1929 BTA LEXIS 2444">*2444 1. The statute of limitation did not bar the assessment in March, 1926, of additional taxes for the year 1920 where returns were not shown to have been filed more than five years before the date of the assessment.
2. The Commissioner's determination that the four petitioners were affiliated for 1920 and 1921 approved.
16 B.T.A. 1119">*1119 The Commissioner determined the following deficiencies for the years 1920 and 1921:
| 1920 | 1921 | |
| J. Friedman & Co | $ 62.72 | $134.80 |
| Buckeye Clothing Co | 88.71 | 69.44 |
| La Belle Clothing Co | 154.90 | 36.76 |
| Famous Co | 260.26 | 116.64 |
Each petitioner separately contests the determination of the Commissioner for each year and alleges (1) that the Commissioner erred in ruling that it was affiliated for the two years with the other three petitioners; (2) that for the year 1920 the assessment of additional taxes was barred by the statute of limitations; and (3) that the Commissioner erred in adding $2,750 to the consolidated net income of the companies for 1920 as an additional amount earned by the Famous Company in1929 BTA LEXIS 2444">*2445 excess of the amount shown on its return. At the hearing the Commissioner confessed error in regard to the third allegation. The proceedings were consolidated.
16 B.T.A. 1119">*1120 FINDINGS OF FACT.
J. Friedman & Co. is a corporation organized under the laws of West Virginia, with its principal office in Pittsburgh, Pa. Prior to April, 1919, it conducted a retail men's clothing and furnishings store at Point Pleasant, W. Va. In April, 1919, it retired from this business and since that time has not engaged in any business except the investment of its money and the collection of rents, interest, and dividends. The Buckeye Clothing Co. is a West Virginia corporation which during the taxable years conducted a retail men's clothing and furnishings store in Marietta, Ohio. The La Belle Clothing Co. is a West Virginia corporation which during the taxable years conducted a retail men's clothing and furnishings store in Steubenville, Ohio. The Famous Company is a West Virginia corporation which during the taxable years conducted a retail men's clothing and furnishings store in East Liverpool, Ohio. During the years 1920 and 1921 the stock of these corporations was held in the following1929 BTA LEXIS 2444">*2446 percentages by the following persons:
| Percentage | ||||
| Stockholder | J. Friedman | Buckeye | La Belle | Famous |
| & Co. | Clothing | Clothing | Company | |
| Marcus Friedman | 39 4/5 | 43 | 42 | 35 15/21 |
| Nettie Friedman | 39 4/5 | 44 | 43 | 35 15/21 |
| L. K. Friedman | 10 | 6 | 4 | 11 19/21 |
| S. L. Friedman | 10 | 6 | 4 | 11 19/21 |
| Lorine Friedman | 1 | |||
| L. E. Clark | 3 | |||
| J. J. Gaughn | 13 | |||
| C. C. Cline | 4 16/21 | |||
| Irma Friedman | 1 | |||
| Caroline Kingsbaker | 2/5 |
Lorine Friedman is the daughter of Marcus Friedman. Clark and Gaughn were employees not related to the Friedmans.
Cline was not related to the Friedmans. During the taxable years he managed the store conducted by the Famous Company under a written contract which was to be in effect for ten years and under which, in lieu of a fixed salary, he was to receive one-half of the net profits of the business.
The property on which the business of the Buckeye Clothing Co. was conducted was owned by J. A. Josephy, who was also manager of the store. A written contract dated April 25, 1916, covered the employment of Josephy for the five-year period following the date of1929 BTA LEXIS 2444">*2447 the contract. This contract provided that he should receive onehalf of the profits of the store in lieu of a fixed salary, and also that the lease of the building should terminate at his option at the termination of his employment for any cause other than some violation 16 B.T.A. 1119">*1121 by him of the contract. The contract also provided that the store should not be merged with any other store but that it should be conducted according to the terms of the agreement and in nowise subject to either profits or losses from any store operated at any other place. On January 10, 1921, the Buckeye Clothing Co. and Josephy entered into a new contract of employment for eleven years, which was substantially similar to the previous contract. Josephy is not related to the Friedmans.
