
    ROYAL INDEMNITY COMPANY v. THE UNITED STATES
    [No. 46617.
    Decided October 2, 1950.
    Plaintiff’s motion for new trial overruled December 5, 1950]
    
    
      
      Mr. Ghas. I. Dawson for the plaintiff. Mr. Arthur W. Grafton; Wyatt, Grafton & Grafton, and Bullitt, Dawson & Tarrant, were on the brief.
    
      Mr. Joseph R. Sheppard, with whom was Mr. Assistant Attorney Generad Theron Lamar Caudle, for the defendant. Messrs. Andrew D. Sharpe and Ellis N. Slade were on the brief.
    
      
      Plaintiff’s petition for writ of certiorari pending.
    
   LittletoN, Judge,

delivered the opinion of the court:

In this case the plaintiff seeks to recover $93,545.80 with interest from January 28, 1942, representing the fourth installment of income and profits taxes, with interest, shown to be due upon the return for the calendar year 1918 filed by the Louisville Woolen Mills, a corporation, and which tax was duly assessed by the Commissioner of Internal Revenue against said corporation. The separate corporation income and profits-tax return filed by the Louisville Woolen Mills for 1918 showed a total income and profits tax due in the sum of $129,364.93. The corporation elected to pay the tax so assessed in quarterly installments, and the first three installments amounting to $97,023.69 were duly paid, leaving a balance of $32,341.24 unpaid which represented the fourth installment due December 15, 1919. On December 20, 1919, the taxpayer, believing that it was entitled to some relief in connection with its excess profits taxes under the provisions of Sections 327 (d) and 328 of the Revenue Act of 1918, filed a request with the Commissioner of Internal Revenue for such relief and at the same time prepared and filed with the Collector of Internal Revenue a claim for abatement of the fourth installment of tax in the amount above-mentioned. In connection with this claim for abatement the Louisville Woolen Mills furnished to the Collector a surety bond for the payment of said balance remaining due, with interest, with the Royal Indemnity Company of New York, the plaintiff herein, as surety on said bond. This bond is set forth in full in Finding 3.

In the audit of the return of the Louisville Woolen Mills and returns of certain other corporations, the Commissioner of Internal Revenue determined that the Louisville Woolen Mills and three other corporations, referred to in the findings, were affiliated with the American Textile Woolen Company, a Tennessee corporation, for the calendar year 1918 and other years, within the meaning of Section 240 of the Revenue Act of 1918, and that the income and excess profits taxes of these corporations should be determined and computed upon a consolidated basis under Section 240 of the taxing act and regulations prescribed by the Commissioner. The American Textile Woolen Company owned all of the capital stock of the Louisville Woolen Mills, Athens Woolen Mills, Sweetwater Woolen Mills, and the Park Woolen Mills. This case involves only the claim for refund by the plaintiff of the fourth installment of the tax, plus interest, paid by it under its surety bond pursuant to a judgment on said bond of the U. S. District Court for the Western District of Kentucky, which was affirmed on appeal, 120 Fed. (2d) 136.

On October 26,1920, the Commissioner, after having made a preliminary audit of the returns filed by the several corporations above-mentioned, mailed to the American Textile Woolen Company, the parent corporation, an audit letter proposing an additional consolidated income and excess profits tax for the consolidated group of $400,885.61 covering the years 1917,1918, and 1919. Following the receipt of this preliminary audit letter the American Textile Woolen Company, as the parent corporation of the consolidated group, prepared and sent to the Commissioner of Internal Revenue a consolidated return for 1918 on which it computed a total ■consolidated tax liability for the group of $351,034.14. No assessment was ever made against American or any of the affiliated corporations upon this return and the amount computed thereon was never formally assessed by the Commissioner. The total income and excess profits taxes which had been shown to be due upon the separate corporation income and profits-tax returns filed by the several corporations in the affiliated group, including American Textile Woolen Company, were $295,610.74. The amounts totaling this sum had been formally assessed by the Commissioner and had all been paid by the several corporations except the last installment of $32,341.24 shown to be due on the return filed by Louisville Woolen Mills. Tn connection with the Commissioner’s audit letter of October 26, 1920, and a consolidated tax liability of $351,034.14 computed by American, as above referred to, the American Company sent to the Collector of Internal Revenue, at Nashville, its check dated November 17, 1921, for $100,000 to apply on the proposed additional tax indicated in the Commissioner’s audit letter. (See Finding 4.)

From this point forward until the final decision was made with respect to the consolidated tax liability of the affiliated group by the Tax Court on January 16, 1932, and the TJ. S. Circuit Court of Appeals on February 16, 1934, 68 Fed. (2d) 820, the matter of the tax liability of the consolidated group was handled before the Commissioner and the courts by the American Textile Woolen Company, the parent corporation. During this time the abatement claim, which had been filed by the Louisville Woolen Mills, was held under consideration by the Commissioner of Internal Revenue, and the surety bond which had been given for the last installment of the tax previously assessed against that corporation on the separate return which it had filed, remained in effect.

