*3426 Value of stock of Ford Motor Company on March 1, 1913, determined. James Couzens,11 B.T.A. 1040">11 B.T.A. 1040, followed.
*936 BEFORE STERNHAGEN, MARQUETTE, AND VAN FOSSAN.
This is a proceeding for the redetermination of income and profits taxes for the calendar year 1919 as to which the Commissioner has determined a deficiency in the sum of $2,277,079.88. The decedent and the petitioner are hereinafter referred to as the petitioner. The deficiency arises from the alleged understatement of the profit derived by the petitioner upon the sale in 1919 of certain shares of stock of the Ford Motor Co. of Michigan. It is alleged that the Commissioner erred in (1) overruling or*3427 ignoring the March 1, 1913, value of the Ford Motor Co. stock determined by a prior Commissioner of Internal Revenue and previous settlements with the taxpayer for income taxes for the year 1919 based thereon, and holding that he had the legal right to review and reverse said determination of the March 1, 1913, value of said stock; (2) holding that the Bureau of Internal Revenue and the United States Government is not estopped from asserting said deficiency; (3) holding that the assessment or collection of said deficiency would be jeopardized by delay, and making a jeopardy assessment of said deficiency; (4) arbitrarily making an assessment of said deficiency without any evidence or lawful determination as a basis thereof, and redetermining the March 1, 1913, value of said stock by the use of methods, factors, and bases having no proper application to the just determination of said value; (5) holding that the March 1, 1913, value of said stock was $3,547.84 per share and was not $9,489.34 or more per share; (6) attempting to impose or assess any additional or deficiency in tax against the petitioner; (7) omitting to file proper claim for additional tax in the Michigan Court having*3428 jurisdiction over the Estate of Philip H. Gray, deceased.
The deficiency is based upon the alleged overvaluation as of March 1, 1913, of the stock of this petitioner sold in 1919, resulting in an understatement of the taxable profit derived from the sale. The numerous errors alleged by the petitioner to have been committed by the Commissioner in his determination raise essentially only three issues: (1) Whether or not, under the circumstances of this case, the Commissioner of Internal Revenue has the legal right or authority to reopen, review, reverse or modify the determination by a predecessor in office of the March 1, 1913, value of the Ford Motor Co. stock owned and sold by this petitioner; (2) whether or not the impending expiration of the statute of limitations constitutes jeopardy within the meaning of the revenue act so as to authorize a jeopardy assessment under said acts, especially where the facts forming the basis of such assessment were fully fully known to the Commissioner at least two years prior *937 to the expiration of the statute of limitations; and (3) the fair market price or value of the stock of the Ford Motor Co. of Michigan on March 1, 1913.
*3429 This proceeding is one of nine appeals taken by individual taxpayers from deficiencies arising out of the same transaction, i.e., the sale in 1919 by the respective taxpayers of stock of the Ford Motor Co. of Michigan, which stock was acquired in each instance prior to March 1, 1913. The nine appeals were consolidated for hearing, inasmuch as most of the evidence was applicable to all, but a separate decision will be rendered in each case. The other proceedings are:
| Docket No. | |
| James Couzens | 10438 |
| Rosetta V. Hauss | 10826 |
| John F. Dodge Estate | 4640 |
| Horace E. Dodge Estate | 4641 |
| Horace H. Rackham | 10825 |
| John W. Anderson | 10910 |
| Paul R. Gray | 11007 |
| David Gray | 11008 |
FINDINGS OF FACT.
1. Philip H. Gray, a resident and citizen of Detroit, Mich., died on November 25, 1922. Luman W. Goodenough was designated as both executor and trustee under the will of said Gray and upon probate thereof duly qualified as executor. The petitioner, as executor, administered the estate and on June 2, 1925, was duly discharged as executor. On August 28, 1925, he duly qualified as trustee under said will and has since administered the estate pursuant to the provisions of said*3430 will.
In the course of the administration of the decedent's estate the petitioner, as executor thereof, paid to the Commissioner of Internal Revenue Federal estate taxes in the sum of $1,284,443.27. A proposed assessment of additional estate taxes in the sum of $61,185.06 is now pending before said Commissioner, no final determination thereof having yet been made. On July 15, 1926, the petitioner filed with the collector of internal revenue at Detroit a claim for refund of so much of the Federal estate taxes paid as aforesaid, as would be refundable in the event the estate of the decedent be found liable for additional income taxes for the year 1919. The petitioner, as executor of the estate, and during the administration thereof, also paid inheritance and succession taxes to the States of Michigan and Connecticut and the Province of Ontario, Dominion of Canada.
2. The Commissioners and Acting Commissioners of Internal Revenue and their respective periods of incumbency, at all times material to this proceeding, were:
| William H. Osborn | Apr. 28, 1913, to Sept. 25, 1917. |
| Daniel C. Roper | Sept. 26, 1917, to Mar. 31, 1920. |
| William M. Williams | Apr. 1, 1920, to Apr. 11, 1921. |
| Millard West (acting commissioner) | Apr. 11, 1921, to May 26, 1921. |
| David H. Blair (present incumbent) | May 26, 1921, to date. |
*3431 *938 3. On March 1, 1913, and for many years prior thereto and continuously thereafter until on or about June 17, 1919, the petitioner was the owner of 525 shares of the stock of the Ford Motor Co. of Michigan, hereinafter sometimes called The Company. In 1919 approximately 58 1/2 per cent of the 20,000 outstanding shares of The Company's stock was owned by Henry Ford and his son, Edsel Ford. On March 1, 1913, other minority stockholders of The Company, whose stock also was sold in 1919 at or about the time of the sale of petitioner's stock, were John F. Dodge, Horace E. Dodge, Horace H. Rackham, John W. Anderson, James Couzens, Rosetta V. (Couzens) Hauss, Paul R. Gray, and David Gray. All of said stockholders were original stockholders of The Company with the exception of Philip H., Paul R. and David Gray, who acquired their stock in 1904 from their father, John S. Gray, an original stockholder.
