Court Opinion

ID: 4488859
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:01:32.619672+00
Date Added: 2024-06-11T07:58:47.477300
License: Public Domain

ÁRUNdell,
dissenting: I can not agree with the treatment in the prevailing opinion of the amounts charged off as bad debts and allowed as deductions in the years prior to 1920 and 1921 and on which there were recoveries in the taxable years. While, as stated in the Macmillan Company decision, “income and profits taxes are levied with respect to annual periods, and each annual period must necessarily stand by itself,” it does not follow that in determining the tax liability of the current year that the course of conduct of a taxpayer during past years in his dealings with the United States should be entirely disregarded. The limitation on the making of additional assessments for the years 1916 to 1919, inclusive, has admittedly expired, but petitioner seeks to retain the benefit of its own acts and at the same time avoid the consequences thereof. The respondent under such circumstances invokes the doctrine of estoppel and it would seem that the necessary elements of an estoppel are here present. That this doctrine has been recognized in tax cases may be seen from an examination of the case of McDonald Coal Co. v. Seiner, 9 Fed. (2d) 992.
The petitioner herein had not ascertained the accounts to be worth-iess but represented to the respondent that it had. With respect to at least some of the items petitioner knew, or at any rate had abundant reason to believe, that they were not worthless. For instance, in the case of the Louisville Brick Co. item petitioner obtained within the year new notes given by the president of the company and secured by mortgages. As to the notes of W. E. Grant and the Louisville College of Dentistry, petitioner held a mortgage against the indebtedness of the college, and so it must have known that the college had some property to which it could look for- payment.
The Commissioner is not chargeable with knowledge of the facts pertaining to the financial condition of petitioner’s debtors and no duty is -imposed upon him by law to acquaint himself with the *1438facts. It is the intention of the statute that returns shall be honestly made and if the Commissioner so desires he may rely on the statements made in them. If it were otherwise the Commissioner would be obliged to examine with suspicion every return filed and be required to make an independent investigation of every fact stated despite the oath of the taxpayer. It was stipulated by the parties that the “ returns for 1916, 1917, 1918, and 1919 were examined and audited by the respondent,” and petitioner quotes this in its argument against the working of an estoppel. How far the examination and audit went is not shown, but it is unbelievable that these deductions would have been allowed if the facts as now asserted by petitioner had been made known to the respondent.
It is to be remembered that the real party in interest is not the Commissioner of Internal Kevenue but the United States, and that the petitioner by taking the deduction for bad debts was benefited by reductions of its taxes which it would not have received but for its erroneous claims, and the United States was correspondingly damaged. The petitioner argues that it was mathematically impossible for the United States to have suffered any pecuniary prejudice on account of the deductions taken for 1919 because in that year petitioner had a net loss of approximately $16,000 and the bad debt deductions amounted to but $7,801.81. In making this argument petitioner fails to take into account the net loss provision of the statute under which a taxpayer obtains the benefit of a net loss as a deduction against income of another year. It is, therefore, my opinion that the position of the respondent is well taken and that petitioner is estopped to now say that he erred in taking the deductions claimed in 1916, 1917, 1918, and 1919. If I am correct in this view, it follows that invested capital can not now be increased because of the claim that the deductions were erroneously taken. In other words, the petitioner must abide by its acts, which acts were the cause of the reduction in invested capital.
Finally, as to the inclusion in income of the amounts recovered in 1920 and 1921. If my view of the application of the doctrine of estoppel is correct, the result is the same as if the deductions taken for bad debts were proper deductions, and consequently any recoveries in subsequent years constitute income. Nott-Atwater Co. v. Poe, — Fed. (2d) — (Dist. Ct., W. Dist. Wash., Oct. 10, 1928). Cf. Chicago, Rock Island & Pacific Ry. Co., 13 B. T. A. 988.
Trussell agrees with this dissent.