Court Opinion

ID: 4598001
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:20:22.199284+00
Date Added: 2024-06-11T07:59:20.619383
License: Public Domain

WISCONSIN FARMER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wisconsin Farmer Co. v. CommissionerDocket No. 105917.United States Board of Tax Appeals46 B.T.A. 116; 1942 BTA LEXIS 906; January 20, 1942, Promulgated *906  Immediately prior to the taxable year petitioner was notified by state taxing authorities that it owed additional state income taxes for prior taxable years.  Petitioner protested assessment of such additional taxes on the ground that a statute of limitations had run with respect to some of the years and, furthermore, contended that petitioner had paid the correct taxes for all the years in question.  In the taxable year the state legislature passed a law nullifying the effect of the statute of limitations upon which petitioner relied as a bar to the action of the state taxing authorities with respect to several of the taxable years.  During the taxable year petitioner was given a hearing on the matter by the state tax commission.  Later in the year petitioner's officers decided to settle the matter by compromise settlement rather than by litigation and, shortly after the taxable year, submitted two plans of compromise to the state tax commission.  Approximately a month after submission the tax commission accepted one of the compromise offers and several months later petitioner paid the amount of that compromise offer, plus interest to date of payment.  Held that the state tax*907  was not properly accruable by petitioner in the taxable year; held, further, that only that portion of the interest on the additional taxes attributable to the taxable year is deductible in the taxable year.  Denver A. Busby, C.P.A., for the petitioner.  Edward C. Adams, Esq., for the respondent.  ARUNDELL*117  The Commissioner determined a deficiency in petitioner's income tax for the fiscal year ended May 31, 1938, in the sum of $900.95.  The issue before the Board is whether or not petitioner is entitled to deduct certain additional taxes and interest thereon imposed by the State of Wisconsin in respect of years prior to the taxable year.  Most of the facts were stipulated.  Additional facts were adduced from evidence presented at the hearing.  FINDINGS OF FACT.  Petitioner was incorporated under the laws of the State of Wisconsin on May 9, 1929.  At all times material herein petitioner kept its books and filed its income tax returns with the Federal Government and the State of Wisconsin on the accrual basis, with its fiscal year ending May 31.  Petitioner's Federal income and excess profits tax return for the taxable year was filed*908  with the collector for the district of Wisconsin.  Under date of May 27, 1937, the Wisconsin Tax Commission, hereinafter referred to as the tax commission, notified petitioner of a proposed adjustment in its Wisconsin income tax liability for the fiscal years 1931 to 1936, inclusive, in the amount of $6,126.97.  The notice stated that petitioner, by written application within 20 days from receipt of the notice, might apply for a hearing on the matter of the additional taxes.  On June 26, 1937, petitioner filed a protest with the tax commission protesting the adjustments proposed in the notice from the tax commission dated May 27, 1937.  The bases of this protest were that the tax commission had erroneously disallowed the deduction of certain circulation expense items and that the statute of limitations barred adjustment of taxes in several of the years under consideration.  No action was taken by the tax commission on the protest filed with it on June 26, 1937, until March 15, 1938, when the following notice was mailed by the tax commission to the petitioner: Pursuant to Sections 71.115(1)(a) and 71.12, Stats., you are hereby notified of an additional assessment of income taxes*909  and surtaxes on income for the period June 1, 1930, to May 31, 1936, inclusive, in the amount of $6,126.97, exclusive of interest.  This assessment is based upon a field audit, the report of *118  which, showing the computation of said additional taxes, has heretofore been sent to you under date of May 27, 1937.  The additional taxes set forth in this notice are not in addition to those contained in the notice heretofore given under date of May 27, 1937.  The purpose of this second notice is to bring said additional taxes within the operative scope of Section 71.115(1)(a), Stats.  Under Section 71.115(1)(a), Stats, the proceedings had with respect to the notice of additional assessments which was sent to you under date of May 27, 1937, are applicable to this notice, unless within twenty days after this notice you file a new protest and request for hearing.  The first hearing on the protest filed on June 26, 1937, was held on April 7, 1938, in the office of the tax commission at Madison, Wisconsin.  No agreement between petitioner and the tax commission was reached at that hearing.  After the hearing held on April 7, 1938, and prior to May 31, 1938, the officers of petitioner*910  determined to settle the controversy by negotiation rather than by litigation and requested petitioner's tax accountant to prepare several proposals of settlement.  On May 18 or 19, 1938, petitioner's tax accountant submitted to petitioner three methods of proposed settlement with the tax commission.  From these three proposed bases the officers of petitioner selected two.  Having selected the two proposed methods of compromise, an officer of petitioner informed petitioner's counsel in Madison, Wisconsin, that a settlement upon the basis of one of the proposals was desired.  On May 29, 1938, the secretary-treasurer of petitioner was informed by wire from its counsel that petitioner's proposal had been submitted to counsel for the tax commission and a conference arranged for June 29, 1938.  