Court Opinion

ID: 4603643
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:32:28.111261+00
Date Added: 2024-06-11T07:52:53.583368
License: Public Domain

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fishel v. CommissionerDocket No. 13912.United States Board of Tax Appeals14 B.T.A. 87; 1928 BTA LEXIS 3029; November 9, 1928, Promulgated *3029  1.  Where no partnership income or excess-profits-tax returns were filed by a partnership for the year 1917, the statute of limitations does not apply to any deficiency that may be determined against the partnership for such year.  2.  Inventory adjustment made by the Commissioner disallowed and the amount thereof restored to the cost of goods purchased in the taxable year on a showing that the goods in such inventory were the property of the petitioner and were inventoried at cost.  Carmi A. Thompson, Esq., George B. Harris, Esq., Orrville Smith, Esq., and Milton A. Warnes, C.P.A., for the petitioners.  Paul L. Peyton, Esq., and Hugh Brewster, Esq., for the respondent.  LANSDON *87  The basis of this proceeding is the Commissioner's rejection of a claim for abatement of an assessment of a deficiency in partnership excess-profits tax for the year 1917, in the amount of $48,865.55.  As finally submitted to the Board, the issues to be determined are as follows: (1) Is the collection of the amount of tax here in controversy barred by the statute of limitations?  (2) Did the Commissioner erroneously increase the income and decrease the*3030  invested capital of the petitioners in the taxable year by his adjustment of inventory as of January 1 of such year?  (3) If the issues raised in (1) and (2) are determined in favor of the respondent, should the resulting tax liability be computed under the provisions of section 210 of the Revenue Act of 1917?  (4) Should a penalty of 50 per cent of any tax found to be due be imposed for failure to file a return required by law?  FINDINGS OF FACT.  The petitioners were on January 1, 1917, and continuously thereafter until December 24, 1917, all the partners doing business at Cleveland, Ohio, under the partnership name of Fishel & Marks, and on said December 24, 1917, said partnership was dissolved, all its operations were terminated, and its business and property were transferred to Fishel & Marks, Inc.  The petitioners, as such former partners, are the sole parties in interest with respect to the taxes hereinafter designated.  In the taxable year and for many years prior and subsequent thereto the partnership and its successor corporation were engaged in the purchase and sale of scrap iron and steel in large quantities.  *88  It was the custom of the partnership*3031  to have its purchases of scrap iron and steel loaded on freight cars which in many cases were billed out to customers from which orders had not been taken and in many others retained in such cars in transit or on storage sidings until the sales thereof were made.  It also accumulated a considerable stock in its yards at Cleveland.  The result of this custom was that at all times its inventories included merchandise on hand in its yard at Cleveland and merchandise contained in cars in transit to customers or to such yards.  Some time in the latter part of December, 1916, the partners, with the assistance of several of their employees, made an inventory of the merchandise in the yards and in the cars in transit.  Such inventory as to the merchandise in the yards was made on the basis of cost or market, whichever was lower, and as to that in cars in transit on the basis of cost.  In the income and excess-profits-tax return of the year 1917, the opening inventory of merchandise in the yards was valued at $252,100.72, and the inventory in transit at $131,522.16, respectively, and at December 31, 1917, at $241,532.41 and $131,522.16, respectively.  The income and excess-profits-tax returns*3032  covering the operations of the year 1917 were made on forms 1031 and 1103 furnished by the Bureau of Internal Revenue and designated as Corporation Income Tax Return and Corporation Excess Profits Tax Return, respectively.  No other returns of income for the year 1917 were made either by the partnership or corporation and the returns so made were filed on March 19, 1918.  Upon audit the Commissioner rejected such returns as the returns of the partnership and determined that the cost of goods sold in the taxable period should be reduced by the amount of $131,522.16 reported as the inventory at cost of goods in transit at January 1, 1917.  The deficiency in controversy was assessed in March, 1923, on the basis of a so-called "dummy return" of the partnership for the period from January 1, 1917, to December 24, 1917, which was made up by the Commissioner not later than December 22, 1922.  Subsequent to the taxable year but prior to the assessment here involved, the successor corporation moved its place of business to a new location, three or four miles from the ground occupied in the taxable year.  At the inception of this tax controversy it was discovered that all the books and accounts*3033  recording and reflecting the transactions of the partnership in 1917 had been lost.  