Rose v. Commissioner

ALFRED L. ROSE AND DOROTHY B. ROSE (HUSBAND AND WIFE), PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Rose v. Commissioner

Docket No. 86028.

United States Board of Tax Appeals

41 B.T.A. 1073; 1940 BTA LEXIS 1106;

May 7, 1940, Promulgated

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">*1106 Petitioners made an overpayment of $2,011.91 in income tax for the year 1932 within two years before filing a claim for refund, which stated two grounds for refund from which the overpayment did not result. Respondent's investigation of the two grounds stated in the claim for refund would not disclose the facts underlying the grounds from which the overpayment resulted. Held, that the claim for refund could not be amended more than two years after the overpayment was made to state the grounds from which the overpayment resulted, and that the overpayment of $2,011.91 was not made within two years before the filing of a valid claim for refund under section 322(d) of the Revenue Act of 1932 as amended by section 809(c) of the Revenue Act of 1933; United States v. Andrews,302 U.S. 517">302 U.S. 517; held, further, that an overpayment of $1,559.51 in income tax was made after the mailing of the notice of deficiency under that section as so amended.

Wilbur H. Friedman, Esq., for the petitioners.

R. H. Transue, Esq., for the respondent.

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HARRON

">*1073 On March 31, 1939, the Board's memorandum opinion was entered in this proceeding">*1107 and in the proceeding brought by Walter Mendelsohn, Docket No. 85967, which were consolidated for hearing and opinion. The opinion directed that decision be entered under Rule 50. The parties have submitted computations for entry of decision in accordance with the opinion. These computations show that there is no deficiency in petitioners' income tax for 1932 and that petitioners have made overpayments in income tax for that year in the total amount of $9,607.13.

The main question is whether an overpayment of $2,011.91 in income tax for 1932 which petitioners made on December 9, 1933, was made within two years before the filing of a valid claim for refund, under section 322(d) of the Revenue Act of 1932 as amended by section 809(c) of the Revenue Act of 1938. The parties agree that petitioners made three overpayments in income tax for 1932 in the total amount of $6,035.71 more than two years before the filing of a claim for refund, and one overpayment in income tax for 1932 in the amount of $1,559.51 after the mailing of the notice of deficiency.

FINDINGS OF FACT.

Petitioners filed a joint income tax return for the year 1932 on March 14, 1933, with the collector of internal">*1108 revenue for the second district of New York.

">*1074 In the joint return petitioners took, inter alia, a deduction of $14,985 for interest paid on an indebtedness secured by mortgages on certain real property, hereinafter referred to as the Lexave property, and a deduction of $3,615 for taxes paid on the Lexave property. Petitioners reported income tax of $8,047.62 in the joint return.

Petitioners paid the income tax reported in the joint return as follows:

March 14, 1933	$2,011.91
June 8, 1933	2,011.90
September 14, 1933	2,011.90
December 9, 1933	2,011.91
Total	8,047.62

In October 1934 petitioners were advised by a letter from an internal revenue agent in charge that he proposed to recommend an additional income tax of $11,075.15 for the year 1932. In a statement attached to the letter various adjustments to the income reported by petitioners in the joint return were recommended, including the disallowance of the deduction of $14,985 for interest paid on the indebtedness secured by the mortgages on the Lexave property and the disallowance of the deduction of $3,615 for taxes paid on the Lexave property. Petitioners filed a protest against">*1109 the proposed recommendations.

In February 1935 petitioners were advised by a letter from a Deputy Commissioner of Internal Revenue that a deficiency of $10,494.80 in income tax for the year 1932 was proposed. The proposed deficiency resulted, in large part, from the disallowance of the deduction of $14,985 for interest paid on the indebtedness secured by mortgages on the Lexave property and the disallowance of the deduction of $3,615 for taxes paid on the Lexave property.

Thereafter, petitioners executed and filed a waiver in which they consented to the assessment and collection of a deficiency of $1,559.51. The deficiency of $1,559.51 resulted from various proposed adjustments to the income reported by petitioners in the joint return, with the exception of the disallowance of the deduction of $14,985 for interest paid on the indebtedness secured by mortgages on the Lexave property and the disallowance of the deduction of $3,615 for taxes paid on the Lexave property.

On December 9, 1935, petitioners filed a claim for refund of $2,000 with the collector of internal revenue for the second district of New York. The following memorandum was attached to the claim for refund:

">*1110 1. Taxpayers deducted $35,800 on their 1933 income tax return as a bad debt from worthless certificates of indebtedness of Park Murray Corp. In ">*1075 auditing taxpayers' 1933 income tax return the Revenue Agent stated he would disallow this deduction as having been a 1932 transaction. Taxpayers contend the deduction was properly taken on the 1933 income tax return; but if the Government should prevail in its contention that said certificates became worthless in 1932, then this claim is filed to protect taxpayers' right to corresponding refund for 1932.