4. Immediately prior to April 15, 1919, Stuart W. Webb, an officer of the Old Colony Trust Co. of Boston, Mass., representing Henry Ford and Edsel Ford, as principals, then undisclosed to the petitioner, visited Detroit to negotiate for the purchase of all the stock of minority*3432 stockholders of The Company. Because of the high Federal income and surtax rates, and the consequent probable imposition of a large tax upon any profits that might be derived from such a sale, certain of said stockholders expressed unwillingness to sell unless there was a determination by the Bureau of Internal Revenue of the March 1, 1913, value of said stock as a basis for the computation of the profit to be derived from the sale thereof.
Shortly thereafter said trust company engaged Arthur A. Ballantine, a Boston lawyer, who, on behalf of said undisclosed principals, conferred with the officials of the Treasury Department and the Bureau of Internal Revenue, and on or about April 29, 1919, wrote the following letter to Daniel C. Roper, Commissioner of Internal Revenue:
HOTEL WASHINGTON,
Washington, D.C., April 29, 1919.
Hon. DANIEL C. ROPER,
Commissioner of Internal Revenue, Treasury Department,Washington, D.C.
SIR: Confirming my conversation with you in behalf of the Old Colony Trust Company, Boston: The Old Colony Trust Company proposes to buy all of the 41% of the stock of the Ford Motor Company, of Detroit, not held by the Ford interests. It is believed*3433 that the purchase if consummated will tend to promote the interests of one of the largest industries in the country. The purchase cannot be effected unless it is possible first to ascertain the judgment of the *939 Bureau of Internal Revenue as to the value of the stock as of March 1, 1913. The Bureau presemably has at hand or readily available all figures necessary for such a valuation.
May I therefore ask that you advise me what valuation the Bureau places on the stock of the Ford Motor Company as of the date mentioned?
Respectfully,
(Signed) ARTHUR A. BALLANTINE.
5. About May 1, 1919, Commissioner Roper instructed Percy S. Talbert, then Chairman of the Committee on Appeals and Review (formerly Chief of The Technical Division) and sometimes Acting Deputy Commissioner of the Bureau of Internal Revenue, to take such assistants as he needed, go to Detroit, and make a valuation of the stock of The Company as of March 1, 1913. Talbert was informed of the pending negotiations for the sale of the minority stock of The Company, that the owners would not sell until they knew what tax would be imposed upon the profits from the transaction and was advised that the purpose*3434 of the proposed valuation was to enable the stockholders to determine what their tax liabilities would be.
6. Pursuant to his instruction Talbert selected four accountants, among the best in the service of the Bureau, and proceeded to the Ford Plant at Detroit. He told Burlingame, the chief of the four accountants, in a general way what data and information he wanted and would endeavor to get, but did not advise any of his assistants of the purpose of the examination. The accountants devoted themselves to an examination of the books and records of The Company, and Talbert examined the minute books and conferred with the officers of The Company about various phases of The Company's business, and particularly concerning the prospects of The Company at March 1, 1913. Upon the completion of the investigation, covering four or five days, Talbert and his assistants returned to Washington. Thereafter, upon receipt of a detailed and exhaustive report from Burlingame, Talbert computed the March 1, 1913, value of The Company's stock and orally reported and explained his conclusions to Commissioner Roper. On May 17, 1919, Talbert submitted to Commissioner Roper a former written report*3435 of his conclusions and valuation, together with a proposed letter addressed to Arthur A. Ballantine, representing the said Old Colony Trust Co.
7. On May 19, 1919, Commissioner Roper wrote the following letter:
MAY 19, 1919.
IT:T
PST
Mr. ARTHUR A. BALLANTINE,
84 State St., Boston, Mass.
SIR: This office is in receipt of your letter of the 29th ultimo requesting, on behalf of the Old Colony Trust Company of Boston, which proposes to buy all of the 41% of the stock of the Ford Motor Company of Detroit not held by the *940 Ford interest, what valuation the Bureau places upon the stock of the Ford Motor Company as of March 1st, 1913, in order that the parties at interest may have some definite idea as to the amount of taxes they will be required to pay upon the profits made through such sale.
You state that it is believed that the purchase, if consummated, will tend to promote the interest of one of the largest concerns in the country, and that the purchase cannot be effected unless it is possible first to ascertain the judgment of the Bureau of Internal Revenue as to the value of the stock on March 1st. 1913.
In reply, you are advised that while ordinarily*3436 it is not the practice of the Bureau to determine such questions in advance of actual transactions, in view of all of the particular circumstances surrounding this case, the Bureau feels justified in departing from that practice and you are accordingly informed that upon consideration of the figures shown by the books and returns of the company, it is disposed to regard $9,489.34 as a fair valuation of the stock on March 1st, 1913, and one which should be used in computing any profits made by the sale.
(Signed) DANIEL C. ROPER,
Commissioner.
and in reply received the following letter of acknowledgment:
84 STATE ST., BOSTON, May 23, 1919.
Hon. DANIEL C. ROPER,
Commissioner of Internal Revenue,Washington, D.C.
SIR: Acknowledgment of your letter of May 19, relative to the value of the stock of the Ford Motor Company as of March 1, 1913, has been delayed owing to my absence from the city. We exceedingly appreciate your making a valuation at this time, in view of the large interests involved, and the impossibility of procedure without ascertainment of the valuation by the Bureau.
Very truly yours,
(Signed) ARTHUR A. BALLANTINE.
The March 1, 1913, value*3437 of said stock as thus determined is sometimes hereinafter referred to as the Roper valuation.
