*1092 Capital stock returns filed in behalf of petitioner, a trust taxable as an association, by a deputy collector pursuant to section 3176, R.S., upon its refusal to file such returns after their due dates, held, to constitute petitioner's first returns under Revenue Act of 1934, section 701, and Revenue Act of 1935, section 105, so that declaration of value therein was binding upon petitioner.
*632 Respondent determined that petitioner was an association taxable as a corporation and that the following deficiencies existed against it:
| Year | Income tax | Excess profits tax |
| 1935 | $1,365.25 | $496.46 |
| 1936 | 1,752.10 | 1,658.90 |
All the deficiencies were challenged in the petition on the ground that petitioner was not an association taxable as a corporation. It now concedes in an amended petition that it was an association taxable as a corporation and is liable for the claimed deficiencies in income tax. The remaining issue is whether it is also liable for the excess profits tax deficiencies, and the question dispositive of that issue*1093 is whether capital stock tax returns prepared and filed on behalf of petitioner by a deputy collector of internal revenue, declaring no value for its capital stock, are valid and binding on petitioner.
FINDINGS OF FACT.
The facts as stipulated are hereby found. Those facts appearing hereinafter which are not from the stipulation have been otherwise found from the record.
Petitioner was a trust. Its only asset was a portion of a tract of land in Pittsburgh, Pennsylvania, upon which was erected a department store. The land was leased upon a long-term lease for a net rental. The only function of the trustee was to receive the net rental, pay interest and amortization upon a mortgage, and, after deducting its compensation, remit the entire balance to the beneficiaries. The lease called for a net rental of $2,750 per month until May 1, 1928, and $3,166.67 per month from May 1, 1928, to the end of the term, April 30, 1968. This rental was in fact paid until *633 September 1932, when the tenant defaulted. The trustee thereafter collected a reduced rent. Negotiations were then conducted with the tenant, which resulted in an agreement, entered into in November 1935, *1094 fixing a new and reduced scale of rentals for the period beginning May 1, 1935. The following sums were actually received by the trustee on account of rents during the years listed:
| 1928 | $36,333.34 |
| 1929 | 38,000.04 |
| 1930 | 38,000.04 |
| 1931 | 38,000.04 |
| 1932 | 33,777.80 |
| 1933 | $20,055.52 |
| 1934 | 18,999.96 |
| 1935 | 18,999.96 |
| 1936 (to Aug. 7, when trust was revoked) | 22,337.37 |
For the years 1932 to 1936, inclusive, the trustee filed with the collector of internal revenue at Pittsburgh fiduciary income tax returns, showing the income received and, as deductions, payments of interest on the mortgage and payments of compensation to the trustee. Petitioner's total net income, as shown by its returns, was as follows:
| 1932 | $24,312.72 |
| 1933 | 10,671.68 |
| 1934 | 9,698.86 |
| 1935 | 9,929.11 |
| 1936 | 17,937.37 |
On March 13, 1937, the Commissioner determined that petitioner was an association, taxable as such, and accordingly mailed to petitioner a notice of deficiency asserting deficiencies in income tax for 1932 and in income tax and excess profits tax for 1933 and 1934. On March 19, 1937, the collector addressed a letter to petitioner requesting it to file Federal capital*1095 stock tax returns for the years 1933, 1934, and 1935. This letter was transmitted by petitioner to its counsel, who, on April 6, 1937, wrote to the collector in part as follows:
A petition will be filed with the United States Board of Tax Appeals denying that this Trust is taxable at the corporation rates. Until this question is settled by the United States Board of Tax Appeals we believe that federal capital stock tax returns should not be filed and we have so advised the Trustee.
Acting on this advice, petitioner declined to file capital stock tax returns, believing that to do so might be construed as an admission conflicting with its claim that it was not an "association."
By letter dated September 1, 1937, the collector at Pittsburgh was instructed by the Acting Deputy Commissioner of Internal Revenue to renew his efforts to secure capital stock tax returns for the years 1933 to date and, if petitioner persisted in refusing to file such returns, to file them on its behalf pursuant to the authority conferred by section 3176 of the United States Revised Statutes. On October *634 11, 1937, the deputy collector at Pittsburgh again requested petitioner to file capital*1096 stock tax returns, but again petitioner declined to do so on advice of counsel, for the same reasons as set forth above. On October 13, 1937, the deputy collector prepared Form 707 (capital stock tax return form) on behalf of petitioner for each of the years 1933 to 1937, both inclusive, which were filed with the collector of internal revenue at Pittsburgh on October 15, 1937. The value of the capital stock declared on these forms was "none."