2. During 1932, taxpayers sold various securities held less than two years at a loss of $62,088.38. A schedule was attached to the return showing these losses, but they were not deducted by reason of Section 23(r) of the 1932 Act. Claim is hereby made for deduction of said losses on the ground that Section 23(r) is unconstitutional, in that it deprives taxpayers of property without due process of law, and is arbitrary, capricious and discriminatory, in violation of the 5th Amendment to the Federal Constitution.

3. This claim is also filed to protect all legal rights of taxpayers, to any refund of income tax found">*1111 to be due them for the year 1932.

In a deficiency notice mailed on May 18, 1936, petitioners were advised of the determination of a deficiency of $7,486.13 in income tax for the year 1932. The deficiency resulted solely from the disallowance of the deduction of $14,985 for interest paid on the indebtedness secured by mortgages on the Lexave property and the disallowance of the deduction of $3,615 for taxes paid on the Lexave property. The following explanation of the disallowance of these deductions was contained in the deficiency notice: "This office holds that the Lexave Corporation is properly taxable as a corporation. The interest of $14,985.50 and taxes of $3,615.00 paid by you represent a deduction to the corporation and a further investment of capital in the corporation by you * * *."

The deficiency notice also contained the following statement:

Consideration has been given to your claim for the refund of $2,000.00, but since an audit of your return results in the above deficiency your claim will be disallowed. Official notice of the disallowance of your claim will be issued by registered mail in accordance with section 1103(a) of the Revenue Act of 1932.

On May 19, 1936, petitioners">*1112 made a payment of $1,789.23 to satisfy the deficiency of $1,559.51, to the assessment and collection of which they had consented, and accrued interest of $229.72 thereon.

Petitioners filed their petition in this proceeding on August 7, 1936.

On November 24, 1937, petitioners filed a claim for refund of $3,600 in tax with the collector of internal revenue for the second district of New York. The claim for refund was entitled "Amended Claim" and attached thereto was a memorandum. Paragraphs 2 and 3 of the memorandum attached to the so-called amended claim for refund were the same as paragraphs 2 and 3 of the memorandum attached to the original claim for refund. Paragraph 1 of the ">*1076 memorandum attached to the so-called amended claim for refund provided in part as follows:

In 1931, Alfred L. Rose participated in a real estate venture with other individuals, contributing $21,000 hereto. Title to the property was taken in the name of a corporation for convenience. Taxpayer was individually obligated to pay carrying charges on the property. In 1932, the value of the property was less than the mortgages thereon, and due to the large operating deficit for that year">*1113 and general business conditions, the 1931 investment became a total loss. As already stated, the taxes and interest were deducted on the 1932 return, and were disallowed by the Commissioner, which disallowance was being contested by taxpayer during 1935 and 1936. The $21,000 investment made in 1931 was not deducted on the 1932 return. Claim is hereby made that both the original investment of $21,000 and the payment in 1932 of $18,600 should be allowed as deductions for 1932, the $21,000 sum as a loss, and the $18,600 sum either as taxes and interest, or as a bad debt, or as a loss; and claim is hereby made for such deductions and corresponding refund.

Petitioners filed an amended petition in this proceeding of December 10, 1937. In the amended petition petitioners alleged, inter alia, that they were entitled to a deduction in the amount of $7,200, which amount had been paid by petitioner Alfred L. Rose in December 1931 to satisfy carrying charges on the Lexave property, either as "taxes, interest, losses, or bad debts", and made claim for the refund of $3,801.23 in income tax.

Respondent has not rejected formally either the original claim for refund or the so-called amended">*1114 claim for refund.

In the memorandum opinion entered on March 31, 1939, it was held that petitioners were entitled to deduct as bad debts owing from the Lexave Syndicate, Inc., the amount of $14,985 which had been taken in the joint return as a deduction for interest paid on an indebtedness secured by mortgages on the Lexave property, and the amount of $3,615 which had been taken in the joint return as a deduction for taxes paid on the Lexave property. It was held also that petitioners were entitled to deduct as a bad debt $7,200 which petitioner Alfred L. Rose had advanced to the Lexave Syndicate, Inc., in December 1931, and to deduct as a loss $21,000 which petitioner Alfred L. Rose had invested in the stock of the Lexave Syndicate, Inc.

Petitioners made overpayments in income tax for the year 1932 in the total amount of $9,607.13. The overpayments in income tax resulted from the allowance of the deductions of $7,200 as a bad debt and $21,000 as a loss, which petitioners had not taken in the joint return.

OPINION.