8. On or about June 17, 1919, the petitioner, having been advised of the Roper valuation, entered into an agreement by his attorney in fact, Luman W. Goodenough, for the sale of all his stock in The Company, 525 shares, to said Stuart W. Webb at $12,500 per share, exclusive of the dividend to be declared and paid pursuant to the decree of the ) entered in the suit of John F. and Horace E. Dodge v. The Ford Motor Co. of Michigan, et al. In accordance with the terms of the agreement, the petitioner deposited the certificates for all his stock with the Detroit Trust Co., the depositary named therein and received the payment therein provided. At or about the same time all the said other minority stockholders of The Company, having been advised of the Roper valuation, likewise entered into agreements or gave options, for the sale of all their stock, and received payment therefor in accordance with the respective agreements entered into or options given.
*941 9. On or about March 15, 1920, the petitioner filed with the*3438 Bureau of Internal Revenue his individual income-tax return for the calendar year 1919, disclosing a net income of $1,183,952.65 subject to normal tax and a net income of $1,404,160.20 subject to surtax. Upon said return the petitioner reported a profit of $1,580,596.50 on the said sale of stock, being the difference between the sale price of $6,562,500 and the March 1, 1913, value thereof, $4,981,903.50, computed in accordance with the said Roper valuation. On or about April 29, 1920, the petitioner filed with said Bureau an amended individual income-tax return for 1919, reporting as subject to surtax the additional sum of $505,978.88, representing the dividend received from The Company pursuant to the aforesaid decree of the Supreme Court of Michigan, and taking additional deductions of $90,831.47 from gross income for charitable contributions. Said amended return disclosed a net income of $1,093,121.18 subject to normal tax and a net income of $1,819,307.61 subject to surtax. Petitioner filed said amended return and paid the tax on said dividend under protest, upon the ground that said dividend was income for the year 1917 and not for the year 1919. In due course the said other*3439 minority stockholders filed their respective individual income-tax returns for the year 1919 and reported therein the profit derived upon the sale of their stock, being the difference between the sales price and the March 1, 1913, value thereof, computed in accordance with the Roper valuation. The profit derived from said sale of stock was the largest individual item of income reported upon the returns of the petitioner and the other minority stockholders. On June 8, 1920, and August 30, 1920, the then Commissioner of Internal Revenue, William M. Williams, assessed against the petitioner the several amounts of tax respectively disclosed by his said original and amended returns, and at or about the same time assessed against each of the said other minority stockholders the several amounts of tax respectively disclosed by their said returns.
10. In December, 1920, I. I. Phillips, chief of an audit section in the Bureau of Internal Revenue, in accordance with the policy established by Office Order No. 101, issued in June, 1919, began a superficial audit of the 1919 return of James Couzens, one of said minority stockholders. In the course of such audit Phillips obtained the confidential*3440 file containing the report and working papers of said Talbert relative to the aforesaid examination and valuation in May, 1919, and the individual returns of the said other minority stockholders, including the petitioner, for the purpose of checking the profit reported by said stockholders upon the sale of said stock in 1919. Upon examination of the confidential file and the returns of said stockholders it was disclosed that the profits from this transaction had been properly reported in accordance with said Roper *942 valuation, and Phillips returned said confidential file to a Mr. Clute, head of the General Audit Division, for disposition, as it had "served its purpose and was of no further use" to him. Pursuant to said audits additional taxes were proposed against several of the said stockholders, who were advised thereof by letters setting forth synopses of their respective returns as corrected. In making said adjustments and proposals of additional tax the Roper valuation was used without change. After various conferences between representatives of said stockholders and Bureau officials such additional taxes were assessed against the respective stockholders, and, after*3441 a hearing held before the Committee on Appeals and Review of said Bureau, were paid in full.
11. On January 10, 1921, the petitioner filed a claim for refund of the tax paid on the aforesaid dividend, which was rejected on July 14, 1921, by the then Commissioner of Internal Revenue, David H. Blair. On March 23, 1922, the petitioner filed a second claim for refund of the tax paid on the aforesaid dividend, which was practically identical with and a duplicate of said original claim.
12. Between February 26, and March 3, 1921, a field investigation of the petitioner's income-tax liabilities for the years 1916, 1917, 1918, and 1919 was made by Internal Revenue Agent T. G. Thurston at Detroit. In his audit of the petitioner's tax return for the year 1919, Thurston investigated the aforementioned sale of stock to determine whether or not the March 1, 1913, valuation thereof as reported was acceptable to the Government. He made an independent examination of the March 1, 1913, value of said stock and thoroughly considered the facts material thereto. He made several computations of value primarily for the purpose of testing the Roper valuation and discussed the question with his*3442 superior officers several times during his examination, and concluded that he was not justified in recommending a change in the Roper valuation. On March 28, 1921, Thurston submitted to C. M. Justice, Internal Revenue Agent in Charge at Detroit, the report of his investigation for the years 1916, 1917, 1918, and 1919. With reference to the profit returned upon the aforesaid sale of stock, as to which no adjustment was made, Thurston reported that:
The market value as at March 1, 1913 of the (the) stock of the Ford Motor of Michigan is taken at $9,489.34 a share in accordance with value set by the Department as shown in letters dated May 19, 1919, to Arthur A. Ballentine, 84 State Street, Boston, Mass. (Reference IT:T:PST.)
Said report was approved by said Justice and forwarded May 24, 1921, to the Bureau of Internal Revenue at Washington. By letter dated December 19, 1921, addressed to the Internal Revenue Agent in Charge at Detroit, the Bureau, referring to profit from stock *943 transactions for 1918 and 1919 as shown in the said Thurston report, requested a supplemental report, covering in detail, information relative to the date of purchase, cost price, March 1, 1913, value, *3443 and selling price of the securities. On February 6, 1922, John W. Cronk, then Internal Revenue Agent in Charge, forwarded to said Bureau a supplemental report prepared by said Thurston, but no further consideration was given therein to the March 1, 1913, value of said Ford Motor Co. stock. Thereafter, pursuant to Office Order 538, issued May 14, 1921, an intensive audit of petitioner's income-tax return for 1919 was made by the Bureau and completed on September 19, 1922 or 1923 (year uncertain).
