*2168 1. The year in which the sale of petitioner's valve department occurred, for the purpose of reporting the profit thereon, determined.
2. Where the facts do not show any intended deception on the part of a taxpayer in representing to the Government that the profit realized on a sale is taxable in a designated year and where the representations complained of are merely expressions of opinion as to the law on the subject, as distinguished from statements concerning a material fact, no basis exists for applying the doctrine of equitable estoppel.
*1199 This proceeding involves the redetermination of a deficiency of $4,583.60 in income and excess-profits taxes for the year 1921. The issues not settled by stipulation at the hearing are the March 1, 1913, value of the regulation valve department of petitioner's business for the purpose of determining the gain realized on a subsequent sale, and whether the sale occurred in the taxable year or the year 1920.
FINDINGS OF FACT.
The petitioner is a New Jersey corporation*2169 with its principal office at Mansfield, Ohio. Until the sale of one of the branches of its business to the Fisher Governor Co., as hereinafter mentioned, petitioner's business consisted of an electrical department and a regulation valve department, in which electrical supplies and brass valves, respectively, were manufactured and sold.
The regulation valve department was organized in 1906 or 1907. The valves produced in the department were manufactured and sold under patents issued to employees of petitioner. The principal patent, No. 802496, was issued and held by G. W. Collin, to whom the petitioner paid a royalty for all valves manufactured under the patent. None of the patents were owned by the petitioner on March 1, 1913. Under an agreement executed on November 17, 1920, the petitioner paid Collin the sum of $1,000 for an assignment of Letters
The valves manufactured under the patents were sold to jobbers and distributors, and direct to users, principally the former. The *1200 petitioner organized and*2170 maintained a separate organization for the sale of valves and was obliged to adopt methods of marketing the product different from those used in its other department. The valves were sold to customers other than purchasers of petitioner's electrical supplies.
In July, 1920, negotiations were started by the petitioner with the Fisher Governor Co., an Iowa corporation, with its principal place of business at Marshalltown, Iowa, which negotiations resulted in the execution of an agreement by the parties on November 26, 1920, for the sale and purchase of the department, clauses one and two of which read as follows:
(1) The Ohio Co. hereby agrees to sell, assign, transfer and set over unto The Fisher Co. that part of its business consisting of the manufacture and sale of the device known as the Ohio Brass Pressure Regulating Valve and hereby does sell, assign, transfer and set over unto The Fisher Co. that part of its business consisting of the manufacture and sale of the said Ohio Valve, as more fully hereinafter set forth.
(2) The Ohio Co. agrees to assign to The Fisher Co.
The petitioner also sold and assigned by the same agreement, all of its right, title and interest in and to a certain contract, dated January 24, 1906, with G. W. Collin, as modified by the agreement of November 17, 1920, for the manufacture and sale of valves under Letters
All of the material and equipment*2172 sold was to be delivered within thirty days from the date of the agreement. The petitioner also agreed (a) to refrain from manufacturing and selling for a period of five years from the date of the contract valves of a type competitive to those made and sold by the purchaser, (b) to refer to the purchaser all orders for, and inquiries concerning, valves received after the execution of the agreement, and (c) to expend $200 in advertising in trade papers the fact that the Fisher Governor Co. was the successor to the petitioner in the manufacture and sale of the Ohio Brass Pressure Regulating Valve. The sales price of $20,000 was payable by four notes for $5,000 each, dated January 1, 1921, and maturing, respectively, March 31, 1921, June 30, 1921, September *1201 30, 1921, and December 31, 1921. The purchase price, represented by the notes, was to be paid at the time of shipment of the material and equipment. In the event shipment was made in 1920, the purchaser was to pay to the petitioner interest on the purchase price from the date of shipment to January 1, 1921.
The first shipment of stools and equipment sold under the agreement of November 26, 1920, including finished*2173 valves sold to the Fisher Governor Co. under the agreement on a cost-plus basis, was made in December, 1920. Shipments were made thereafter as the tools and equipment could be released. The final shipment was made in April, 1921. The four notes executed by the Fisher Governor Co. under the sales contract were transmitted to the petitioner by letter on January 4, 1921. The notes were subsequently paid in full.
The sale of the regulation value department was recorded on petitioner's books in January, 1921, as of January 1, 1921, by the following entries:
| The Fisher Governor Co., $20,000. | |
| Patterns | $500 |
| Durable tools | 2,000 |
| Surplus | 12,355 |
| Profit and loss | 5,145 |
| Bills receivable, $20,000. | |
| The Fisher Governor Co., $20,000. |
The petitioner's books for 1920 were not closed until about February 20, 1921.
