1934 BTA LEXIS 1402">*1402 The petitioner and other corporations affiliated with it changed their accounting period from a fiscal to a calendar year and filed a consolidated return for the last eight months of 1923. The respondent determined that the affiliation ceased August 31, 1923, on account of which he computed the tax liability of the affiliated group for the first four months on the basis of a consolidated return and the tax liability of the petitioner for the last four months on the basis of a separate return. Thereafter a closing agreement was entered into with the affiliated group for the period May 1, 1923, to August 31, 1923. Held, that, under the circumstances, section 606 of the Revenue Act of 1928 authorized the execution of the agreement. Held, further, that in the absence of a showing of fraud, malfeasance or misrepresentation of a material fact the agreement may not be set aside for the purpose of redetermining the tax liability of the affiliated group for the entire eight months as one taxable period.
29 B.T.A. 1236">*1237 The deficiency1934 BTA LEXIS 1402">*1403 involved in this proceeding is in income tax in the amount of $32,258.86 for the period September 1 to December 31, 1923. The questions presented for decision are whether the respondent erred in treating the last eight months of 1923 as two taxable periods of four months each instead of one period, and whether the petitioner is entitled to an allowance for depreciation on intangible drilling costs during the first four months.
FINDINGS OF FACT.
The petitioner, a Maine corporation, which on August 27, 1923, changed its name from Central Petroleum Co., was the parent company of an affiliated group consisting of itself and the Wolverine Oil Co., Sagamore Oil & Gas Co., Wigwam Oil Co., Roth-Argue, Maire Brothers Oil Co., and St. Lawrence Oil Co. The petitioner owned all of the outstanding capital stock of the Wolverine Oil Co., Roth-Argue, Maire Brothers Oil Co., and St Lawrence Oil Co., except qualifying shares, and substantially all of the outstanding capital stock of the other two subsidiary companies.
On January 5, 1923, the board of directors of the petitioner authorized the president thereof to cause the assets of the subsidiary companies to be transferred to it upon such1934 BTA LEXIS 1402">*1404 terms as he might designate and to bring about the dissolution of the subsidiary companies at such time or times as he should consider advisable. The assets of the Roth-Argue, Maire Brothers Oil Co. were conveyed to the petitioner on March 1, 1923, and the assets of the other companies on January 31, 1923. The petitioner assumed all of the liabilities of the subsidiary companies outstanding on December 31, 1922, and agreed to buy such stock of the Sagamore Oil & Gas Co. and Wigwam Oil Co. as it did not own, at its par or book value, whichever was greater. All of the subsidiary companies were dissolved after December 31, 1923.
The subsidiary corporations maintained separate sets of books prior to the conveyance of their assets to the petitioner. The petitioner 29 B.T.A. 1236">*1238 continued this method of accounting until August 31, 1923, when, as a matter of convenience, the books were closed and the balances in the accounts were transferred to like accounts in the books of the petitioner.
The affiliated group filed returns on the basis of a fiscal year ending April 30 up to and including 1923. The respondent permitted the corporations to change their accounting period to a calendar1934 BTA LEXIS 1402">*1405 year basis. The petitioner filed a consolidated return for itself and subsidiaries for the period of eight months ending December 31, 1923.
In a letter dated July 17, 1929, addressed to the petitioner, relating to consideration given the income tax liability of the affiliated group for the fiscal years ending in 1920, 1921, 1922, and 1923, and the period May 1, 1923, to August 31, 1923, the respondent proposed deficiencies of $64,722.60 and $238,478.50 for 1920 and 1921, respectively, and no additional taxes for 1922, 1923, and the period May 1, 1923, to August 31, 1923. The statement attached to the letter showed a tax liability of $168,745.89 for 1920, $419,720.97 for 1921, consolidated net losses in 1922, 1923, and the four-month period ending August 31, 1923, and an overassessment of $12,200.33 for 1923 barred by the statute of limitations. The respondent computed the income tax liability of the petitioner for the last four months of 1923 on the basis of a separate return.
On September 12, 1929, the members of the affiliated group executed a closing agreement in pursuance of section 606 of the Revenue Act of 1928 covering their income and profits tax liability for the1934 BTA LEXIS 1402">*1406 fiscal years ending April 30, in 1920, 1921, 1922, 1923, and the period May 1, 1923, to August 31, 1923. This agreement provides, in part, as follows:
WHEREAS, there has been a determination of the tax liability of said taxpayers in respect of income and profits tax for the said periods listed above in the principal sum of six hundred thousand six hundred sixty seven dollars and nineteen cents ($600,667.19); and
WHEREAS, said taxpayers hereby agree to this determination and consent to the assessment and collection of any deficiency in tax included in the amount of the principal tax liability so determined, together with any penalty or interest applicable thereto as provided by law, and/or to accept any abatement, credit or refund made in accordance with such determination, together with any interest due thereon as provided by law.
