Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.
Before SPARKS and ALSCHULER, Circuit Judges, and LINDLEY, District Judge.
This appeal involves a refund of income and excess profits taxes for 1917. The District Court rendered judgment for the Government and from that judgment the appeal is prosecuted.
The facts found are substantially as follows: On June 8, 1916, Henry F. Campbell and Harry C. Stutz (who owned seventy-eight per cent of the capital stock of the Stutz Motor Car Company of Indiana) entered into two contracts with Allan A. Ryan (a member of Allan A. Ryan and Company of New York). By the terms of those contract appellant was to be organized with 75,000 shares of no par value capital stock, which was to be purchased by Ryan and Company for $1,125,000. Appellant, in turn, was to purchase the entire outstanding capital stock, consisting of 1000 shares, of the Stutz Motor Car Company of Indiana for $1,125,000. Ryan, in turn, was to transfer to Stutz and Campbell, without cost to them, 37,500 shares of the capital stock of appellant, and he was to dispose of 27,500 of those shares for Stutz and Campbell, through sales upon the New York Stock Exchange at a minimum price of thirty dollars per share. Whatever he received above that figure was to be divided equally between the vendors and Ryan, and Ryan was to receive certain compensation for services and expenses. Those contracts were performed (with the exception that Ryan never received any compensation for his services or expenses).
Appellant was incorporated, and on June 22, 1916, Ryan and Company submitted an offer to it to purchase its outstanding capital stock for $1,125,000 in cash. The offer was accepted on the same day by appellant's incorporators and directors, among whom were Stutz, Campbell and Ryan. On the same day, Stutz and Campbell offered to sell the entire capital stock of the Stutz Motor Car Company of Indiana for $1,125,000 in cash, and the offer was accepted and consummated by appellant's incorporators and directors.
Appellant continued to own the stock of the Indiana corporation until June 20, 1917, when all of the assets of the latter company were transferred to appellant, which in turn surrendered the stock of the Indiana corporation, and the latter corporation was dissolved in September, 1917.
Appellant paid $460,885.01 as income and profits taxes for the calendar year 1917, paying $380,206.93 on June 28, 1918, and $80,678.08 on October 30, 1919. On August 1, 1919, the Commissioner advised appellant that its invested capital stock for the year 1917 had been determined to be$1,975,976.78. On February 9, 1924, appellant filed a claim for refund, having previously filed two appeals on the respective dates of March 6, 1923, and May 7, 1923. Appellant's claim for a refund was rejected on June 7, 1926, and on December 9, 1926, it petitioned the Commissioner to re-open its claim for refund. It is not disclosed whether that petition was acted upon prior to the institution of this action, but after its institution appellant filed additionalrequests for reopening of the claim which were refused after conferences with appellant's representatives.
On June 2, 1928, within two years after the Commissioner's rejection of the refund claim, appellant filed its original bill of complaint in this action. The time for filing such bill expired on June 6, 1928. Revenue Act of 1926 § 1113 (a), 44 Stat. 116, 26 U.S.C.A. § 156 (see 26 U.S.C.A. §§ 1672-1673). Appellant filed its amended bill on September 20, 1928, and its second amended bill on December 4, 1934.
We are first confronted with appellee's contention that the suit in its present form was not timely brought. In support of this contention appellee urges that the original bill was based solely on the ground that appellant was entitled to special assessment under section 210 of the Revenue Act of 1917 (40 Stat. 307), and that both amended bills sought to recover on the theory that appellant had not been allowed sufficient invested capital. It is argued, under the ruling in Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 48 S. Ct. 587, 72 L. Ed. 985, which was decided on June 4, 1928, that the original complaint did not assert a justiciable controversy, because, as held in that case, the decision of the Commissioner in refusing a special assessment is final and can not be reviewed in the District Courts. Appellee urges that each amended bill asserted a justiciable controversy wholly unrelated to the theory relied upon in the original bill, and must be considered as a new cause of action filed after the period of limitation for filing such actions had expired.