All the notices, audits, and determinations, which were made by the Commissioner relative to the tax liability of the consolidated group of the deficiencies in such tax for the calendar years 1917,1918 and 1919, were sent to the parent corporation, the American Textile Woolen Company. As shown in Findings 11-14, the Commissioner made his final determination on October 7,1925, of a total consolidated tax liability of $429,539.94 and a deficiency of $33,929.20 for 1918, after deducting the taxes theretofore assessed against the several corporations in the total amount of $395,610.74. This statutory deficiency notice set forth the amounts of taxes which had been formally assessed against the several corporations, including the additional payment of $100,000 by the American Company on November 17,. 1921. This deficiency notice allowed the request on behalf of the consolidated group for determination of the excess profits tax under Section 328 of the Revenue Act of 1918, and concluded with the following statement:

In accordance with the above conclusions, your claim for the refund of $45,000 filed by American Textile Woolen Company, abatement of $5,541.09 filed by the Park Woolen Mills, and abatement of $32,341.24 filed by the Louisville Woolen Mills, aggregating $82,882.33 will be rejected.
The Collector of Internal Revenue for your district will be officially notified at the expiration of thirty days from the date of this letter of the rejection.
Upon receipt of notice and demand from that official, payment should be made to his office, in accordance with the conditions of his notice.

The American Company appealed to the Tax Court for a redetermination of the deficiency for 1918, and also for 1917 and 1919. Among other issues raised in this proceeding by the American Textile "Woolen Company were (1) that the deficiencies asserted were barred by the statute of limitations, and (2) that in his determination of the deficiencies the Commissioner erred in allocating the consolidated tax liability of the consolidated group to the American Textile Woolen Company. The Tax Court held (23 B. T. A. 670) that an agreement existed among members of the affiliated group for the allocation of this consolidated tax to the American Textile Woolen Company, the parent corporation, and approved the action of the Commissioner in sending the statutory notice of the deficiencies for the years 1917, 1918 and 1919, to the American Company.

In the final determinations by the Commissioner of Internal Revenue and the Tax Court as to the deficiencies payable by the American Textile Woolen Company, the parent corporation, credit was given for the total amounts of taxes which had been shown to be due and had been formally assessed upon the separate individual returns filed by the several corporations.

As shown in Finding 27, the Commissioner, on August 23, 1932, formally rejected the abatement claim previously filed by the Louisville Woolen Mills for the fourth installment of the tax shown to be due upon the return filed by it and for which credit had been given in the decisions of the Commis,-sioner and the Tax Court, in determining the deficiency in the consolidated tax liability for 1918 of $33,929.20, against the American Textile Woolen Company.

After the plaintiff had paid the judgment of the U. S. District Court, as hereinbefore stated, under its bond for the payment of the fourth installment of the tax and interest thereon, assessed in 1919 against the Louisville Woolen Mills, it filed a claim for refund with the Commissioner of Internal Revenue, which was rejected. In this suit, which is based upon the rejection of that claim for refund, the plaintiff •contends that the collection of the fourth installment of the 1918 tax, shown on the return filed by the Louisville Woolen Mills, became barred by the statute of limitations on March 15, 1924, five years after the return made by the Louisville Woolen Mills was filed, because of the existence of an agreement among the group of consolidated corporations that the •consolidated tax liability of the group for 1918 should be allocated to the American Woolen Textile Company, the parent corporation. Plaintiff further contends that the allocation or assessment of any part of the total tax liability -of the consolidated group against the Louisville Woolen Mills became barred February 12,1926, five years after the American Textile Woolen Company prepared and sent to the Commissioner of Internal Revenue a consolidated income and profits-tax return on which said company computed a total fax liability for the consolidated group of $351,034.14. These contentions of plaintiff are based upon the theory that when it was found that the corporations were affiliated and the agreement among the group that the parent corporation would assume liability for the consolidated tax, the assessments theretofore made against the several corporations on the basis of the separate returns filed by them, became void .and of no effect, and relieved them of all liability therefor. Plaintiff says that upon the payment of the tax, with interest, covered by the bond given to the Collector of Internal Revenue at Louisville, Kentucky, on December 20, 1919, it was subrogated to all of the rights which the Louisville Woolen Mills had to contest the authority of the Government to collect from it any part of the consolidated tax liability finally determined to be due, and that plaintiff is therefore entitled to a refund of the tax and interest paid for the reasons above stated.

The defendants says that under the decision in United States v. John Barth Co., 279 U. S. 370, 375, the giving of the bond to insure the collection of the tax in question created in the Government a cause of action separate and distinct from that which previously existed for the collection of such tax upon the assessment which had been made,, and that in any event the judgments of the District Court and the Court of Appeals, hereinbefore referred to, against the plaintiff on its bond for the amount which it here seeks to recover, are res adjudicata. In those cases the courts, following the rule announced in the Barth case, supra, held only that the plaintiff could not under the terms of its bond defend against the claim of the Government for the payment of the amount of tax and interest covered by the bond, on the ground that the Govermnent was without right to collect the tax, for which the bond had been given, from the Louisville Woolen Mills.