The manager of each store purchased the merchandise for his store, and in so doing was in no way influenced by the existence of any other store. There was no shifting of merchandise from one store to another. There was no sales policy common to all stores. A separate set of books for all stores was kept for each store at the office of J. Friedman & Co. All bills were paid from this office. Separate bank accounts1929 BTA LEXIS 2444">*2448 were maintained for each store. Profits and losses were not shifted from one store to another. After J. Friedman & Co. sold its store in April, 1919, it loaned money to the La Belle Clothing Co. on which the latter paid interest at 6 per cent. A part of this loan has been paid off.
Separate returns were made for each company. The return of J. Friedman & Co. for the calendar year 1920 was stamped "Rec'd. - 62 - 49 March 5, 1921 Dist. - West Va." The return of the Buckeye Clothing Co. for the period January 31, 1920, to January 31, 1921, was stamped "Rec'd. Mar. 8, 1921, 11th Dist. Ohio." The return of the La Belle Clothing Co. for the calendar year 1920 was stamped "Received with Remittance. Mar. 5, 1921. Collector of Internal Revenue 18th Dist. Ohio." The return of the Famous Company for the period February 1, 1920, to February 1, 1921, was stamped "Received with Remittance. Mar. 5, 1921. Collector of Internal Revenue 18th Dist. Ohio." These returns were signed and sworn to under date of February 28, 1921. The assessment against the Buckeye Clothing Co. involved herein was made and signed by the Commissioner on March 5, 1926. The other assessments involved herein were1929 BTA LEXIS 2444">*2449 made and signed by the Commissioner on March 4, 1926.
OPINION.
MURDOCK: The petitioner contends that the assessments for the year 1920 were made too late. It will be noted that these assessments were made in March, 1926. On February 26, 1926, the Revenue Act of 1926, was approved. It provided in section 277(a)(3):
The amount of income, excess-profits, and war-profits taxes imposed by the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, the Act entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," approved October 3, 1913, the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, and by any 16 B.T.A. 1119">*1122 such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
The petitioners contend that their returns for the periods as set out in our findings of fact above were prepared at the office of J. Friedman & Co. in Pittsburgh, and were mailed1929 BTA LEXIS 2444">*2450 from there on February 28, 1921, and in the ordinary course of the mails would have reached their destinations at Parkersburg, W. Va., at Columbus, Ohio, and at Cleveland, Ohio, on or about the first of March, 1921, or in any event before March 4, 1921, and therefore the assessments were made more than five years after the returns were filed. In this connection it is interesting to note that the Revenue Act of 1918, section 250(d), provided that the amount of tax due under any return should be determined and assessed by the Commissioner within five years after the return was due or was made, whereas the later acts provide that the tax shall be determined and assessed within a certain number of years after the return was filed.
Statutes of limitations sought to be applied to bar the rights of the Government must receive a strict construction in favor of the Government. ; . In other cases it might be important to decide exactly when returns are filed within the meaning of the revenue acts, but in the present case it is not necessary to decide1929 BTA LEXIS 2444">*2451 and we do not decide when the returns in question were filed or whether some of them were proper returns to start the running of the statute of limitations. Cf. , and other similar cases decided by this Board. See also ; .
