The opinion of the court was delivered by: HAHN
This is an action for the recovery of income tax claimed to have been unlawfully assessed and collected by the defendant. Recovery is sought for the fiscal years ending April 30, 1919, and April 30, 1920, in the amount of $25,480.48. The sole reason advanced for such recovery in the evidence is that the commissioner unlawfully reduced the salaries voted to the officers of the plaintiff company by its directors for said years.
The view I am compelled to take of the case makes it necessary to consider only one of the defenses of the government. It is urged that the court had no jurisdiction herein because the plaintiff for the years mentioned requested and received special consideration by the Commissioner of Internal Revenue under the Revenue Act of 1918, §§ 327 and 328, 40 Stat. 1057, 1093. The same contention was made prior to a trial upon the merits, but at that time I overruled the government's contention without prejudice, because the very able brief of plaintiff's counsel left me in great doubt as to the validity of the government's position.
Under Revenue Act of 1917, § 210, 40 Stat. 307 -- United States v. Factors & Finance Corp., 288 U.S. 89, 94, 95, 53 S. Ct. 287, 77 L. Ed. 633; Joseph Joseph & Bros. Co. v. United States, 71 F.2d 389 (C.C.A.6).
Under Revenue Act of 1918, §§ 327, 328 -- United States v. Henry Prentiss & Co., 288 U.S. 73, 53 S. Ct. 283, 77 L. Ed. 626; Heiner v. Diamond Alkali Co., 288 U.S. 502, 53 S. Ct. 413, 77 L. Ed. 921; Bemis Bros. Bag Co. v. United States, 289 U.S. 28, 53 S. Ct. 454, 77 L. Ed. 1011; Cleveland Automobile Club v. United States, 70 F.2d 365 (C.C.A. 6); McKeever v. Eaton (D.C.Conn, Thomas J.) 6 F.Supp. 697; Michigan Iron & Land Co. v. United States (Ct.Cl.) 10 F.Supp. 563, 570, 571.
It may be said at the outset that though there has been no regulation or ruling upon the subject, it has been the practice generally in the Bureau of Internal Revenue to require taxpayers who apply for special assessment under sections 327 and 328 first to acquiesce in the computation of the tax as made without special assessment upon the ordinary statutory basis, and such a determination is perhaps necessarily a condition precedent to a correct computation of the tax under the special assessment provisions.
Considering a few of the exhibits which seem to have a direct bearing upon the proposition under consideration, Exhibit D is a thirty-day letter dated July 2, 1925. Exhibit E, dated July 29, 1925, is a letter of protest by the taxpayer, as follows:
"We protest the assessment of $17,904.28 for the fiscal year ended April 30, 1919, and $85,611.26 for the fiscal year ended April 30, 1920, for the reason it is believed that there are such abnormalities in the invested capital as would warrant the assessment of the excess profits taxes under the provisions of sections 327 and 328 of the Revenue Act of 1918, and it is therefore requested that the case be forwarded to the Special Assessment Section and we be given ten days additional time in which to file a formal protest setting forth in detail the abnormalities referred to above."
Exhibit 1 is a certified copy of a letter of protest dated March 2, 1926. The letter opens:
"In order that there shall be a final determination of the statutory tax liability for the fiscal years ending April 30, 1919, and April 30, 1920, before our request for special assessment is considered," etc.
It is suggested in the letter (1) that the invested capital for the years be recomputed, and (2) that the disallowance of officers' salaries be reconsidered. The closing paragraph of the letter is as follows:
"After the net income and invested capital have been adjusted in accordance with our contentions outlined above. It is requested that the case be returned to the Special Assessment Section for reconsideration."
Exhibit F is a letter from the Commissioner of Internal Revenue to the taxpayer, under date of April ...