13. By letter dated May 26, 1922, the said Bureau notified the petitioner of proposed assessments of additional income taxes for the years 1917, 1918, and 1919, as disclosed by audit of his returns and verified by said field investigation. Substantially all the proposed additional assessment for the year 1919, in the sum of $108,970.73, resulted from a reduction in the amount of the deductions from gross income allowed for charitable contributions. In that year the petitioner gave to certain exempt charitable institutions 347 shares of stock in the Ford Motor Co. of Canada, for which deductions from gross income were taken at the then market value, to wit, $430 per share, and the said*3444 proposed additional assessment was based upon the allowance of deductions for said shares of stock at cost or March 1, 1913, value thereof, to wit, $71.43 per share. By letter dated June 12, 1922, addressed to the then Commissioner of Internal Revenue, David H. Blair, the petitioner filed a protest against this proposed additional assessment, on the ground that the basis for determining the value of a charitable contribution made in property other than money is the market value of the property at the date of gift and not the cost or March 1, 1913, value thereof. Thereafter, Commissioner Blair accorded the petitioner several hearings upon said protest, which was overruled on November 25, 1922, and on or about December 11, 1922, the petitioner filed an appeal therefrom in accordance with the practice of said Bureau. The petitioner's return for 1919 was stamped "Closed December 29, 1922," by the Field Audit Control Section and the case was returned to the general files on February 7, 1923. On or about January 5, 1923, a hearing on the appeal of December 11, 1922, was had before the Solicitor of Internal Revenue and his associates, and prior to a final determination thereon Commissioner*3445 Blair, upon the regular assessment list for January, 1923, made an assessment against the petitioner of additional taxes in the sum of $108,970.73 for the year 1919. Upon telegraphic advices that a final determination by the Solicitor upon said appeal had not yet been announced, Commissioner Blair delayed the collection of *944 this additional assessment and the petitioner was notified thereof by letter dated March 14, 1923, from the collector of internal revenue for Detroit. On September 26, 1923, said Bureau advised the petitioner that the appeal of the petitioner had been sustained to the extent that $90,829.36 of the assessment of $108,907.73 would be abated. Of the unabated portion of said assessment the petitioner paid $13,412.43 on March 1, 1924, and $1,501.76 on June 17, 1925, and on June 13, 1925, the petitioner filed with the said collector of internal revenue a claim in abatement for $3,227.18, accompanied by bond. The records of said collector and of said Bureau disclose no action upon the latter claim in abatement and no payment of the amount therein claimed. On the assessment list of March, 1924, there was assessed interest upon the unabated portion of said*3446 additional assessment, which has been paid by the petitioner. In the proposal, adjustment and assessment of said additional taxes the Roper valuation was employed without change and the profit from the aforesaid sale of stock based thereon, as reported upon decedent's return, was used without adjustment.
14. Similar field investigations of the income-tax liabilities of the said other minority stockholders for the year 1919 were made and reports thereon, containing similar references to the March 1, 1913, value of said Ford Motor Co. stock, were submitted to said Bureau in 1921 and 1922. Likewise, similar supplemental reports were requested and made in 1922 and 1923, relative to stock transactions in 1919 of four of the said other minority stockholders.
In like manner, intensive audits of the income-tax returns for 1919 of all the said other minority stockholders were made by the Bureau in 1922, 1923, or 1924.
The Bureau also addressed to six of the said other minority stockholders similar letters containing synopses of their returns as corrected and proposing assessments of additional taxes for the year 1919 based upon the aforesaid field investigations and intensive audits. *3447 Protests against the assessment of additional taxes were filed by each of said six stockholders, and, after hearings and conferences held thereon, said additional taxes, as adjusted, were assessed and paid. In the proposal, adjustment and assessment of said additional taxes, as well as in the adjustment and settlement of the 1919 taxes of the remaining two said minority stockholders (Rackham and Hauss), the Roper valuation was employed without change and the profits derived from the aforesaid sales of stock, as reported upon the respective returns of all said stockholders, were used without adjustment.
15. On February 11, 1922, Senator James E. Watson of Indiana wrote to Commissioner Blair as follows:
*945 UNITED STATES SENATE,
COMMITTEE ON INTERSTATE COMMERCE,
February 11, 1922.
Hon. DAVIS H. BLAIR,
1614 21st St., N.W., Washington, D.C.
DEAR MR. COMMISSIONER: I am writing you at your home because I want you to get this letter. After you read the enclosed, return the whole thing to me as I want to use it in the future.
This refers to the subject of taxation insofar as it relates to Henry Ford, a matter I have hitherto taken up with you but which*3448 we did not run to a finality.
Look this over carefully, and, if you deem it worthy of further consideration, set somebody to work on it to find out just what there is to it. I shall be very glad if you will do this.
With all good wishes,
Sincerely yours,
(Signed) JAMES E. WATSON.
And on February 15, 1922, Commissioner Blair replied as follows:
Hon. JAMES E. WATSON,
United States Senate.
MY DEAR SENATOR: I am returning the paper which I received from you yesterday. I have made a copy of the statement so as to make another investigation. I shall trace it this time through entirely different channel, and if we get any results, we shall let you know.
I thank you for calling my attention to it.
Sincerely yours,
(Signed) D. H. BLAIR,
Commissioner.
The memorandum enclosed therewith referred to the aforementioned sales of stock in 1919, the Roper valuation, and certain facts pertaining to automobile production, and suggested a comparison of the sales price of the stock in 1919 with the Roper valuation, which was alleged to have been excessive. Commissioner Blair turned the memorandum over to Deputy Commissioner Batson with instructions to look into*3449 the matter. Pursuant to these instructions Paul F. Cain, Assistant Head, Special Audit Division, investigated the transaction and reviewed the Roper valuation. On February 27, 1922, Cain submitted to Assistant Deputy Commissioner Chatterton a memorandum on the subject, referring to the aforesaid Talbert memorandum of May 17, 1919, and certain pertinent facts affecting the March 1, 1913, value of said stock. He therein computed said value by three different methods and determined the Roper valuation was fair and proper. He concluded that:
In view of the fact shown above, and the general study I have made of this case, I feel that a fair estimate of the value of this property was arrived at in the figure of $9,489.34, and that this is more nearly correct than either the figure of $3,617.00 or $7,754.00, and that the value which has already been used is a fair value.