On June 29, 1938, a second hearing was held in the office of the tax commission at Madison, Wisconsin, at which time two alternative proposals for settlement were submitted by petitioner to the tax commission and were discussed by the parties.  The representatives of the tax commission advised petitioner's representative that one of the proposals would be recommended to the commission.  During*911  the month of July 1938 one of the bases of settlement proposed by petitioner on June 29, 1938, was formally approved by both petitioner and the tax commission, and on August 2, 1938, petitioner received a letter from the tax commission reading as follows: Enclosed herewith is our amended audit report covering the fiscal years ended May 31, 1931 to May 31, 1936.  This report was prepared in accordance with the agreement reached with your representatives as the result of conferences held at this office on April 7, 1938 and June 29, 1938.  The disposition of your appeal in accordance with the agreement has been approved by the Tax Commission, and you are therefore notified that the assessment of additional income taxes of which notice was given on May 27, 1937 is hereby modified to conform to the results set forth in the amended report.  *119  You will observe that on amended Exhibit A interest has been computed on the additional taxes to the date of October 1, 1938.  This was done at the request of your attorney, Mr. Robert B. Murphy, who advised us that it was your wish to have the additional taxes placed on the October 1, 1938 tax roll.  You will be billed for the additional*912  taxes on or shortly after September 1, 1938, and that bill will be due and payable on or before October 1.  After the taxable year but prior to the date petitioner's books for the taxable year were closed, petitioner made entries on its books for the taxable year representing additional taxes and interest thereon in the amounts of $5,125.97 and $1,766.48, respectively.  The net additional tax with interest computed to October 1, 1938, was paid by petitioner on September 30, 1938.  The tax and interest was apportioned as follows: Fiscal yearInterest1931Additional tax$1,399.42$573.731932Additional tax1,698.88594.571933Additional tax2,381.50690.581934Overpayment(867.60)(201.66)1935Overpayment(13.80)(2.38)1936Additional tax526.5659.21Total5,124.961,714.05In its return for the taxable year, the petitioner deducted the additional Wisconsin income tax and interest thereon, as computed by it, in the respective amounts of $5,125.97 and $1,766.48.  Respondent disallowed these deductions.  OPINION.  ARUNDELL: The question before us is whether or not petitioner is entitled to deduct from gross income*913  of the taxable year an amount representing additional income taxes and interest thereon asserted against petitioner by the State of Wisconsin for years prior to the taxable year.  Petitioner contends that three of the years to which the additional taxes relate were barred by limitation prior to the taxable year but were reopened for assessment purposes by a statute passed by the State of Wisconsin in the taxable year.  It asserts that the passage of the statute in the taxable year caused the additional taxes to accrue in that year.  Petitioner maintains that, in any event, no liability for the additional taxes existed until the officers of petitioner decided to admit liability in a compromise settlement.  Respondent argues that neither the additional taxes nor the interest thereon accrued in the taxable year.  He maintains that the additional taxes accrued in the years in respect of which they were imposed and that the interest accrued in the year following the taxable year.  *120  The provisions of Wisconsin law which are material to our consideration of petitioner's argument with relation to the additional state taxes imposed for 1931, 1932, and 1933 are section 71.11(5) *914  of the Wisconsin Statutes of 1931 and section 71.115(1)(a) of the Wisconsin Statutes which was enacted in 1937 at a special session of the legislature.  We turn first to petitioner's contention that the passage of section 71.115(1)(a)1 in the taxable year caused a liability for some of the additional taxes to spring up in that year.  Petitioner's argument is presumably based upon the premise that the expiration of the statutory limitation period contained in section 71.11(5) of the Wisconsin Statutes of 1931 2 erased not only the authority of the tax commission to collect the tax, but also petitioner's obligation to pay the tax.  We are of the opinion that this premise is not sound.  It is true that under the law of Wisconsin the expiration of a statutory limitation period usually erases not only the remedy (in this case the assessment), but also eliminates the substantive right upon which a cause of action might be based. Eingartner v. Illinois Steel Co.,103 Wis. 373">103 Wis. 373; 79 N.W. 433">79 N.W. 433; Long v. Mates,219 Wis. 414">219 Wis. 414; *915 263 N.W. 371">263 N.W. 371; but cf. Banking Comm. v. Buchanan,227 Wis. 544">227 Wis. 544; 279 N.W. 71">279 N.W. 71. The Wisconsin authorities, however, have enunciated a different rule with regard to limitations for additional assessments of tax by the state tax commission.  In State ex. rel. Globe Steel Tubes Co. v. Lyons,183 Wis. 107">183 Wis. 107; 197 N.W. 578">197 N.W. 578, the Supreme Court of Wisconsin stated that a state statute imposing a period of limitation upon the assessment or reassessment of taxes was not a statute of limitation under which *121  expiration of the statutory period would eliminate the taxpayer's obligation to pay the tax.  The rule of the Globe Steel Tubes case was recently applied by the Supreme Court of Wisconsin to section 71.11(5) of the 1929 Statutes of Wisconsin, a provision similar in all material respects to 71.11(5) of the 1931 statutes upon which petitioner here relies.  