
    JACOBS BROTHERS, INC. v. THE UNITED STATES
    [No. 630-53.
    Decided November 7, 1956]
    
      
      Mr. Morris Fedder for the plaintiff. Mr. Martin Fedder was on the brief.
    
      Mr. J. W. Hussey, with whom was Mr. Assistant Attorney General Charles K. Biee, for the defendant. Mr. Andrew D. Sharpe was on the brief.
   MaddeN, Judge,

delivered the opinion of the court:

The plaintiff filed fraudulent income and excess profits tax returns for each of the years 1943, 1944, and 1945. The frauds were discovered and the Commissioner of Internal Revenue in 1951 assessed increased excess profits taxes for those years on the basis of the plaintiff’s true income. He also, acting pursuant to section 293 (b) of the Internal Revenue Code of 1939, 26 U. S. C. (1952 Ed.) § 293, assessed a 50 percent fraud penalty upon the deficiencies, that is, the difference between the excess profits taxes paid by the plaintiff, and those that it should have paid.

The result of the increase in the plaintiff’s excess profits taxes was a decrease in its income taxes, since, under 26 U. S. C. (1940 Ed., Supp. IV) §26 (e) a taxpayer was entitled to a credit on its normal tax net income of an amount equal to its adjusted excess profits net income. The Commissioner of Internal Revenue, therefore, at the same time that he assessed the deficiencies and interest and fraud penalties relating to the plaintiff’s excess profits taxes, allowed and credited to the plaintiff the overassessments of its income taxes which resulted from the increase in its excess profits taxes. The plaintiff paid the amounts determined by the Commissioner.

The plaintiff filed claims for refund of parts of the amounts paid, asserting that in determining the amounts to which the 50 percent fraud penalty should be applied, the Commissioner should have deducted the overpayments of income tax from the deficiencies in excess profits tax.

The Government urges that the excess profits tax and the income tax were separate taxes. It cites Babcock and Wilcox Co. v. Pedrick, 212 F. 2d 645 (CA2), and W. G. Duncan Coal Co. v. Glenn, 120 F. Supp. 948 (D. C. W. D. Ky), which hold that in determining the dates from which interest on deficiencies and overassessments should run, the two types of taxes should be treated as separate.

The plaintiff points to section 26 (e), referred to above, which allows a credit in determining income tax net income of the amount of a taxpayer’s adjusted excess profits net income. It cites section 710 (a) (1) (B), which provides that the income tax and the excess profits tax added together should not exceed 80 per centum of the taxpayer’s surtax net income.

The sections of the Code defining “deficiency”, section 271 (a) (1) (2),26U. S. C. (1952 Ed.) § 271, and providing for the 50 percent fraud penalty, section 293 (b), 26 TJ. S. C. (1952 Ed.) § 293, appear in chapter I of the Code, which relates to income taxes. They are incorporated into subchapter E of chapter II, which relates to the excess profits taxes here in question, by section 729 (a), 26 U. S. C. (1940 Ed.) § 729, which says:

All provisions of law (including penalties) applicable in respect of the taxes imposed by Chapter 1, shall, insofar as not inconsistent with this subchapter, be applicable in respect to the tax imposed by this subchapter.

There is no clear mandate in the statutes which required the Commissioner of Internal Revenue to do what he did. The interest cases relied on by the Government involve statutes which provide definitely on what date taxes are due and from what date interest should be computed. In the instant case, if honest returns had been made, the plaintiff’s income for income tax purposes would have been reduced because of the credit of its excess profits tax income, and only the taxes shown by combining the information shown on the two returns would have been payable. We think that when the two returns were corrected by the Commissioner to eliminate the results of the plaintiff’s fraud, only the deficiency shown after considering the two corrected returns together should have been used as the sum to which to apply the fraud penalty.

The plaintiff also claims that the 10 percent postwar refund credit of excess profits taxes, provided for by sections 780 and 781 of the Code, as amended, 26 U. S. C. (1940 Ed., Supp. IV) Secs. 780, 781, should have been deducted from the excess profits tax deficiency before the 50 percent fraud penalty was applied to it. This contention concerns only the taxes for the year 1943, since the Commissioner did make the deduction for the years 1944 and 1945. The cited sections provided that if the excess profits taxes were paid before July 1, 1945, the taxpayer should be given a non-interest-bearing, nonnegotiable bond of the United States for the amount of the refund, payable on the cessation of hostilities in the then current war; but if the tax was paid after July 1,1945, the refund should be made in cash.

At the time the plaintiff’s return for 1943 was made, even if the return had been a non-fraudulent one, the plaintiff would not have received the 10 percent post-war deduction either in cash or by credit. It would have received a bond, not payable until an undetermined time in the future. On a return which was later shown to have involved a deficiency, the deficiency would not have been decreased or otherwise affected by the Government’s bond. We conclude, therefore, that the 50 percent fraud penalty was properly applied to the 1943 excess profits tax deficiency, as reduced by the income tax overassessment, but without any reduction on account of the 10 percent postwar refund credit. Stein v. Commissioner, 25 T. C. 940, 963.

The plaintiff is entitled to recover and judgment will be entered to that effect. The amount of the judgment will be determined in further proceedings, pursuant to Rule 38 (c).

It is so ordered.

Laramoee, Judge; Whitaker, Judge; Littleton, Judge; and JoNes, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the facts as stipulated by the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff was incorporated under the laws of the State of Maryland on September 21, 1926. Its stock has at all times been owned by Charles B. Jacobs, Irvin B. Jacobs, and Samuel B. Jacobs in proportions of 37%:37%: 25, respectively. Its principal place of business is located at 1512 Harford Avenue, Baltimore 2, Maryland, and its principal business activity is the manufacture and sale of women’s uniforms.