*946 Cain's memorandum was approved by Chatterton and submitted to Commissioner Blair.
16. Another and independent investigation of the aforesaid sales of stock was made by agents of the Special Intelligence Unit, Internal Revenue Service, and on May 22, 1922, Special Agent P. T. Roche, at Detroit, submitted*3450 to E. L. Irey, Chief of the Unit, through David Nolan, Special Agent in Charge at Detroit, a report referring to the transaction and suggesting that the matter be investigaged. Pursuant to this suggestion Special Agent J. R. Cox made an investigation, and, after conferring with C. M. Justice, then Head of the Field Division of the Income Tax Unit, reported to Irey on June 21 and June 22, 1922. The reports of both Roche and Cox were shown to Assistant Commissioner Smith by Irey. On June 22, 1922, Irey wrote to Nolan as follows:
JUNE 22, 1922.
SI-JRC-ERW
Mr. DAVID NOLAN,
Acting Special Agent in Charge,Chicago, Illinois.
With your communication of May 23d you transmitted a special report of Special Agent Roche with reference to the alleged evasion of taxes incident to the sale of stock in June, 1919, of the Ford Motor Company.
Inquiries made in the Bureau have developed that information similar to that contained in the special report of Special Agent Roche has been received in the Bureau on one or more occasions previously; that the returns of the Ford Motor Company and the individuals who sold their stock have been investigated by Internal Revenue Agents; *3451 and that the Bureau is fully conversant with all of the details concerning the matter.
Under the circumstances there is, of course, no necessity for any further investigation by Special Agents at the present time.
(Signed) ELMER L. IREY,
Chief, Special Intelligence Unit.
17. In further pursuance of Commissioner Blair's instructions to Deputy Commissioner Batson, N. T. Johnson, Chairman of the Committee on Appeals and Review, at the request of Carl A. Mapes, Solicitor of Internal Revenue, also investigated the matter and reviewed the file containing the original report of May 17, 1919, from Talbert to Roper, the working papers upon which said report was based and the record of the investigation made in 1919 by Talbert and his four accountant associates. On September 29, 1922, John son reported to Mapes, in part, as follows:
Under date of May 17, 1919, Mr. Talbert, then Chief of the Technical Division of the Income Tax Unit, made a report upon an investigation made by himself, Mr. Burlingame, Mr. King, Mr. Masland and Mr. Taylor in Detroit with a view to establishing the March 1 value of the Ford Motor Company stock. This report was addressed to the Commissioner of*3452 Internal Revenue and was evidently approved by him as the basis for computing gain upon the subsequent sale of such stock. The March 1 value fixed by Mr. Talbert *947 in his report was $9,489.23 per share. The attached file contains the original report addressed to the Commissioner and I am inclined to think that the basis used in fixing the March 1 value is sound.
This report was approved by Mapes and by him transmitted to Commissioner Blair, with the following memorandum:
Mr. COMMISSIONER -
In the light of Mr. Johnson's memo. I concur in the recommendation.
C. A. M.Commissioner Blair communicated the substance of the various reports submitted to him to Senator Watson, by whom the investigation was originally suggested in February, 1922. Thereupon the memoranda were sent to the files.
18. Commissioner Blair approved the recommendation, dated July 20, 1923, of the Solicitor of Internal Revenue in the case of Mrs. Gustava D. Anderson of Detroit, that the valuation of the Ford Motor Co. stock by the Bureau as of January 1, 1917, at $14,420 per share for capital stock purposes, be accepted as the fair market value of the stock of said company received by her*3453 on January 29, 1917, by way of gift. Mrs. Anderson was advised of this adjustment by letter, indicating a refund to her of $64,020.73 as a result thereof.
19. On or about February 12, 1925, one M. W. Thompson, in a personal interview, orally advised the Secretary of the Treasury that Senator James Couzens and other Ford minority stockholders, including the petitioner, owed large taxes upon profits derived from the aforesaid sale of stock in 1919. On March 6, 1925, said Thompson, in person, handed to the Secretary of the Treasury a memorandum, substantially similar to the memorandum transmitted to Commissioner Blair on February 11, 1922, by Senator Watson, referring to the aforesaid sales of stock in 1919 and the Roper valuation, which was alleged to have been grossly excessive. It was therein suggested that the 1913 value of the Ford Company stock would be more accurately determined by comparing 1919 production and earning power with 1913 production and earning power, and applying to the 1913 earnings per share the ratio of 1919 earnings per share to the 1919 sales price; a 1913 value of about $2,500 per share being thus derived. A statement of The Company's production by years*3454 was also incorporated therein. Thompson transmitted to the Secretary of the Treasury, by a note dated March 12, 1925, written en route by train from New York to St. Louis, another memorandum suggesting that the 1913 value for said stock indicated in his preceding memorandum might be too high and that for tax purposes the use of par value was justified in the absence of a satisfactory appraised value, and in view of the lack of time within which to make a precise determination.
*948 20. On March 7, 1925, Commissioner Blair wrote, and, accompanied by his assistant, C. R. Nash, personally delivered, a letter to Senator Couzens transmitting a copy of said Thompson memorandum of March 6, 1925, advising him that there appeared nothing in the files of the Bureau to sustain the Roper valuation, that said memorandum made a prima facie case that the Roper valuation was excessive and that, being put on notice, the Bureau necessarily must take action to establish the correct 1913 value of The Company's stock. This letter called attention to the early expiration of the statute of limitations for making an assessment, requested Senator Couzens to execute a waiver extending the statutory*3455 period, and advised that an immediate assessment of additional taxes upon the information available would be necessary if such waiver was not received promptly. Commissioner Blair was not then sure that additional taxes were due and desired the waiver to enable him to investigate the matter. Senator Couzens refused to execute the waiver requested.