In connection with the preparation of the forms the deputy collector checked the capital stock card index and the corporation card index maintained at the collector's office, to determine whether corporation returns or capital stock tax returns had ever been filed by petitioner. In the course of his inquiry he learned that petitioner filed fiduciary income tax returns on Form 1041. He looked at the fiduciary returns for some of the years. There were no balance sheets or surplus analyses attached to them. They did, however, disclose distribution of income to the trust beneficiaries. The deputy collector talked with the chief conferee in the internal revenue agent's office in Pittsburgh, who advised him that controversy existed over the*1097 Commissioner's determination that petitioner was an association. The deputy collector did not examine petitioner's books, nor did he inquire of petitioner's counsel or issue a subpoena on anyone to appear and furnish information regarding the value of petitioner's capital.
The deficiency notice forming the basis of the present controversy, determining deficiencies for the years 1935 and 1936, was mailed to petitioner on March 8, 1940. In his determination respondent used the net income as reported by the trustee on the fiduciary income tax returns, minus certain deductions for the year 1936 which are not in dispute in this proceeding. The excess profits tax for each year was computed on the basis of a declaration of "no value" for petitioner's capital stock. The petition was filed April 6, 1940, and respondent answered on June 5, 1940.
On December 31, 1940, petitioner filed with the collector at Pittsburgh Form 707 for each of the years ending June 30, 1935 and 1936, showing declared capital valuations of $100,000 and $180,000, respectively, and paid the tax, penalty, and interest due thereon. On April 9, 1941, petitioner filed Form 707 for the year ended June 30, 1934, which*1098 showed a capital value of $100,000, and paid the tax due thereon. An amended petition and answer thereto were filed herein on April 8, 1941, six days prior to the hearing.
OPINION.
OPPER: The present case raises a comparatively narrow phase of the aggravated question presented when a trust taxable as an association has failed to file a timely capital stock tax return in the *635 belief that none was required. In this case, as in , and , the matter of petitioner's liability to tax as a corporation was in dispute at the time when capital stock tax returns became due. Unlike those cases, however, a capital stock tax return was filed for petitioner by the collector, after he had satisfied himself that none would be forthcoming from petitioner. Not until after the matter of petitioner's liability to tax as a corporation had been determined by the Board in (two Members dissenting), the determination had been affirmed by the *1099 , on April 26, 1940 (one judge dissenting), and a petition for certiorari had been denied by the United States Supreme Court, , on October 14, 1940; and in fact after the original petition herein had been filed April 6, 1940, and answered June 5, 1940, did petitioner attempt to file capital stock tax returns for the years in question. This was long after expiration of the time fixed for the filing of an original return.
The parties are now in agreement that petitioner was taxable as a corporation; that capital stock tax returns were accordingly due from it under the law; that the time for amending a valid return under the statute had expired; and that, therefore, if respondent's action in filing returns for petitioner constituted the filing of original returns, it is conclusive and petitioner's returns filed after the period of amendment are invalid and ineffectual. ; affd. (C.C.A., 3d Cir.), *1100 ; certiorari granted, ; cf. . The issue here is limited to petitioner's assertion that respondent failed to take the action which would render the returns filed by him effective under R.S. 3176, as reenacted and amended by section 1103, Revenue Act of 1926; 1 that, therefore, this action was a nullity, there was in fact no earlier return, cf. , and accordingly filing by petitioner, even though late, was permissible. See
*1101 The contention is that respondent failed to take the pains necessary *636 to determine an actual or at least a reasonable value for petitioner's capital stock and since he was bound to do this, the return resulting was arbitrary and unreasonable and may be disregarded. This position seems to us to overlook significant factors which arise from the peculiar operation of the capital stock tax provision 2 and its interplay with the excess profits tax, 3 deficiency in which concerns us here. Even assuming that the collector failed to make as complete an examination as was required of him, a conclusion the record by no means supports, and even assuming this to be a consideration from which petitioner can take an advantage, cf. , 4 there yet remain these distinctions between an ordinary return and the capital stock tax return involved in this proceeding.
*1102 Speaking of the capital stock and excess profits tax provisions, the Supreme Court said in :
* * * Here the purpose of the statute is unmistakable. It is to allow the taxpayer to fix for itself the amount of the taxable base for purposes of computation of the capital stock tax, but with the proviso that the amount thus fixed for the first taxable year shall be accepted, * * * for the purpose of computing the capital stock and excess profits taxes in later years. Congress thus avoided the necessity of prescribing a formula for arriving at the actual value of capital for the purpose of computing excess profits taxes * * *. At the same time it guarded against loss of revenue to the Government through understatements of capital * * *.