2. Plaintiff was organized to succeed to the business of a partnership consisting of Charles B. Jacobs, plaintiff’s president; Irvin B. Jacobs, plaintiff’s vice-president; and Samuel B. Jacobs, plaintiff’s secretary-treasurer.

3. Plaintiff filed fraudulent income and excess profits tax returns for each of the calendar years 1943, 1944, and 1945. The returns for 1943 disclosed net income of $78,129.42 and income tax liability of $31,251.77, declared value excess profits tax of $221.14, and no excess profits tax due. The returns for 1944 reported net income of $82,943.34 and income tax liability of $21,580.92 and excess profits tax liability of $24,787.34. The returns for 1945 reported net income of $67,261.07 and income tax liability of $22,460.99 and excess profits tax liability of $9,997.73. Plaintiff duly paid the amounts of taxes shown due on the returns.

4. Plaintiff’s federal income and excess profits tax returns for the calendar years 1939 to 1946, inclusive, were examined by Internal Revenue Agent M. W. Hardesty, whose findings were incorporated in a report dated October 19,1948. With respect to the calendar years 1943,1944, and 1945, the agent determined plaintiff’s net income to be $110,712.78 for 1943, $122,575.19 for 1944, and $98,081.86 for 1945. The increases made by the agent were attributable to the disallowance of salesmen’s commissions accrued and deducted in an excessive amount of $13,401.38 and the addition to income of unreported sales aggregating $19,273.34 for 1943. The agent disallowed claimed salesmen’s commissions of $18,565.62 and added unreported income from sales of $21,066.23 for 1944. The agent disallowed claimed deductions for salesmen’s commissions of $5,242.09 and added to income unreported sales in the amount $5,969.33 for 1945. For 1945, the agent also disallowed a loss on the sale of property to a controlled corporation in the amount of $19,609.37. The Commissioner of Internal Revenue approved, with minor adjustments, the revenue agent’s findings, except in respect of the loss of $19,609.37 for 1945. A 50 percent fraud penalty was assessed under the terms of section 293 (b) of the Internal Revenue Code of 1939.

5. Pursuant to the reports of revenue agents, field conferences, and plaintiff’s “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment” dated January 9, 1951, the Commissioner of Internal Revenue in March 1951 assessed deficiencies against plaintiff for 1943,1944, and 1945 as follows:

1943 — Declared value excess profits tax $2,156.53, interest thereon $893.39, and penalty thereon $1,067.95; excess profits tax $50,673.82, interest thereon $19,438.96, and penalty thereon $28,255.05. The Commissioner also allowed and refunded an over-assessment of income tax in the amount of $10,890.75, plus statutory interest thereon.
1944 — Declared value excess profits tax $1,489.96, interest thereon $527.85, and penalty thereon $744.98; excess profits tax $33,806.93, interest thereon $11,976.91, and penalty thereon $17,156.47. The Commissioner also allowed and refunded an over-assessment of income tax of $559.37, plus statutory interest thereon.
1945 — Excess profits tax $15,592.19, interest thereon $4,588.37, and penalty thereon $7,616.60. The Commissioner also allowed and refunded an overassessment of income tax in the amount of $1,076.85, plus statutory interest thereon.

The minor discrepancies in the foregoing 50 percent penalty computations were occasioned by adjustments and payments made in conformity with earlier revenue agents’ reports. The assessed deficiencies were paid or satisfied on various dates during 1951 and 1952.

6. The bases upon which the deficiencies for 1943, 1944, and 1945 were determined were (1) that plaintiff had fraudulently overaccrued on its books and deducted in its federal tax returns amounts falsely represented as liability for salesmen’s commissions, and (2) that in each of the years sales from which substantial amounts of income had been realized by plaintiff were not shown in plaintiff’s books of account and had not been reported in its federal tax returns.

7.The computations of penalties by the Commissioner of Internal Revenue on plaintiff’s excess profits tax deficiencies were as follows:

Deficiency Excess Profits Tam 1949 1944 1945

Revenue agent’s report 12/6/44- $5,836.28

Revenue agent’s report 11/21/46- $506.01

Revenue agent’s report 10/19/48- 50, 673.82 33, 806.93 $15,233.14

Deficiency for purposes of computing penalty_ 56, 510.10 34,312.94 15,233.14

Fifty percent penalty_$28,255.05 $17,156.47 $7,616.60

8.Plaintiff’s computations of the proper penalties on the excess profits tax deficiencies are as follows:

Deficiency Excess Profits Tam 1949 1944 1945

Revenue agent’s report 12/6/44- $5, 836.28

Revenue agent’s report 11/21/46- $506. 01

Revenue agent’s report 10/19/48- 50,673. 82 33,806.93 $15,233.14

$56,510.10 $34,312.94 $15,233.14

Overassessment income tarn per

Revenue agent’s report 10/19/48- $10,890. 75

Post-war refund — report 12/6/44_ 583.63

Post-war refund — report 10/19/48_ 5, 067.38

$559.37 $1, 076.85

$16, 541. 76 $559.37 $1,076. 85

Deficiency for purposes of computing penalty_ $39,968.34 $33,753.57 $14,156.29

Fifty percent penalty_ $19,984.17 $16, 876. 79 $7, 078.15

9.On June 5, 1952, plaintiff timely filed claims for refund for each of the years 1943, 1944, and 1945, with the District Director of Internal Revenue at Baltimore, Maryland. The claims were disallowed by letter dated April 8, 1953.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Eule 38 (c) of the Eules of this court.

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount' due plaintiff, it was ordered May 8, 1957, that judgment be entered for the plaintiff for $7,287.97.  