The tools and patterns used by petitioner in the manufacture of valves were replaced whenever wear and tear on them required replacement. The petitioner depreciated their cost at the rate of 10 per cent per annum. The petitioner had practically the same quantity of tools and patterns on hand on November 26, 1920, as it had March 1, 1913. The depreciated*2174 book value of the tools and patterns on November 26, 1920, was about $2,500.
The net profits of the regulation valve department of petitioner's business for the three years preceding 1913 were: 1910, $3,323.69; 1911, $4,393.05; 1912, $3,848.83.
During and prior to the taxable year the petitioner kept its books and filed its returns on the accrual basis of accounting.
The income-tax returns filed by the petitioner for the years 1920 and 1921 were prepared by a firm of public accountants from the former's books. The petitioner did not furnish the accounting firm with a copy of the agreement of November 26, 1920, for use in connection with the preparation of the returns.
In its return for the year 1921 the petitioner reported a profit of $5,145 on the sale of its valve department. In computing this profit the petitioner placed a March 1, 1913, value of $2,500 on tools and patterns, and $12,355 on the remainder of the assets sold.
*1202 The value of the business was determined by the petitioner solely on the basis of the net profits of the department for the three years preceding 1913, and the years 1918, 1919, and 1920. In his determination of the profit realized*2175 on the sale the respondent declined to allow any part of the $12,355 claimed as the value of the business sold.
The books and records of petitioner were examined by a revenue agent during the summer of 1925 for the purpose of verifying the tax returns filed for the years 1920 and 1921. The audit extended over a period of about three weeks. The sale made to the Fisher Governor Co. was discussed with the revenue agent the greater part of a day. As a result of this audit, on September 3, 1925, the internal revenue agent in charge at Cleveland, Ohio, informed the petitioner by letter that a recommendation was being made to the Commissioner that its tax returns for the years 1920 and 1921 be accepted as correct and closed as filed.
In a letter dated March 8, 1926, addressed to the Commissioner, and an affidavit executed on November 10, 1927, written and executed in connection with the petitioner's tax liability for the years 1920 and 1921, the latters' treasurer referred to the sale to the Fisher Governor Co. as having occurred in the year 1921.
The opening paragraph of the deficiency letter sent to the petitioner on March 12, 1926, reads as follows:
An examination of your*2176 income and profits tax returns and of your books of accounts and records and those of your affiliated company discloses a deficiency in tax aggregating $6,686.11 for the years 1920 and 1921 as shown in the attached statement.
A short time after February, 1928, the petitioner furnished the Special Advisory Committee of the Bureau of Internal Revenue with a copy of the agreement of November 26, 1920, in order to enable the committee to determine to whom the sale had been made and what had been sold.
The issue respecting the year in which sale was made was raised on February 9, 1929, by an amendment to the petition.
At the hearing it was stipulated that there should be allowed as a credit against taxes for the year 1921, the sum of $1,293.60 for Canadian taxes accrued for that year in lieu of the sum of $510.84 allowed by the respondent for taxes paid by the petitioner in the year 1921.
OPINION.
ARUNDELL: It is being contended on behalf of the respondent that the profit realized on the sale of the petitioner's value department is taxable in the year 1921 on the theory that for tax purposes the sale *1203 was not completed in the year 1920. We are unable to concur*2177 in this view.
By the terms of clause 1 of the sales contract, the petitioner actually assigned and transferred its title and interest in the property to the Fisher Governor Co., and thereafter the assets were at the risk of the latter even though they remained in the possession of the former. The sales contract also provided that the petitioner should refrain from manufacturing valves of a type competitive to those made and sold by both companies, effective on the date of execution of the agreement and that all orders received for valves after that date, as well as inquiries received concerning them should be transmitted to the buyer. The object sought to be accomplished by this arrangement was to immediately place petitioner's valve business in the hands of the buyer.