The court stated in its opinion in Schuette v. Wisconsin Tax Commission,234 Wis. 574">234 Wis. 574; *916 292 N.W. 9">292 N.W. 9: Under the rule of the Globe Steel Tubes Co. case, the statute is not a limitation in favor of the taxpayer and against the state but rather a limitation upon the commission's authority to go back and to make new assessments for years not permitted at a given time by the legislature.  Under that ruling it may not be said that the taxpayer has acquired any vested rights against the state as to assessments which properly should have been made.  Under the construction which we have given to similar statutes, taxpayers acquire no vested rights against the state, as to such assessments.  We consider therefore that sec. 71.115(1)(a), is a valid and constitutional enactment.  *917  Thus, under Wisconsin law petitioner remained under an obligation to pay any additional taxes of the barred years even though such taxes might not be assessed because of the expiration of the limitation period.  So long as the 1931 limitation remained in effect the state tax commission could not make a valid reassessment.  When the legislature passed a new limitation statute in the taxable year, however, the tax commission was permitted to make additional assessments of taxes which petitioner was already under a duty to pay.  We conclude, therefore, that the enactment of section 71.115(1)(a) in the taxable year created no new liability for tax which could be accrued by petitioner in the taxable year.  Our conclusion that no new liability for tax arose by the removal of the limitation period would seem to answer petitioner's argument that the events of the taxable year provided a basis for the accrual within the taxable year before us of the deficiency determined by the Wisconsin Tax Commission.  But if we are wrong on that point we are still of the opinion that the events of the taxable year did not serve to provide a basis for the accrual of the additional liability.  The protest*918  filed with the Wisconsin Tax Commission by the petitioner on June 26, 1937, the notice of deficiency mailed to petitioner by that commission on March 15, 1938, the hearing held April 7, 1938, and the conclusion reached by petitioner's officers among themselves to make a compromise settlement, all taken together, are not enough.  The actual submission of petitioner's two alternative offers of settlement occurred in the following taxable year and it was not until August 2, 1938, that the tax commission advised petitioner of its decision to accept one of the offers.  It was at that time that the amount of petitioner's liability to the State of Wisconsin for additional taxes was determined.  *122  What has heretofore been said has been largely in answer to the argument advanced by petitioner in its brief.  The time when additional taxes may be accrued has been settled by the Supreme Court of the United States in United States v. Anderson,269 U.S. 422">269 U.S. 422. In that case it was decided that taxes are to be accrued in the year in which the events fixing the liability have occurred.  The differences between the taxpayer and the State of Wisconsin as to how to apply*919  the law do not change the situation.  It follows that the taxes should be accrued in the years to which they relate. Red Wing Potteries, Inc.,43 B.T.A. 841">43 B.T.A. 841; Rawlings Manufacturing Co.,44 B.T.A. 161">44 B.T.A. 161. There remains for disposition only the proper determination of the interest due on the deficiency found by the Wisconsin Tax Commission.  Petitioner accrued as of the taxable year approximately the amount of interest due on the entire deficiency imposed.  It is our opinion that only so much of the interest as is properly attributable to the taxable year may be deducted from petitioner's gross income of that year.  Brooklyn Union Gas Co.,22 B.T.A. 507">22 B.T.A. 507; affd., 62 Fed.(2d) 505. The administrative difficulties to which respondent objected in G.C.M. 9575, X-1 C.B. 381, cited in respondent's brief, are not present in the instant proceeding.  Decision will be entered under Rule 50.Footnotes1. 71.115 Years open to audit and adjustment.  (1) Additional assessments and corrections of assessments by office audit or field investigation may be made of income of any taxpayer if notice pursuant to section 71.12 is given within the time specified in this subsection.  (a) Subsequent to the enactment of this subsection and prior to April 1, 1938, such notice may be given with respect to income received in any year or years subsequent to the calendar year 1926 or corresponding fiscal year.  A notice pursuant to section 71.12 given prior to the enactment of this subsection shall not preclude the tax commission or the assessor of incomes from giving a notice within the time herein specified unless heretofore the assessment or correction based upon such prior notice has become final and conclusive under the provisions of sections 71.12, 71.13, 71.14, 71.15, and 71.16.  In instances where an additional assessment or correction of an assessment based upon such prior notice has not become final and conclusive, the record and proceedings in respect thereto shall be applicable to any notice given within the time herein specified, unless, within twenty days after such latter notice, an application for hearing is filed in accordance with section 71.12, in which case the former record and proceedings shall be vacated and new proceedings taken in accordance with sections 71.12, 71.13, 71.14, 71.15, and 71.16↩.  [Effective date, Oct. 6, 1937.] 2. (5) Additional assessments and corrections of assessments may be made of income of any taxpayer if such corrections are made within seven years after the close of the period covered by the income tax return, provided that after July 1, 1933, additional assessments or corrections and assessments may be made if such assessments and corrections are made within four years after the close of the period covered by the income tax return, but if no return is filed for any of the years since January 1, 1911, income of such years may be assessed when discovered. ↩