21. On March 12, 1925, Acting Commissioner of Internal Revenue C. R. Nash made what is known as a jeopardy assessment under section 274(d) of the Revenue Act of 1924 of additional income and profits taxes against the petitioner for the year 1919 in the sum of $2,627,309.05, notice of which was mailed to the petitioner on March 12, 1925, and received by the petitioner on or about March 13, 1925. The increase of petitioner's taxable income derived from the aforesaid sale upon which said assessment was based resulted from a reduction in the March 1, 1913, value of said stock to $2,634 per share. On or about March 15, 1925, the petitioner received from the collector of internal revenue at Detroit a notice and demand for payment of said additional taxes. On or about March 23, 1925, the petitioner filed with said collector a claim in abatement*3456 of said assessment, together with the required bond. By letter dated April 28, 1925, addressed to the Commissioner of Internal Revenue, the petitioner requested that he be permitted to examine the income tax returns of the Ford Company for the years 1913 to 1919, inclusive; that he be furnished with the formula, figures and data used in making the Roper valuation, and the formula, figures and data employed in determining the value of said stock forming the basis of said assessment. By letter dated May 14, 1925, from the Deputy Commissioner of Internal Revenue the petitioner was refused permission to examine The Company's income-tax returns, and was advised that the formulae, figures, and data used in making the Roper valuation and in determining the value forming the basis of said assessment of additional taxes were:
*949 The value of $9,489.34 as of March 1, 1913, which was placed upon the stock of the Ford Motor Company in Bureau letter of May 19, 1919, was computed as follows:
| Actual earnings for 1912 | $14,119,989.87 |
| Estimated earnings for 1913, based on earnings for 2 months | |
| (January 1 to February 28, 1913, $ 3,972,896.17) | 23,837,377.02 |
| 37,957,366.89 | |
| Average annual earnings of 20,000 shares | 18,978,683.45 |
| Average annual earnings of each share | 984.934 |
| Capitalized at 10% | 9,489.34 |
*3457 The value of $2,634.00 as used in Bureau letters of March 12, 1925, was computed as follows:
| Average annual income for the years 1910, 1911 and 1912 | $8,602,000.00 |
| Average annual income for the years 1916, 1917 and 1918 | 43,500,000.00 |
| Value upon the basis of the sale in 1919, 20,000 shares at | |
| $13,320.00 | 266,400,000.00 |
Average income prior to sale, $43,500.00 (sic.): Total value as at the time of the sale, $266,400,000: Average income prior to 1913, $8,602,000: Fair market value of total stock as of March 1, 1913, ($52,680,000).
| Fair market value as of March 1, 1913 of 20,000 shares | |
| (shown above) | $52,680,000.00 |
| Fair market value of each share | 2,634.00 |
22. On June 29 and 30, 1925, petitioner was accorded hearings before the Bureau of Internal Revenue upon said claim in abatement of March 23, 1925, and was thereafter advised, by letter dated November 19, 1925, from said Bureau, that of said additional assessment in the sum of $2,627,309.05 the sum of $350,229.17 would be abated and that the claim would be rejected as to the balance of $2,277,079.88, which last-named sum is the deficiency appealed from in this proceeding. The partial allowance*3458 of said claim in abatement resulted from the increase in the March 1, 1913, value of said stock from $2,634 per share, upon the basis of which said assessment of March 12, 1925, was made, to $3,547.84 per share. Thereafter, in response to a request dated November 25, 1925, for information as to the basis and method of determining said March 1, 1913, value of $3,547.84 per share, the petitioner was advised by letter dated December 16, 1925, from Commissioner Blair, as follows:
* * *, you are advised that the maximum value of $3,547.84 for each share of the Ford Motor Company stock as of March 1, 1913, has been determined by the application of the method outlined in a memorandum of the Committee on Appeals and Review (A.R.M. (third method), ) to the results of operations of the Ford Motor Company during the period from January 1, 1909 to February 28, 1913.
The factors and figures taken into account are as follows:
| Average annual earnings | $7,882,133.27 |
| Deduction: 8% on average net tangibles, $7,704,973.94 | 616,397.92 |
| Excess earnings attributable to intangibles | 7,265,735.35 |
| Intangibles - excess earnings capitalized at 15% | 48,438,235.67 |
| Add: Net tangibles on March 1, 1913 | 22,518,635.02 |
| Total value of 20,000 shares | 70,956,870.69 |
| Value of each share | 3,547.84 |
*3459 *950 23. On March 11, 12 and 13, 1925, Acting Commissioner Nash made similar assessments of additional taxes for 1919 against five of the said other minority stockholders (James Couzens, John W. Anderson, Horace Rackham, Paul R. Gray and David Gray), and on March 12, 1925, the three other minority stockholders (Rosetta V. Hauss, Horace E. Dodge and John F. Dodge, or their representatives) were notified of proposed assessments of additional taxes for 1919, based upon a reduction of the March 1, 1913, valuation to $2,634 per share. Thereafter, said assessments of additional taxes for 1919 against said five other minority stockholders were partially abated and said proposed assessments of additional taxes for 1919 against said three other minority stockholders were reduced in amount, based upon an increase in the March 1, 1913, value of said stock from $2,634 per share to $3,547.84 per share.
24. In making the last-named assessments of additional taxes for 1919 under section 274(d) of the Revenue Act of 1924, the only jeopardy present in the mind of said Nash was the impending expiration of the statutory period of limitations for the assessment of taxes for the year 1919. *3460 The Secretary of the Treasury advised United States Senator Ernst, by telegram dated March 14, 1925, as follows:
NEW YORK, N.Y., March 14, 1925 - 7 a.m.
Senator RICHARD ERNST,
United States Senate, Washington, D.C.