At the time of the discovery and many times thereafter diligent search for the missing books and records was made and at the date of the hearing none of them had been found.  The man who kept the books is dead.  *89  On January 22, 1923, the proper parties executed the following: JANUARY 22, 1923.  (Date) INCOME AND PROFITS TAX WAIVER.  In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, The Fishel & Marks Company, of Cleveland, Ohio, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said The Fishel & Marks Company for the years 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations.  (Signed) THE FISHEL & MARKS*3034  CO.  Taxpayer.By H. R. FISHEL, President.H. D. BLAIR, Commissioner A.[CORPORATE SEAL.] The income and profits-tax return covering the operations of 1917, signed by A. S. Fishel and Joseph D. Marks, as vice president and secretary-treasurer, respectively, of the corporation, was filed on March 19, 1918.  The waiver above set forth was executed on January 22, 1923.  The assessment of the tax here in controversy was made by the Commissioner on March 27, 1923.  OPINION.  LANSDON: The petitioners admit that they filed no partnership return for the year 1917.  This disposes of its contention that the statute of limitations has run against its tax liability for such year.  The waiver introduced in evidence was executed by the officers of the corporation and therefore has no relation to the statute of limitations against the tax liability of the partnership.  Since the evidence discloses that the partnership has never filed a return for the period from January 1 to December 24, 1917, there is no defense against the respondent's motion that we add 50 per cent thereof to any tax liability determined for the period here involved on account of neglect to file the*3035  return required by law, and since it is admitted that no partnership return was filed, such motion is granted.  The Commissioner, on recomputation, should impose and collect such penalty.  The second issue is solely a question of fact.  The Commissioner has subtracted the amount of $131,522.16, representing the alleged value of yard purchases in transit at January 1, 1917, from the reported amount of the petitioners' opening inventory for the taxable period.  The effect of such action was to increase the petitioners' *90  gross income and reduce their earned surplus, if any, for invested capital purposes for the period involved by such amount.  Our function here is to determine whether the petitioners have adduced sufficient evidence to overcome the presumption that the determination of the Commissioner was correct.  The petitioners allege that all the books, accounts and records of the business for the year in question have been lost.  Several witnesses testified that frequent and prolonged searches have been made and that none of the missing books or papers have ever been found.  On this showing oral evidence in proof of the value of the yard purchases in transit at January 1, 1917, was*3036  received at the hearing.  There is no controversy over the value of the inventory of material in stock at January 1, 1917, or of any part of the closing inventory of such year.  We, therefore, limit our discussion to the evidence offered to support the valuation of the "yard purchase" inventory in transit which was included in the opening inventory for the taxable period in the amount above set forth.  Joseph D. Marks, one of the partners, testified that there was always a large quantity of scrap iron and steel in transit but not sold; that this was because the yards of the company were so small that there was no room for further storage of merchandise; that railroad cars were therefore used by the company for warehousing purposes; that whenever possible deliveries to customers were made from railroad cars which had never been unloaded; and that all such scrap was included in "yard purchases" inventory.  Marks also testified that to his own personal knowledge there was approximately the same amount of scrap iron and steel in transit at all times and including the beginning and the end of the taxable year.  He testified further that the amount of yard purchases at the beginning of*3037  the taxable year was ascertained by totaling the invoices that had been received for scrap iron and steel, then in transit.  A. S. Fishel and H. R. Fishel testified to the same effect.  The respondent offered no evidence in rebuttal.  Consideration of the evidence convinces us that the petitioners' inventory of scrap iron and steel, designated as "yard purchases," in transit at January 1, 1917, was taken at cost and that the valuation thereof was $131,522.16.  The Commissioner erroneously deducted this amount from the cost of goods purchased and from the determination of earned surplus in his computation of the invested capital of the partnership.  Cf. . Having determined the issues of fact herein favorably to the petitioner, it is unnecessary to decide the question of special assessment.  Decision will be entered under Rule 50.