NOW, THIS AGREEMENT WITNESSETH, that said taxpayers and said commissioner of Internal Revenue hereby mutually agree that the principal amount of such liability so determined shall be final and conclusive if and when this agreement is approved by the Secretary of the Treasury or the Under-secretary.
The agreement was executed by the Acting Commissioner1934 BTA LEXIS 1402">*1407 of Internal Revenue, and approved by the Secretary of the Treasury on October 21, 1929.
29 B.T.A. 1236">*1239 OPINION.
SEAWELL: The petitioner asks us to set aside the respondent's conclusion that the last eight months of 1923 constitute two taxable periods of four months each, requiring a consolidated return of the affiliated group for the first period and a separate return of the petitioner for the second period, and to hold that the income tax liability of the affiliated group should be computed on the basis of a consolidated return for the entire eight months. The respondent argues that the closing agreement bars a decision in favor of the petitioner.
There is agreement that the respondent split the period of eight months ending December 31, 1923, for which a consolidated return was filed, upon the theory that the affiliation was broken on August 31, 1923. The petitioner now argues that the affiliation continued throughout the year. The record here shows that the petitioner acquired all of the assets of the subsidiary companies, and such of their stock as it did not own, prior to May 1, 1923; and that the books of the several corporations comprising the affiliated group were1934 BTA LEXIS 1402">*1408 consolidated on August 31, 1923. The revenue agents who examined the books of the petitioner and its affiliates for the fiscal year 1923 and the four-month period ending August 31, 1923, reported to the internal revenue agent in charge, St. Louis, that the petitioner "absorbed" its subsidiaries August 31, 1923. This report was considered by the respondent when computing the tax liability of the affiliated group for the years and period covered by the closing agreement. Whether in reaching a conclusion that the affiliation ceased on August 31, 1923, the respondent relied on this report or facts developed by an independent investigation, does not appear. It may be that facts other than those present here lead to the determination. In the absence of proof to the contrary, we are not warranted in saying that he did not have reasonable grounds for his holding. Whether there was a merger or consolidation of the corporations prior to May 1, 1923, or whether the affiliation continued until August 31, 1923, or beyond the close of 1923, are questions which need not be answered, for we think the major issue is controlled by other considerations.
Section 606 of the Revenue Act of 19281934 BTA LEXIS 1402">*1409 authorizes the respondent to enter into written agreements with any taxpayer respecting his liability for "any internal revenue tax for any taxable period ending prior to the date of the agreement." Other pertinent provisions of the section are:
b) Finality of agreements. - If such agreement is approved by the Secretary, or the Undersecretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except 29 B.T.A. 1236">*1240 upon a showing of fraud or malfeasance, or misrepresentation of a material fact -
(1) the case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the United States, and
(2) in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded.
As to a similar provision in the 1926 Act (section 1106(b)), the court in Bankers' Reserve Life Co., 42 Fed.(2d) 313, said:
The purpose of the statute in providing for closing agreements was to enable the taxpayer1934 BTA LEXIS 1402">*1410 and the government finally and completely to settle all controversies in respect of the tax liability for a particular year or years and to protect the taxpayer against a further demand by the reopening of a case as a result of a different view of the matter being taken by the government officers or as the result of subsequent court decisions prior to the expiration of the statute of limitations, and to prevent the filing of additional claims for refund or the institution of suit by the taxpayer for the same reasons. * * *
In Dubinsky v. Becker (U.S. Dist. Ct., E. Dist. Mo., Feb. 25, 1931), C.C.H. 1931, p. 8283, the court, citing numerous cases, said: "The very purpose of the Act was to close controversies, and end negotiations, regardless of subsequent legislation, court decisions, department rulings or other situations, which might occasion the reopening of the matter." Thus it is evident that the object of the statute was to have agreements entered into in pursuance thereof end for all time the matters agreed upon except upon a showing of fraud, malfeasance, or misrepresentation of a material fact. The petitioner has no fault to find with such an interpretation of the1934 BTA LEXIS 1402">*1411 act. It contends, however, that the statute contains no sanction for closing agreements for periods of less than a full year except where a taxpayer changes its basis of computing net income from a fiscal to a calendar year or vice versa. On this ground it says that the parties here were without statutory authority to agree upon the four months ending August 31, 1923, as constituting a taxable period.
The regulations of the Commissioner relating to the 1921 Revenue Act require returns of corporate income for fractional parts of a year for reasons other than a change of accounting period from a calendar to a fiscal year or vice versa. Arts. 621, 622, 626, and 634, Regulation 62. The reports of this Board and the courts contain many cases involving the question of whether the income tax liability of a corporate taxpayer or an affiliated group of corporations should, because of some change of status, be computed on the basis of a single or consolidated return for the whole or only a portion of a year and whether a certain period constituted a taxable year. Some of these cases arose under the 1921 Act. See 1934 BTA LEXIS 1402">*1412 Industrial Cotton Mills Co.,22 B.T.A. 648">22 B.T.A. 648; Industrial Cotton Mills Co. v. Commissioner, 61 Fed.(2d) 291; General Box Corp.,22 B.T.A. 725">22 B.T.A. 725; Newblock Oil Co.29 B.T.A. 1236">*1241 of Texas,26 B.T.A. 696">26 B.T.A. 696; Riley Stoker Corp.,26 B.T.A. 749">26 B.T.A. 749; Commissioner v. Riley Stoker Corp., 67 Fed.(2d) 688. If the affiliation actually terminated on August 31, 1923, as the respondent determined, it was proper to require a consolidated return for the period of affiliation. 22 B.T.A. 648">Industrial Cotton Mills Co., supra; affirmed on this point, 61 Fed.(2d) 291; 22 B.T.A. 725">General Box Corp., supra.These cases reflect the highly controversial character of the question in some circumstances and indicate the extent to which rulings in the matter affect taxable net income.