I understand that you wish to learn from me when first there was brought to my attention the question of an additional tax being due from Senator Couzens on his 1919 taxes. While Finance Committee was considering extension of life of Couzens's committee in February, this year, the person who later furnished the memorandum which Mr. Blair sent Senator Couzens called on me and stated that the minority stockholders, including Senator Couzens, who sold out to Mr. Ford in 1919, owed large additional taxes. The information was entirely new to me. I was unwilling to raise the question then, because I would be charged with attempting to intimidate Senator Couzens in his effort to have his committee extended. On March 6, of this year, I received a memorandum giving detailed information with respect to the valuation of Ford stock, a copy of which was delivered to Senator Couzens the next day by Mr. Blair.
A. W. MELLON.The Couzens Committee referred to was*3461 the committee appointed under Senate Resolution 168, 68th Congress, First Session, adopted *951 March 12, 1924, for the investigation of the Bureau of Internal Revenue, of which Senator James Couzens, one of the aforesaid minority stockholders, was chairman. The life of said Committee was extended by Senate Resolution 333, 68th Congress, Second Session, adopted February 26, 1925.
25. At the hearing respondent contended for no specific figure as the March 1, 1913, value of the Company's stock.
26. Prior to 1919 the policy of the Bureau of Internal Revenue was to be as helpful as possible to taxpayers in making their tax returns. It was recognized that the magnitude of the Bureau's work would require the cooperation of taxpayers and that such was best secured by assisting taxpayers in proper cases. Following the passage of the Revenue Act of 1909, and also the Revenue Act of 1912, the Bureau received numerous inquiries raising a variety of questions relative to the application of various provisions of the acts. Answers were given to as many inquiries as possible, which appeared proper and legitimate, upon the basis of the facts stated therein, without regard to whether*3462 they were made before or after the return was filed. Hypothetical questions as well as questions of both law and fact were answered. Many of the rulings on hypothetical cases were published in the form of primers for the information and guidance of the public. Later this practice was modified, answers were curtailed, and instructions not to answer hypothetical questions were issued, because of the increased volume of inquiries evoked by the complexity of later Revenue Acts.
Early in 1919, prior to May 19, oral instructions were issued in the Bureau, for the purpose of checking the volume of inquiries, to refuse to answer questions that were not based upon completed transactions. On August 13, 1919, the Commissioner of Internal Revenue addressed to various officials of the Bureau and others concerned a memorandum, known as I.T. - Mimeograph 2228, stating that the resources of the Bureau were inadequate to answer the numerous requests for rulings and advice upon abstract cases and prospective transactions involving questions of income-tax liability, especially in view of the number, complexity and importance of new questions arising under the Revenue Act of 1918, and that administrative*3463 necessity required that actual cases be given precedence. It was then declared that:
It will be the policy of the Bureau not to answer any inquiry except under the following circumstances:
(a) The transaction must be completed and not merely proposed or planned.
(b) The complete facts relating to the transaction, together with abstracts from contracts, or other documents, necessary to present the complete facts, must be given.
*952 (c) The names of all of the real parties interested (not "dummies" used in the transaction) must be stated regardless of who presents the question, whether attorney, accountant, tax service or other representative.
DANIEL C. ROPER, Commissioner.
Thereafter the settled policy of the Bureau was to refuse answers to hypothetical questions relating to proposed transactions and to reply to such inquiries with a form letter enclosing a copy of the mimeograph or a letter advising that no answer could be given unless the information required was furnished. Following the passage of the Revenue Acts of 1921, 1924, and 1926 similar mimeographs were issued and followed.
27. On June 11, 1919, in view of the pressing need of the Government*3464 for funds, there was issued within the Income Tax Unit of the Bureau, Office Order No. 101, establishing a procedure for auditing returns according to the classifications therein set forth. It was provided that all returns showing gross income of $1,000,000 or more or net income of $300,000 or more and individual returns showing net income of $100,000 or more should receive a superficial audit for the purpose of immediately assessing any additional tax found due and thereafter be sent to the field for exhaustive audit. Other returns were to be carefully examined, and, if deemed advisable, prepared for field examination. The order called attention to some inaccuracies frequently found on returns which could be corrected, and the tax adjusted, upon a superficial audit. The order was limited in terms to 1917 returns, but the procedure therein established was extended and applied, under oral instructions, to returns for all years until it was rescinded on May 14, 1921, by Office Order No. 538, which provided that, until further notice, all returns, with certain indicated exceptions, should be audited intensively. The superficial audit of returns under Order 101 was only a casual or*3465 cursory examination to correct errors apparent on the face of the return and to make the necessary adjustment of tax resulting from such errors. Any additional tax disclosed was then assessed. The return was stamped with an identifying legend and sent to the Technical Division for review of the audit. A photostatic copy of the return was sent to the field for intensive examination and the original returned to the auditor. It was then transmitted to the Proving Section on a summary sheet for assessment and the assessment forwarded to the collector of internal revenue for collection. A field investigation was made by a revenue agent and his report thereon was forwarded to the Bureau and transmitted to the Field Review Section for audit.
28. It has been the practice of the Bureau since the passage of the Revenue Act of 1913 to make a desk audit, upon the information at *953 hand, of returns as soon as received and to assess immediately any additional tax clearly due, and to refer doubtful cases to field agents for further investigation. Generally only one field examination of returns for a particular year was made, but further examinations were made whenever deemed necessary. *3466 It was customary to make more than one audit of returns and to make additional assessments as often as a tax was found to be due and within the statutory period of limitations for making assessments. Reaudits were made as often as additional facts were developed, whether through so-called information certificates or within the Bureau or from the taxpayer, and no distinction was made between additional tax occasioned by a change in the law and one resulting from a change in the facts. It was the practice of the Bureau to make jeopardy assessments when the true tax liability was undetermined, and the applicable statute of limitations was about to expire. A period of six days was considered the minimum time within which to perform the clerical work incident to the making of an assessment. Between February 15, 1925, and March 15, 1925, over 3,000 jeopardy assessments on account of the running of the statute of limitations were made by the Bureau under I.T.U. Memorandum 21, dated January 27, 1925, providing that jeopardy assessments be made, or other outlined procedure be taken, in those cases moving to the Solicitor of Internal Revenue, where the statute of limitations was about to*3467 expire. The practice of making more than one assessment in a case was followed under the Revenue Acts of 1913, 1916, 1917, 1918, 1921, 1924, and 1926.