The petitioners had the burden of proving that assessment was barred by the statute of limitations contained in the Revenue Act of 1926, and they have failed to sustain this burden. Their evidence on this point consisted solely of the testimony of a witness who at the time had been the bookkeeper for J. Friedman & Co. She testified that she prepared the returns of the various companies for 1920. She was then shown certain memoranda on the outside of packets containing duplicates of income-tax returns which she testified she had made at the time she prepared the returns and sent them to the various collectors. On the envelope containing the duplicate returns of J. Friedman & Co. she said there was such a memorandum made by her. After examining this she stated that the return for 1920 was mailed to the collector of1929 BTA LEXIS 2444">*2452 internal revenue at Parkersburg, W. Va., on February 28, 1921. From similar memoranda she stated that the return for the Buckeye Clothing Company for 1921 was mailed to the collector of internal revenue at Columbus, Ohio, on February 28, 1921, and the returns for the La Belle Clothing Co.16 B.T.A. 1119">*1123 and the Famous Company were mailed on the same date to the collector of internal revenue at Cleveland, Ohio. On cross-examination she stated that, except for the memoranda, she could not tell on what date the returns were mailed to the various collectors; that she did not recollect anything with reference to placing the returns in a mail box. This was substantially the extent of her testimony. It was apparent that the witness had no present recollection at the time she testified of the details or dates of mailing the various returns in question. From the circumstance that the witness made these memoranda at or about the time that the returns were made, we are asked to infer that the returns were actually and properly mailed on the 28th day of February, 1921, and reached the collectors in due course. This evidence falls short, however, of establishing the fact that the returns were1929 BTA LEXIS 2444">*2453 properly mailed on this date. In Wigmore on Evidence, Second Edition, vol. 1, sec. 95, the rule upon which the petitioner relies is stated as follows:
The fixed methods and systematic operation of the Government's postal service have been long conceded to be evidence of the due delivery to the addressee of mail matter placed for that purpose in the custody of the authorities. The conditions are that the mail matter shall appear to have conformed to the chief regulations of the service, namely, that it shall have been sufficiently prepaid in stamps, correctly addressed and placed in the appropriate receptacle.
In the present case we have no testimony that the returns were sufficiently prepaid in stamps, that they were correctly addressed, or that they were placed in the appropriate receptacle, so we can not find as a fact on what day they were mailed or when in due course they would have reached the collectors. Furthermore, following the testimony of the witness, the Commissioner offered in evidence the returns of the four petitioners which he had received. Each of these returns bore a stamp and each stamp purported to show the date on which the returns had been received at1929 BTA LEXIS 2444">*2454 the office of the collector of internal revenue to which it had been sent. The two returns sent to Cleveland, Ohio, and the one sent to Parkersburg, W. Va., were each stamped as if they had been received on March 5, 1921, while that sent to the collector of internal revenue, Columbus, Ohio, was stamped as if it had been received March 8, 1921. This proof offered by the Commissioner, from which we might infer that the returns were filed on the dates shown, is certainly as strong as the proof offered by the petitioners, and in this state of the record we can not find as a fact that the returns were filed within the meaning of the Revenue Act of 1926, more than five years before the date on which the taxes were assessed. See . Cf. . Therefore, we must sustain the Commissioner on this point.
The four petitioners filed separate returns, but the Commissioner determined that they were affiliated for the years 1920 and 1921 and 16 B.T.A. 1119">*1124 computed their respective tax liabilities accordingly. The petitioners contend that the Commissioner erred in this.
Section 240(b) of the Revenue1929 BTA LEXIS 2444">*2455 Act of 1918 and section 240(c) of the Revenue Act of 1924 are as follows:
For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
In the present case it appears that the same four individuals during the taxable years owned 99 3/5 per cent of the stock of J. Friedman & Co., 99 per cent of the stock of the Buckeye Clothing Co., and 95 5/21 per cent of the stock of the Famous Company, and that during the year 1920 they owned 93 per cent of the stock of the La Belle Clothing Co., and, for the year 1921, 3 per cent of the remaining 6 per cent of the stock of this corporation not owned by the same four individuals was held as treasury stock. We think that, within the meaning of the revenue acts in question, these petitioners owned substantially all of the stock of these corporations. We do not see how any different conclusion could be reached under the clear wording of the above quoted sections of these Acts. Under the Revenue Act of 1918 and the Revenue Act of 1921, for any taxable year before January 1, 1922, corporations1929 BTA LEXIS 2444">*2456 were required to make consolidated returns, and on this basis their taxes were to be computed and determined if they were affiliated. We sustain the Commissioner's determination in so far as the question of affiliation is concerned.
The Commissioner at the time of the hearing confessed that he had erred in adding $2,750 to the consolidated net income of the companies for 1920. So that he may have an opportunity to correct this error.
Judgment will be entered under Rule 50.
Footnotes
1. In 1921 this stock was held as treasury stock. ↩