner. For that reason we will not undertake to decide whether the filing of the amendment to the petition in the instant case would be permissible under the decisions of the Supreme Court above quoted if the same rule applied to it as applies to amending claims for refund.

The reasons why we think that petitions before the Board are not subject to the same rules regarding amendment as are applied to claims for refund filed with the Commissioner are that the Board was created and continued as an independent agency in the executive branch of the Government and Congress has specifically prescribed that its proceedings shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board itself may prescribe. It has been held that the question of what constitutes a "petition" is one for the Board to determine. Continental Petroleum Co. v.United States, (Dist. Ct., W.D. Okla., Apr. 14, 1936, not reported); affirmed by the . The petition here in question was in all respects regular and the amendment thereto was offered and allowed in accordance with the Board's rules and with no objection on the part of the respondent as to the propriety of permitting it to be filed. The respondent merely argues as to the legal effect of the amendment. He argues that, due to section 322(d) of the Revenue Act of 1932, as amended by section 504(a) of the Revenue Act of 1934, the amendment to the petition is wholly ineffective in so far as authorizing the refund of the admitted overpayment. This brings us to the consideration of respondent's second principal ground mentioned above, which is that the amendment to the petition sets up a new cause of action and starts a new date for the filing of the petition.

The leading cases relied upon by respondent in support of his second ground are ; ; and ; affd., . In the last mentioned case the United States District Court, W.D. Missouri, stated the principal of law relied upon by respondent as follows:

It is undoubtedly the law that, although a cause of action is instituted within the time provided for in the statute of limitations, an amendment to such cause of action which states a new and different cause of action, unless the amendment is also within the time provided for in the statute, can not be maintained. It is barred by the statute of limitations.

We do not question the correctness of the above statement of law. The difficulty is not with the statement itself, but with what constitutes a "cause of action" in cases involving the determination of the income tax liability of taxpayers.

Did the amendment to the petition, which was filed pursuant to leave granted in our order dated September 28, 1936, set up a new cause of action? We think not. Proceedings are brought before this Board in cases where the Commissioner has determined a deficiency for a given taxable year. If the petition has been properly filed, the Board has jurisdiction to determine the correct tax liability for that year.

It seems plain to us that it was the intent of Congress, in establishing the Board of Tax Appeals and in enacting statutes to govern the hearing and decision of tax cases before it, that the entire tax liability of the taxpayer should be determined for the given taxable year, assuming, of course, that issues are properly raised.

If there is no deficiency, that fact should be determined; if there is a deficiency, then the amount thereof should be determined. If there is an overpayment, then that fact should be determined, and, where section 504 of the Revenue Act of 1934 is applicable, we should also determine, as a part of our decision, the amount of the overpayment which was paid within the time prescribed by the applicable revenue act to save it from the running of the statute of limitations; or, if there is an increased deficiency over that determined by the Commissioner, that fact should be determined, when the Commissioner has properly pleaded the necessary allegations for the determination of an increased deficiency.

It seems clear that, where the original deficiency notice was sent to the taxpayer prior to the expiration of the statute of limitation, the Commissioner may amend his pleadings and ask for an increased deficiency on grounds entirely different from those originally relied upon, even though the time of filing the amendment to his answer asking for the increased deficiency would be barred by the statute of limitations if it were an original deficiency notice. In such a case, the Commissioner's claim for the increased deficiency relates back to the time of mailing the original deficiency notice. Cf. . It seems to us that it would be a strained construction for us to hold that an amendment to a petition which merely sets up an additional assignment of error and facts to support it would be setting up a new cause of action and thereby fix a new date as the date of the filing of the petition. We can not subscribe to such a theory.

In , we held that the cases of , and , were not there in point, and, among other things, we said:

In the present case, as in Eastman Gardiner Naval Stores Co., supra, petitioner had one right of action in the sense that term is used in the cases cited. This was its right to petition this Board for a review of its income-tax liability for certain years as finally determined by the Commissioner. When the petition was filed the final determination had been made and the petitioner was seeking a review thereof. It was not a condition which gave him two distinct rights of action under which he elected to pursue one and then save the benefit given by the other, as in the Weyler case.

It follows that if the amendment to the petition in the instant proceeding did not set up a new cause of action, and we do not think it did, then it relates back and is effective from the date the original petitioner was filed. It is considered as incorporated into and as a part of the original petition. ; ; certiorari denied, (amending to show diversity of citizenship), quoting the following from :

"It is elementary that an amendment dates back to the filing of the petition, and is to supply defects in the cause of action then existing, or at most to bring into the suit grounds of action which existed at the beginning of the case. ."

In , the court said:

A statute giving a taxpayer the opportunity to secure a refund of an overpayment is to be liberally construed in the taxpayer's favor. .

Reviewed by the Board.

A decision will be entered that there is an overpayment of tax for the taxable year 1932 in the amount of $2,057.98, and that $1,669.92 thereof was paid within two years before the filing of the petition in this proceeding.