It is clear from a reading of the bond (Finding 3) that by its express terms and conditions it was a waiver or extension of any statute of limitation as to collection of the fourth installment of the 1918 tax, that might otherwise have been relied upon by the taxpayer, Louisville Woolen Mills, had the Collector, without such bond, delayed collecting this tax beyond March 15,1924. The tax of $32,341.24 had been duly assessed, was due and payable, and notice and demand for payment thereof had been made upon the taxpayer at the-time the bond was given to the Collector to secure him and the United States against loss, by granting an extension of time within which to enable the taxpayer to obtain a final ruling from the Commissioner of Internal Revenue as to whether or not said sum was due from the Louisville Woolen Mills upon its income for 1918. That ruling was made about August 23,1932. The tax for which the bond was given was finally determined to be due as a part of the tax computed by the Commissioner and determined to be due upon the consolidated net income and invested capital of the affiliated corporations, after applying the relief provisions of Section 328 of the Revenue Act of 1918. This determination was judicially approved by the Tax Court, and the Circuit Court of Appeals for the Sixth Circuit. These decisions are not and cannot be questioned here.

Under the facts and circumstances of the case we find nothing in the provisions of Section 240 of the Revenue Act of 1918 relating to consolidated returns and the computation of tax upon consolidated net income and invested capital, or in any other provision of the tax statutes, which would warrant the conclusion that the Louisville Woolen Mills, had it paid the tax here in question at the time plaintiff paid it, could recover such tax on the ground that it was barred by any statute of limitation. The rights of plaintiff, as surety on the bond given to secure the payment of the tax, can be no greater than those of Louisville.

As shown in the findings, the five corporations, constituting the affiliated group, filed separate returns for 1918, in March 1919, and the taxes shown to be due on such returns were duly assessed against such corporations and, with the exceptions of the fourth installment due by Louisville Woolen Mills and a small amount reported by and assessed against the Park Woolen Mills, such assessments were paid. In all of his determinations and computations of the tax upon the basis of consolidated income and invested capital, and in the final statutory notice of a deficiency of $33,929.20 sent to the parent corporation, the American Textile Woolen Company, under the provisions of the Revenue Act of 1924, the Commissioner listed and credited against the total tax of the consolidated group the amounts of taxes already assessed against the several corporations. In its re-determination of the deficiency for 1918 the Tax Court did likewise in its judgment of January 16, 1932. No consolidated return was ever filed with the Collector of Internal Revenue by the parent corporation, and no new assessment was ever made of any portion of the consolidated tax liability of $429,539.94 for 1918 except the payment of $100,000 by American Textile Woolen Company, November 17,1921, and the deficiency of $39,362.70 determined by the Tax Court.

In our opinion there was no necessity under any provision of the revenue statute for the making of a new or further assessment against the parent corporation of the total of the portions of such consolidated tax which had previously been assessed against the several corporations, on the returns which they had filed. The statute in effect at the time the Commissioner made his preliminary determination, on January 12, 1925, and his final determination on October 7, 1925 (Findings 11 and 13), was the Revenue Act of 1924. That Act prescribed the procedure to be followed before assessment and collection of deficiencies, and provided for appeals to the Board of Tax Appeals (now the Tax Court). The jurisdiction of the Board was then limited to the redetermination of deficiencies. The statute defined a deficiency as the difference between the tax which had been assessed or collected without assessment and the tax determined to be due. The Commissioner and the Tax Court in effect consolidated the separate returns, computed consolidated income and tax, and after allocating to the several corporations the taxes which had been assessed against them, came up with a consolidated tax deficiency. This procedure and method had been followed throughout the period of the audit beginning October 26, 1920. This was acquiesced in by the consolidated group, and at every step credit was taken for the assessments which had been made against the proposed consolidated tax liability. The case was prosecuted throughout by the American Textile Woolen Company, the parent corporation. Its officers were the officers of each of the affiliated corporations.

The conclusion arrived at by the courts, under the facts and circumstances, that the parent corporation, American Textile Woolen Company, had, by its conduct, agreed to assume liability for the consolidated tax, did not, in our opinion, render void the assessments previously made or cause the collection of tax and interest, here involved, from the Louisville Woolen Mills or the plaintiff, to become barred under any statute of limitation on March 15,1924 (five years after the Louisville Woolen Mills filed its return), or on February-12, 1926 (five years after American Textile Woolen Company prepared and sent to the Commissioner a consolidated return with the payment of an additional amount of $100,000).

Plaintiff is not entitled to recover and its petition is dismissed. It is so ordered.

Howell, Judge; MaddeN, Judge; Whitaker, Judge; and JoNes, Chief Judge, concur. 
      
       Sec. 240.
      (a) That corporations which are affiliated within the meaning of this section ■shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return : * * *
      In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then he assessed tipon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. * * *
      (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls * * * substantially all the stock of the other or others, * * *.
     