HARRON: The main question is whether an overpayment of $2,011.91 in income tax which petitioners made on December 9, 1933, was made within two years before">*1115 the filing of a valid claim for ">*1077 refund, under section 322(d) of the Revenue Act of 1932 as amended by section 809(c) of the Revenue Act of 1938, the pertinent provisions of which are set forth in the margin. ¹

The original claim for refund was filed on December 9, 1935. Thus, it is evident that the payment of $2,011.91 on December 9, 1933, was made within two years">*1116 before the filing of the original claim for refund. In the computation of the period of time between the making of the payment and the filing of the original claim for refund, the day on which the payment was made, December 9, 1933, is to be excluded, and the day on which the original claim for refund was filed, December 9, 1935, is to be included. Burnet v. Willingham Loan & Trust Co.,282 U.S. 437">282 U.S. 437; Chambers v. Lucas, 41 Fed.(2d) 299; United Telephone Co.,1 B.T.A. 450">1 B.T.A. 450; Harriet M. Hooper,26 B.T.A. 758">26 B.T.A. 758; and see Sheets v. Selden's Lessee,2 Wall. 177, 190, in which the Supreme Court, through Mr. Justice Field, stated in part as follows:

* * * The general current of the modern authorities on the interpretation * * * of statutes, where time is to be computed from a particular day or a particular event, as when an act is to be performed within a specified period from or after a day named, is to exclude the day thus designated, and to include the last day of the specified period.

Although the original claim for refund specified two grounds for refund, it did not specify the grounds">*1117 from which the overpayment in tax resulted. Thus, the original claim for refund failed to comply with the requirements of a valid claim for refund as provided in article 1254 of Regulations 77, relating to the Revenue Act of 1932, the pertinent provisions of which are set forth in the margin. ²Georgie W. Rathborne,39 B.T.A. 56">39 B.T.A. 56.

Petitioners do not contend that, within the statutory period of limitation, respondent waived compliance with the requirements of a valid claim for refund as provided in article 1254 of Regulations ">*1078 77. Cf. ">*1118 Tucker v. Alexander,275 U.S. 228">275 U.S. 228; United States v. Garbutt Oil Co.,302 U.S. 528">302 U.S. 528. Nor do the facts establish such a waiver by respondent. It is to be noted that respondent could not waive the bar of the statutory period of limitation. See 302 U.S. 528">United States v. Garbutt Oil Co., supra.

Petitioners do contend that the so-called amended claim for refund, which specified one of the grounds from which the overpayment resulted, was a permissible amendment to the original claim for refund and related back to correct the insufficiency of the original claim for refund. Respondent contends that the so-called amended claim for refund was not a permissible amendment to the original claim for refund.

The original claim for refund was subject to permissible amendment prior to its final rejection by respondent. See United States v. Memphis Cotton Oil Co.,288 U.S. 62">288 U.S. 62. Although respondent notified petitioners in the deficiency notice that the original claim for refund would be disallowed and that official notice of the disallowance of the claim would be issued by registered mail, there is no evidence to show">*1119 a final rejection of the original claim for refund by respondent. Cf. 288 U.S. 62">United States v. Memphis Cotton Oil Co., supra.

The general rule as to the permissibility of an amendment to a claim for refund after the expiration of the statutory period of limition is stated by the Supreme Court, through Mr. Justice Roberts, in United States v. Andrews,302 U.S. 517">302 U.S. 517, 302 U.S. 517">524, as follows:

* * * Where a claim which the Commissioner could have rejected as too general, and as omitting to specify the matters needing investigation, has not misled him but has been the basis of an investigation which disclosed facts necessary to his action in making a refund, an amendment which merely makes more definite the matters already within his knowledge, or which, in the course of his investigation, he would naturally have ascertained, is permissible. On the other hand, a claim which demands relief upon one asserted fact situation, and asks an investigation of the elements appropriate to the requested relief, cannot be amended to discard that basis and invoke action requiring examination of other matters not germane to the first claim.

">*1120 The general rule as to the permissibility of an amendment to a claim for refund after the expiration of the statutory period of limitation has also been stated by the Circuit Court, second Circuit, through Swan, Circuit Judge, in Pink v. United States, 105 Fed.(2d) 183, 187, as follows:

* * * Whether a new ground of recovery may be introduced after the statute has run by amending a pending claim filed in time depends upon the facts which an investigation of the original claim would disclose. Where the facts upon which the amendment is based would necessarily have been ascertained by the Commissioner in determining the merits of the original claim, the amendment is proper. Bemis Bros. Bag Co. v. United States,289 U.S. 28">289 U.S. 28, 53 S. Ct. 454, 77 L. Ed. 1011; United States v. Memphis Cotton Oil Co.,288 U.S. 62">288 U.S. 62, ">*1079 53 S. Ct. 278, 77 L. Ed. 619; United States v. Factors & Finance Co.,288 U.S. 89">288 U.S. 89, 53 S. Ct. 287, 77 L. Ed. 633. The rule is otherwise when the amendment requires the examination of new matters which would not have been disclosed by an investigation of the original claim. ">*1121 United States v. Andrews,302 U.S. 517">302 U.S. 517, 58 S. Ct. 315, 82 L. Ed. 398; United States v. Garbutt Oil Co.,302 U.S. 528">302 U.S. 528, 58 S. Ct. 320, 82 L. Ed. 405; Marks v. United States, 2 Cir., 98 F.2d 564">98 F.2d 564.

An analysis of the facts shows that the so-called amended claim for refund, which was filed after the expiration of the statutory period of limitation, was not a permissible amendment to the original claim for refund under the rules which are set forth above. The original claim for refund was specific; it pointed to two specific grounds for refund: A deduction of $35,800 as a bad debt owing from the Park Murray Corporation, and a deduction of $62,088.38 as a loss from the sale of certain securities held by petitioners for less than two years, which deductions were not taken by petitioners in the joint return. Even though a general statement was added as paragraph 3 of the original claim for refund, to the effect that the original claim for refund was "also filed to protect all legal rights of taxpayers to any refund of income tax found to be due them for the year 1932", respondent spondent was called upon to investigate only the two">*1122 grounds specified in the original claim for refund, and was not called upon to make a complete reaudit of petitioners' joint return. 302 U.S. 517">United States v. Andrews, supra, in which the Supreme Court, through Mr. Justice Roberts, stated in part as follows:

* * * The very specification of the items of complaint would tend to confine the investigation to those items and there is no evidence that the examination was more extended.

It is clear that an investigation of the two grounds specified in the original claim for refund would not disclose the material facts underlying the grounds from which the overpayment resulted; there was no relation whatsoever between the facts underlying the grounds specified in the original claim for refund and the facts underlying the grounds from which the overpayment resulted.

Even if it were assumed that the general statement made in paragraph 3 of the original claim called upon respondent to make a complete reaudit of petitioners' joint return, there is no evidence that the reaudit necessarily would have disclosed the material facts underlying the grounds from which the overpayment resulted. ">*1123 Cf. Pink v. United States, supra. Moreover, contrary to statements made by petitioners in their brief, there is no evidence to show that respondent in fact knew the material facts underlying the grounds from which the overpayment resulted; i.e., the facts determinative of when the investment of $21,000 in the Lexave Syndicate Became worthless. See 302 U.S. 517">United States v. Andrews, supra.

">*1080 It should be pointed out that the so-called amended claim for refund stated only one of the two grounds from which the overpayment resulted - the deduction of $21,000 as a loss occasioned by the worthlessness of the investment of petitioner Alfred L. Rose in the stock of the Lexave Syndicate, Inc. The other ground from which the overpayment resulted, the deduction of $7,200 as a bad debt owing to petitioner Alfred L. Rose from the Lexave Syndicate, Inc., was stated for the first time in the amended petition filed by petitioners on December 10, 1937. In view of the conclusion that the original claim for refund could not be amended, after the expiration of the statutory period of limitation, to specify the grounds from which the overpayment resulted, ">*1124 it is not necessary to consider the further question as to whether the statements in the amended petition with respect to the bad debt deduction of $7,200 could operate as an amendment to the original claim for refund. Cf. 39 B.T.A. 56">Georgie W. Rathborne, supra.,

Therefore, it is held that petitioners made overpayments in income tax for the year 1932 in the total amount of $9,607.13; that the overpayment of $2,011.91 in income tax which petitioners made on December 9, 1933, was not paid within two years before the filing of a valid claim for refund which stated the grounds from which the overpayment resulted; and that the overpayment of $1,559.51 in income tax which petitioners made on May 19, 1936, was made after the mailing of the notice of deficiency.

Reviewed by the Board.

Decision will be entered that there is an overpayment of tax for the year 1932 in the amount of $9,607.13, and that $1,559.51 was paid after the mailing of the notice of deficiency.

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Footnotes

• 1. SEC. 322. REFUNDS AND CREDITS.

  * * *

  (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 taxpayer. No mines as part of its decision that such portion was paid within two years before the filing of the claim or the filing of the petition, whichever is earlier, or that such portion was paid after the mailing of the notice of deficiency; * * * ↩

• 2. ART. 1254. Claims for refund by taxpayers. - * * *

  The claim must set forth in detail and under oath each ground upon which a refund is claimed, and facts sufficient to apprise the Commissioner of the exact basis thereof. No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed prior to the expiration of such period. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund. ↩