The power granted the Commissioner in section 606, supra, is stated in broad terms. Whether it extends to agreements covering a single item affecting tax liability in a taxable period is beyond the scope of our inquiry. Certainly the statute confers authority to enter into agreements finally and completely settling1934 BTA LEXIS 1402">*1413 all matters affecting a taxpayer's tax liability, such as was done here. What in fact and law constitutes a taxpayer's taxable period is, in some cases, only one of the many things that enter into the determination of a taxpayer's correct tax liability. If a taxpayer and the Commissioner could not agree upon such a question in closing agreements, controversies of that character would have to await the bar of the statute of limitations or pass through the courts for final disposition. The act contains no words indicating such an intent. We think the statute, in the circumstances present here, authorized the execution of the closing agreement in question.
The petitioner argues further that, if there is statutory authority for the agreement, it contains no agreement of the parties thereto that the period from May 1 to August 31, 1923, constitutes a taxable period. The statement attached to the letter of July 17, 1929, clearly shows the respondent's treatment of the return for the first half of the last eight months of 1923, and contains his method of reaching the tax liability or consolidated net loss of the affiliated group for each of the four fiscal years and the short period. 1934 BTA LEXIS 1402">*1414 It does not appear that this treatment of the return by the respondent was ever questioned. The fact that the petitioner and its affiliates held the closing agreement from the time of the receipt of the letter of July 17, 1929, until September 12, 1929, when they signed it, indicates that the contents of the document were considered before the paper was signed. The agreement sets forth in unmistakable terms that the periods within its provisions are the "Fiscal years ended April 30, 1920, April 30, 1921, April 30, 1922, April 30, 1923, and period May 1, 1923 to August 31, 1923." The principal sum of $600,667.19 was set forth in the document as the income and profits tax liability of the taxpayers for such periods. The agreement of the parties that such sum constitutes the income and profits tax liability of the affiliated group for the periods covered thereby must be regarded as including 29 B.T.A. 1236">*1242 an agreement upon the four months ending August 31, 1923, as constituting a taxable period.
Finally, the petitioner argues that if the statute authorizes the respondent and a taxpayer to agree upon what constitutes a taxable period of less than a year in cases involving other than1934 BTA LEXIS 1402">*1415 a change of accounting period, and the parties here did agree upon the period of four months ending August 31, 1923, as a taxable period, the closing agreement in question here should not operate against it because of misrepresentation of a material fact "in regard to affiliation," made by a revenue agent to the respondent. The only evidence on the point is that revenue agents, as already pointed out, reported that the petitioner "absorbed" its affiliates on August 31, 1923. Obviously, the respondent is not required to follow reports of his subordinates in determining a taxpayer's tax liability for a specified period. For aught we know his final determination, which, of course, controls, might have been based upon an entirely different investigation containing other facts. The claim made involves not a misrepresentation by the respondent, but one alleged to have been made by an employee under his jurisdiction. The agents' statement, at most, is nothing more than a mistake of fact.
In Hyde v. United States, 59 Fed.(2d) 302, the plaintiff reported certain income for tax purposes in accordance with a statement received from the trustees of her father's estate. 1934 BTA LEXIS 1402">*1416 Thereafter she sued for refund, claiming that by reason of the trustees' statement she had overstated her income, and was entitled to set aside a closing agreement for the year she reported the income. In denying her claim, the court said:
The statute does not expressly limit the misrepresentations upon which the agreement may be set aside to statements made by the agents of the government, but a reading of the context shows plainly that the statute was not intended to apply to misrepresentations made by other parties.
There has been no proof of misrepresentation of a material fact by the respondent in connection with the closing agreement and its effect may not be avoided by the petitioner on that ground.
The parties having entered into a valid and binding closing agreement as to the first half of the last eight months of 1923, we are powerless to set it aside and combine the period covered thereby with the four-month period ending December 31, 1923, to redetermine the petitioner's income tax liability for the entire eight months.
In view of the conclusion reached on the first issue, it is not necessary for us to consider the second allegation of error, which relates1934 BTA LEXIS 1402">*1417 to an allowance for depreciation on intangible drilling costs for the period May 1 to August 31, 1923.
Reviewed by the Board.
Decision will be entered for the respondent.