The fact that all of the material sold was not shipped before the close of the year 1920 and the notes evidencing the purchase price were not delivered until in January, 1921, is not material. "If the property by the terms of the agreement passed immediately to the buyer, the contract was deemed a bargain and sale." *2178
The sales contract of November 26, 1920, definitely fixed the liabilities of the parties, including that of the buyer to pay the purchase price upon delivery of the material, and nothing remained for either party to perform to make the transaction a binding one. Had the petitioner made immediate shipment of the material sold, it could have demanded the notes, and it refused, could have maintained an action for the purchase price. The notes were actually delivered before the final shipment of material was made. The purchase price having been definitely fixed under the sales contract, the petitioner could have determined the amount of its profits on the transaction*2179 as readily in 1920 as in the year 1921. The fact that it deferred making the necessary bookkeeping entries for the sale until after the close of the year in which the sale became absolute and the liabilities of the buyer and seller were made certain, does not affect the situation. Where the books do not reflect the actual facts, as here, the latter must prevail. Neither the Commissioner nor a taxpayer may arbitrarily designate the year in which income is taxable.
*1204 In our opinion the sale was completed in the year 1920, and since the petitioner was on the accrual basis of accounting, the profit realized on the transaction is taxable in that year.
The respondent maintains that if the profit realized on the sale is properly accruable in the year 1920, the petitioner, because of representations made to him, should be estopped to deny that the income is not taxable in the year 1921.
Having raised the question of estoppel, it is incumbent upon the respondent to show that the elements of the doctrine are present. *2180
The time when an isolated transaction such as the one before us should be entered on the taxpayer's books, and any profit realized thereon returned for tax purposes, is frequently a difficult matter to determine. The petitioner here, after construing the contract of sale in the light of the law of contracts, its method of recording and reporting income, and the taxing acts, concluded that the profit realized on the sale was taxable in the year 1921, and so returned it. This position the petitioner adhered to until the early part of 1929, when it filed an amendment to its petition asking that the income be placed where it properly belonged. It does not appear of record, however, that the question of whether the sale was completed in 1920 or 1921 was ever made an issue in any of the petitioner's dealings with*2181 the Bureau of Internal Revenue. The misrepresentations alleged to have been made by the petitioner subsequent to the filing of its return for 1921 were made in connection with a dispute with the respondent concerning the value of the business sold, without any apparent intention on the part of the former to mislead the latter as to the year the sale took place.
The petitioner's treasurer testified at the hearing that the revenue agent who examined the petitioner's books of account and records to verify the correctness of its returns for the years 1920 and 1921 was "given everything on the situation [sale] he asked for." This testimony indicates a willingness on the part of the petitioner to reveal such facts as the respondent's representative regarded as recessary to determine its correct tax liability for each of the two years. There is nothing of record tending to show that the petitioner ever actively concealed any of the facts bearing on the question.
*1205 Another element of estoppel is that the alleged misrepresentations must be concerning a material facts, as distinguished from a mere expression of opinion as to the law of a contract. *2182
This language did not mislead or induce either the defendants or the insurance companies to alter or change their position in any respect whatever, nor influence their conduct in any way. Both the defendants and the insurance companies had the written contracts before them, and were presumed, as a matter of law, to know their legal effect and operation. What the complainant said in his testimony was a statement of opinion upon the question of law, where the facts were equally well known to both parties. Such statements of opinion do not operate as an estoppel. If he had said, in express terms, that by that contract he was responsible for the loss, it would have been, under the circumstances, only the expression of an opinion as to the law of the contract, and not a declaration or admission of a fact, such as would estop him from subsequently taking a different position as to the true interpretation of the written instrument.
The testimony in this proceeding does not disclose whether or not the respondent has a copy of the contract of sale before him prior to the mailing of his deficiency letter on March 12, 1926. *2183 The petitioner's treasurer testified that it was his "recollection" that the contract was placed in the hands of the revenue agent for examination during the course of the audit he made of its books in 1925. Other testimony in the record indicates that the revenue agent did not consider the question seriously, since the tax rates were the same for both years. In any event there has been no proof that the respondent was not in as good a position as to the petitioner to determine the year in which the profit was taxable. As we pointed out in our discussion of the first issue, income is taxable in the year of receipt or accrual, depending upon the taxpayer's method of reporting income, and neither the Government nor the taxpayer may arbitrarily designate the taxable year.
Had the petitioner appealed from the deficiencies asserted for both years, and raised the question in its original petition or an amendment thereto, the respondent would doubtless concede the former's right to have the issue decided upon its merits, since in such a situation it could not be said that the latter had acted to his injury to damage, thereby eliminating one of the essential elements of estoppel. If*2184 the respondent has sustained any damage, it is because the time for making an additional assessment for the year 1920 has expired.
In our opinion the respondent has failed to show the presence of facts justifying an application of the doctrine of estoppel against the petitioner.
Judgment will be entered under Rule 50.