29. The files of the Bureau are classified as active and inactive. The active file contains all returns on which the statute of limitations has not run and the inactive file contains all returns on which the statute of limitations has run. All returns are filed in groups by years and are transferred periodically from the active to the inactive file for storage purposes in like groups. The 1919 returns were transferred to the inactive file some time after March, 1925. Under the Bureau practice after a case had been audited, letters sent to the taxpayer, conferences held, revised assessment letters mailed, and the tax assessed, the file thereon was returned to the general files, disassembled and its component parts filed separately, the returns in one file and the revenue agents' reports and correspondence in another file. As a rule no case was placed in the general files during the pendency of any question or unless it was temporarily closed. Once there a case remained in the general files until some reason appeared for withdrawing*3468 it for further audit or until transferred to the inactive files.
30. A case was closed in the Bureau (1) when the statute of limitations applicable thereto expired, or (2) when, in accordance *954 with the Revenue Act of 1921 or 1924 or 1926, a final agreement was entered into between the taxpayer and the Commissioner settling the tax liability of the taxpayer, or (3) when the taxpayer's liability had been determined to the extent of and in accordance with the data available, assessment made, and the case sent to the general files. Closed cases of the last-named class were subject to reopening in accordance with the practice of the Bureau at any time, but cases within the first two classes could not be reopened.
31. The number of cases reopened upon the application of taxpayers seeking refunds became so great that the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, issued under date of October 31, 1921, the following Treasury Decision, No. 3240, as a restriction upon reopening cases:
REOPENING OF CASES.
TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,
Washington, D.C.To Collectors of Internal Revenue*3469 and others concerned:
Where any case in the Bureau of Internal Revenue has been finally closed after the taxpayer, or other party thereto, has had a hearing or has been afforded by written notice an opportunity to present oral or written arguments or statements of fact in support of his contentions, the case will not be reopened except (1) where a showing is made of new and material facts, accompanied by an explanation, satisfactory to the Commissioner of Internal Revenue, of the failure to produce such facts prior to the closing of the case, or (2) where the case is materially affected by the change of regulations or by the final decision of another case either by the Commissioner of Internal Revenue or by a court of competent jurisdiction. The application for reopening a case should be addressed to the Commissioner of Internal Revenue, should state succinctly the facts and circumstances upon which the application is based, and must be supported by the affidavit of a person having knowledge of the facts.
This decision is not to be construed as modifying the regulations relating to the filing of claims in abatement or claims for refund, nor as denying the right of a taxpayer*3470 to a hearing or to an appeal at any stage of his case until the case has been finally closed. After the taxpayer has exhausted his remedies within the Bureau, however, and the case has been finally closed, it will be reopened only under the conditions stated in the decision.
D. H. BLAIR,Commissioner of Internal Revenue.
Approved October 31, 1921.
A. W. MELLON,Secretary of the Treasury.
On December 3, 1923, the Tax Simplification Board reported to the Speaker of the House of Representatives, in part, as follows:
In surveying the work of the income tax unit it was discovered that even after the return of a taxpayer had been audited, an additional tax liability found, the amount thereof assessed and subsequently paid by the taxpayer, and *955 the case marked closed, it frequently happened that the case was reopened by an auditor or other official of the income tax unit, of his own motion on account of some new ruling or decision. The taxpayer was, thereupon, notified and the questions of additional tax liability or overpayment were again gone into, although the amount thereof had been previously settled. As long as such procedure prevailed the work*3471 of the income tax unit was materially increased and there was no chance of the taxpayer knowing definitely what his tax liability was short of the period of the statute of limitations, and, indeed, not even then, for in many cases he had been induced to sign a waiver of the statute. This practice appeared to our board to be disastrous to the orderly procedure of the administration of the revenue law, grossly unfair to the taxpayer, and productive of little, if any, benefit to the Government.
Our board brought this situation to the attention of the Commissioner, and, in pursuance of our recommendation, he issued an order that cases once closed should not be reopened except in case of fraud or gross error.
The Commissioner's order referred to was issued January 20, 1923, and read as follows:
JANUARY 20. 1923.
Numerous complaints from various sources have reached me that taxpayer are being subjected to examinations and requests for information concerning cases in which the audits have been completed and the cases closed. Such examinations are not advisable and are clearly contrary to the spirit of the act and the regulations of the department. The reopening of closed cases*3472 should be the rare exception and not the rule. In the absence of evidence of fraud or gross error, cases once closed are not to be reopened.
32. The facts found and set forth in findings numbers 131 to 332, inclusive, of the Board's decision in the case of James Couzens, Docket No. 10438, are equally applicable to the issues of this case and, for brevity, are hereby incorporated herein and made a part hereof by reference.
33. The fair market price or value on March 1, 1913, of the 525 shares of stock in the Ford Motor Co. of Michigan owned by the petitioner on that date and sold by him in June, 1919, as aforesaid, was $5,250,000, or at the rate of $10,000 per share.
OPINION.
VAN FOSSAN: In the case of , we had before us the same issues and in large part the same facts as are here presented. The considerations on which the decision in that case was based are equally pertinent and controlling in this proceeding.
The fair market value on March 1, 1913, of the stock of the Ford Motor Co. owned by petitioner was $5,250,000, or at the rate of $10,000 per share.
Reviewed by the Board.
Judgment will be entered under*3473 Rule 50.
SMITH, MORRIS, ARUNDELL, and MILLIKEN did not participate in the consideration or decision of this proceeding.