Petition for Review of Decision of the United States Board of Tax Appeals.
Before Sparks and Treanor, Circuit Judges, and Lindley, District Judge. Treanor, Circuit Judge.
This case is brought to this court by a petition for review filed by the Commissioner of Internal Revenue. The questions presented for review, as stated by the petitioner, are as follows:
1. Did the Commissioner of Internal Revenue determine a deficiency in the taxpayer's tax liability for the calendar year 1927, or for the period from January 1, 1927, to June 30, 1927, inclusive?
2. Did the notice of deficiency which was sent by the Commissioner to the taxpayer constitute a sufficient notice of deficiency for the calendar year 1927?
The Board of Tax Appeals was of the opinion that the evidence did not establish as a fact that the Commissioner determined a deficiency for the calendar year 1927, but, in the opinion of the Board, "if the proof were sufficient on that point, the notice sent to the taxpayer certainly did not constitute a notice of deficiency for the calendar year 1927." The Board held that it had jurisdiction to redetermine the taxpayer's liability only for the period from January 1, 1927, to June 30, 1927; that the deficiency, if any, was the result of profit derived from the sale of the taxpayer's assets, which profit was received subsequently to June 30, 1927. In view of the foregoing, the Board of Tax Appeals held that it was without jurisdiction to determine the tax liability of the taxpayer for the calendar year 1927.
The taxpayer, a corporation organized under the laws of Illinois, transferred all of its assets to its successor in business during the calendar year 1927. By agreement the sale of the taxpayer's assets was effective as of June 30, 1927, although the taxpayer's books were not closed as of that date. On March 10, 1928, the taxpayer filed its federal income tax return, which return purported to be for the calendar year 1927.The tax return contained no item of gain or loss from the sale of its assets during the year.
As a result of an examination of the taxpayer's income tax return for 1926 and 1927 the agent who made the examination recommended that an additional tax be assessed against the taxpayer in the sum of $27,394.17. The principal adjustment made by the Agent to the income reported by the taxpayer in its 1927 return was the addition of $200,293,20, which represented the profit realized by the taxpayer from the transfer of its assets in 1927.
When the taxpayer was notified of the foregoing adjustment it filed a protest with the Internal Revenue Agent. The objections to the adjustment, as set out in the written protest, went to the merits of the changes and did not challenge the proposed deficiency assessment on the ground that the amount of income in question was not earned during the period January 1, 1927, to June 30, 1927. The protest referred to "a deficiency in taxes in the amount of $27,394.17 for the period from January 1 to June 30, 1927, as detailed in Revenue Agent Edwin W. Sivertsen's report dated April 27, 1928, on the audit of the Corporation's tax returns for the period from January 1, 126 to June 30, 1927."
Upon receipt of the taxpayer's protest a supplemental examination of the taxpayer's 1927 return was made by another agent and another notice was issued by the Commissioner under date of November 10, 1930. And after receipt of the Commissioner's notice the taxpayer filed a petition with the Board of Tax Appeals on January 8, 1931. for a redetermination of the deficiency, in which petition it was stated that "as a basis of its proceeding" the petitioner alleged, among other facts, that "the taxes in controversy are income taxes for the year 1927 and are in the following amount, $22,312.40." The petition set forth three alleged errors upon which the notice of deficiency was based, among which is the following: "(a) The Commissioner erred in including in the taxable income of the petitioner for the six months period ending June 30, 1927, the sum of $162,650.49 alleged by the Commissioner to be profit sustained by the petitioner upon the sale of its assets to the Forest Glen National Milk Company."
The foregoing statement standing alone would indicate that the petitioner was basing the alleged error on the fact that the alleged profit was included in the "six months period ending June 30, 1927"; but a reading of the entire petition discloses that the error relied upon was the charging of any profit to the taxpayer which was based upon the sale of its assets, the contention of the taxpayer being that the alleged sale of assets was a sale of the stock of the petitioner corporation by its stockholders and not a sale of assets by the corporation. And under the heading "the facts upon which the taxpayer relies as a basis of its appeal" is found no statement of fact that the sum of $162,650.49 "alleged by the commissioner to be profit sustained by the petitioner upon the sale of its assets" was not received during the period January 1 to June 30, 1927, nor is there a statement of fact that such alleged profit was received subsequently to June 30, 1927.
At the hearing before the Board of Tax Appeals, filed February 23, 1935, the Commissioner was granted leave to amend his answer and by this amendment the Commissioner admitted "that the taxes in controversy are income taxes for the year 1927 in the amount of $22,312.40" and alleged "that said year is the calendar year 1927." Petitioner replied with a denial that the taxes were for the calendar year 1927, and alleged that any deficiency "for any other part or period of the year 1927 than that specified in the said notice of deficiency aforesaid is wholly barred by the Statute of Limitations."
When the Commissioner of Internal Revenue has determined a deficiency against a taxpayer for a taxable year the Board of Tax appeals has no jurisdiction "to determine whether or not the tax for any other taxalbe year has been overpaid or underpaid." n.1 [Footnote Omitted] Consequently, our first question is to determine whether the Commissioner in fact did determine the deficiency in question for the taxpayer's taxable year of 1927.
The return made by the taxpayer as of March 15, 1928, was a return for the calendar year 1927. It was not questioned that the taxpayer kept its books of account on the calendar year basis, and had made its returns for prior years on the basis of the calendar year. As a matter of law the taxable period for the taxpayer was the calendar year 1927 and not the period from January 1 to June 30, 1927. the revenue agent who made the examination could not change the taxpayer's taxable period even if he had confined his examination and adjustments to the period January 1 to June 30, 1927. Only the taxpayer, with the approval of the Commissioner, could have changed its taxable period from the calendar year. The fact that any particular transaction produces income in a particular month does not make such income any the less income for the taxable year. And while the fact that an agent confines his examination of a return to an auditing of the accounts of a portion of the taxable year may affect the merits of the deficiency determination, still the determination is none the less a determination of a deficiency for the taxable year. There is no contention in ...