There *637 is therefore no requirement that a capital stock tax return shall record the actual, or even a reasonably computed, value of any taxpayer's capital stock. If the taxpayer elects to do so it may impute for capital stock tax purposes a completely arbitrary and unfounded value to its capital and though this may result in the payment of a smaller tax or none at all, no one is in a*1103 position to complain. Selection of a declared value of the taxpayer's capital is consequently a pure matter of election with no reference whatever to any fact other than the taxpayer's state of mind. Under such circumstances, if a taxpayer fails to make the election required, the Commissioner may do it for him and the taxpayer will be bound. ; ; see . We think it can hardly lie in the mouth of the taxpayer to object to the collector's action as arbitrary when the statute permits the taxpayer himself, in taking the same action, to be as arbitrary as he chooses.
Petitioner's contention can be summarized in its own words as on "that the statute requires that the Collector shall file a return which * * * shall represent a bona fide estimate of the taxpayer's true liability." Although the deficiency here involves excess profits taxes, the return creating the controversy was a capital stock tax return. The value disclosed by such a return may have a secondary effect in that it controls the excess profits tax which will be due on a specified quantum*1104 of corporate income. But it has a primary function by which in its own right it may be the occasion for the separate though connected capital stock tax. This is demonstrated in the present case by the necessity, complied with here by petitioner, of paying a delinquent capital stock tax when it filed the returns which respondent contends were of no effect. We do not suggest that petitioner might not have been bound if the return filed by the collector had imposed a declared value which would have resulted in some capital stock tax liability. Cf. ;Nevertheless, it can not be successfully asserted that the return which the collector did file was not a bona fide estimate of the taxpayer's true liability, merely because it was as favorable to the taxpayer as possible. The taxpayer itself could, without restraint or evasion, have filed an exactly identical return showing the same liability as the one resulting from that filed by the collector, which it could not be contended did not truly represent the taxpayer's liability.
It is abundantly evident that one of the purposes of the provisions here under review*1105 was to preclude the benefit of hindsight to a taxpayer in selecting the amounts of capital stock and excess profits taxes it chooses to make itself liable for. Cf. . It has been held that there are circumstances where the sequence of events may maneuver the taxpayer into that position, notwithstanding the manifest statutory purpose. ;But that result was conditioned upon and in a sense due 5 to the opportunity afforded the Government's tax officers to protect the revenue by a return filed on the taxpayer's behalf, which would have the effect of preventing the delay and consequent benefit of a knowledge of after-events. While in this case the action ultimately resorted to by petitioner might have been no different in substance by reason of that after-acquired information, we can not say that would be true in every case. In order to accomplish the clear legislative purpose and to avoid inequitable discrimination between taxpayers, *1106 we think it necessary to conclude that the collector acted properly in filing the returns as he did; that they were petitioner's first returns; that the later filing by the petitioner was untimely under the statute; that it is bound by the earlier returns; and that, therefore, the deficiences were properly determined.
Decision will be entered for the respondent.
Footnotes
1. SEC. 1103. Section 3176 of the Revised Statutes, as amended, is amended to read as follows:
"SEC. 3176. If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner of Internal Revenue may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes. * * *" ↩
2. E.g., Revenue Act of 1935 -
SEC. 105. CAPITAL STOCK TAX.
(a) For each year ending June 30, beginning with the year ending June 30, 1936, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1.40 for each $1,000 of the adjusted declared value of its capital stock.
* * *
(f) For the first year ending June 30 in respect of which a tax is imposed by this section upon any corporation, the adjusted declared value shall be the value, as declared by the corporation in its first return under this section (which declaration of value cannot be amended) * * *.
[See to same effect Revenue Act of 1934, sec. 701.] ↩
3. SEC. 106. EXCESS-PROFITS TAX.
(a) There is hereby imposed upon the net income of every corporation for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 105, an excess-profits tax equal to the sum of the following:
6 per centum of such portion of its net income for such income-tax taxable year as is in excess of 10 per centum and not in excess of 15 per centum of the adjusted declared value;
12 per centum of such portion of its net income for such income-tax taxable year as is in excess of 15 per centum of the adjusted declared value.
(b) The adjusted declared value shall be determined as provided in section 105 as of the close of the preceding income-tax taxable year * * *.
[See to same effect Revenue Act of 1934, sec. 702.] ↩
4. "* * * the powers there given the assessor were conferred for the benefit of the United States. Taxpayers, if they make the required return, will have no cause to complain that the assessor did not issue a summons to them or those representing such taxpayer to appear and give evidence upon the subject, or that the assessor did not enter the place where the taxpayer resides and make the examination of his books and papers as authorized by that section of the act. Doubtless he may do so if he deems it necessary, but the tax is not rendered illegal if the assessor omits to procure the necessary information in that way. Steps of the kind may be taken by the assessor or they may be omitted * * *." ↩
5. "On the contrary, we think that Congress deliberately created this right to cover delinquencies arising from reasonable causes, and, having so created it, safeguarded it against abuses by authorizing the collector to make binding returns where none were filed by the taxpayer * * *." ↩