It is clear to us that the original bill was not based solely on the ground that appellant was entitled to a special assessment. It alleged specifically that at the time of the acquisition of appellant's assets, its invested capital amounted to not less than $3,500,000, and that the Commissioner had erroneously based the assessment on a valuation of $1,699,367, and that by reason of those facts, appellant had overpaid its tax in the sum of not less than $200,000, for which it asked a refund. The controversy throughout all these proceedings has been the alleged fact that the Commissioner valued the capital investment too low, and no complaint was made by appellee of the dearth of specifications until more than two years had elapsed from the rejection of the refund.
It is true the original bill alleged that the Secretary of the Treasury was unable to determine accurately the amount of invested capital, and for that reason appellant requested a special assessment under section 210, supra, but the alleged facts of the original bill, if true, were sufficient to warrant the Commissioner in determining the correct amount of the invested capital if it could be accurately determined, or to adjust the assessment under section 210, if it could not otherwise be accurately determined. The Government at all the times referred to had possession of all the facts, and it certainly was not surprised by the allegations of any of the amendments.
At the time the original bill was filed, it was thought that a decision of the Supreme Court was close at hand in the Williamsport Case. That surmise proved to be well grounded, for it followed within two days. Thereupon, in accord with that opinion, appellant without objection filed its amended bill on September 20, in which it abandoned its request for a computation of its tax under section 210, and persisted in its demand for a refund because of the Commissioner's erroneous valuation of the capital investment. If, as appellee contends, the original complaint was based solely on a request for special assessment, the first amended bill should have been objected to, and it should not have been permitted to be filed, because in that event the original bill did not present a justiciable controversy and it could not be amended to state a new cause of action. But neither appellee nor the court objected to the filing of the first amended bill, and likewise on December 4, 1934, the second amended bill was filed without objection. It was met by a motion to dismiss and later by an answer, both being based on the alleged fact of departure in theory, and the expiration of the statute of limitations. The motion to dismiss was overruled and the cause went to trial. We think the court's ruling in this respect was right. United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 54 S. Ct. 443, 78 L. Ed. 859; United States v. Memphis Cotton Oil Co., 288 U.S. 62, 53 S. Ct. 278, 77 L. Ed. 619; United States v. Factors & Finance Co., 288 U.S. 89, 53 S. Ct. 287, 77 L. Ed. 633; Bemis Bros. Bag Co. v. United States, 289 U.S. 28, 53 S. Ct. 454, 77 L. Ed. 1011.
Appellee relies upon United States v. Henry Prentiss & Co., 288 U.S. 73, 53 S. Ct. 283, 77 L. Ed. 626, as holdingcontrary to this view. It is true that in that case the court held that a claim for special assessment could not be turned by amendment into one for the revision of the assessment by increasing the value of the real estate included in invested capital, and that a claim on that ground, coming after the time limited by statute for filing claims, was barred. That decision, however, must be read in the light of the facts there presented. The taxpayer had filed its claim for refund based on an alleged erroneous denial of a special assessment. The Commissioner thereupon acknowledged the filing by letter in which he advised the taxpayer: "No consideration may be given under the provisions of Sections 327 and 328 until statutory net income and invested capital are definitely determined. It is therefore necessary that you acquiesce in the net income and invested capital as shown in the revenue agent's report of March 25, 1920, for the year 1918, or submit exceptions, if any, which you may take thereto. If exceptions are taken they should be presented in the form of appeal prepared in accordance with the provisions of Treasury Decision 3492, a copy of which is enclosed." The taxpayer took no appeal and it filed no exceptions complaining of the assessment of capital or income. It obviously chose to acquiesce in the report that the cash value of the capital had been fairly ascertained, and to take its stand on the position that under sections 327 and 328 its tax should be determined without reference to such value and in accordance with other methods both exceptional and discretionary. The Commissioner thereupon proceeded to a consideration of the claim that error had been committed in failing to give the taxpayer the benefit of a special method of assessment, and that claim was ...