*2367 1. Where $95,000 was paid in 1922 in compromise of proposed additional assessments of income and profits taxes for 1917 to 1920, inclusive, invested capital for 1921 should be adjusted by the amount of the compromise payment.
2. Special assessment denied.
*36 This proceeding is for the redetermination of a deficiency of $3,314.71, income and profits taxes for 1921. The petitioner alleges that respondent erred:
(a) In excluding from invested capital for 1921 the sum of $3,750, representing the cost of good will to the extent of 25 per cent of the par value of capital stock outstanding at the beginning of 1921;
(b) In excluding from invested capital for 1921 the sum of $95,000, representing the amount paid by petitioner on its own account and the account of others in 1922, in compromise of all taxes, interests and penalties claimed by respondent to have been due from the petitioner, the Hamilton Garment Co., and the Kleva Klad Dress Co., for the years 1917 to 1920, inclusive.
At the hearing*2368 petitioner waived the error assigned in (a) with respect to the good will item, and amended its petition by alleging that respondent erred,
(c) In denying petitioner the benefit of special assessment under sections 327 and 328 of the Revenue Act of 1921, for the reason that *37 within the meaning of section 327(a), the respondent is unable to determine petitioner's invested capital.
FINDINGS OF FACT.
The petitioner, the Hamilton Garment Co., and the Kleva Klad Dress Co., are New York corporations organized under the laws of that State in 1910, 1915, and 1918, respectively.
On March 17, 1922, the respondent addressed a letter to petitioner wherein he stated that after an examination of petitioner's returns and the returns of its affiliated companies, the Kleva Klad Dress Co. and the Hamilton Garment Co., for the years 1917 to 1920, inclusive, he proposed to assess against and collect from these corporations additional income and profits taxes and penalties for the years 1917 to 1920, inclusive, aggregating the sum of $410,420.36.
Respondent's computation of net income for each of the affiliated companies for the years 1917 to 1920, inclusive, is shown in the letter*2369 of March 17, 1922, as follows:
| 1917 | 1918 | 1919 | 1920 | |
| Petitioner | $80,236.55 | $63,451.74 | $162,467.57 | $143,889.12 |
| Hamilton Garment Co | 5,056.27 | 10,408.44 | 2,821.17 | 956.49 |
| Kleva Klad Dress Co | 17,567.60 | 44,623.40 | 16,223.16 | |
| Total | 85,292.82 | 91,427.78 | 209,912.14 | 161,068.77 |
The taxes and penalties proposed in the letter of March 17 were as follows:
| 1917 | Additional taxes claimed | Penalties asserted | Total |
| Petitioner | $36,607.08 | $36,607.08 | $73,214.16 |
| Hamilton Garment Co | 289.37 | 303.38 | 592.75 |
| Total for 1917 | 36,896.45 | 36,910.46 | 73,806.91 |
| AS A CONSOLIDATED GROUP | |||
| 1918 | 65,130.31 | 32,565.16 | 97,695.47 |
| 1919 | 89,839.98 | 44,919.99 | 134,759.97 |
| 1920 | 69,438.67 | 34,719.34 | 104,158.01 |
| Total for all years | 261,305.41 | 149,114.95 | 410,420.36 |
On the same date respondent addressed a letter to the Hamilton Garment Co., wherein he proposed the assessment against and collection from the said company of additional income and profits taxes and penalties for the year 1917 in a total amount of $592.85.
Under date of July 10, 1922, the petitioner, the Hamilton Garment Co. and the Kleva Klad Dress Co., addressed a letter to respondent*2370 in care of the Collector of Internal Revenue for the Second District *38 of New York, wherein they offered to pay $95,000 in compromise of all claims for additional taxes, penalties, and interest against the said companies. The concluding paragraph of this letter, which was signed by the officers of the three corporations, reads as follows:
This offer is made without prejudice and upon the understanding that it is not intended to and shall not constitute an admission, directly or indirectly, of any wrongful or unlawful act on the part of the taxpayers and/or any of them, or the validity of any of the claims made against them and/or any of them.
This offer in compromise was accompanied by the payment to respondent of the $95,000.
Under date of August 28, 1922, the respondent, with the advice and consent of the Secretary of the Treasury, duly accepted said offer in compromise and said $95,000 "in settlement and compromise of all income tax, interest and penalties in question for the years 1917, 1918, 1919, and 1920." (Signed) "Carl A. Mapes, Solicitor of Internal Revenue."
Thereafter and on September 15, 1922, counsel for the petitioner, the Hamilton Garment Co., and*2371 the Kleva Klad Dress Co., addressed a letter to the Solicitor of Internal Revenue acknowledging receipt of his letter dated August 28, 1922, wherein counsel confirmed the acceptance of the offer in compromise contained in their letter of July 10, 1922, and stated that "we take it that the case is finally closed accordingly without further action on the part of our clients or ourselves." To this letter of September 15, 1922, the Solicitor on September 22, 1922, replied as follows:
Reference is made to your letter of September 15th, 1922, and it is advised that you are correct in your conjectures that the case, above mentioned, is finally closed, and that the offer in compromise was accepted in the terms presented by your clients. Your letter will be placed with the files.
(Signed) CARL A. MAPES, Solicitor.
No notice of any determination by the respondent of additional income and profits taxes, penalties, or interest for the years 1917 to 1920, inclusive, against the petitioner or its affiliated companies, other than the determination found in respondent's letters of March 17, 1922, was ever received by the petitioner, the Hamilton Garment Co. and the Kleva Klad Dress Co.
*2372 The amounts of deficiencies shown in the notice mailed to the petitioner and the Hamilton Garment Co. on March 17, 1922, were assessed by the respondent in September, 1922. Subsequently, these assessments were canceled by the collector on the filing of claims for abatement, and the assessments were removed from the list. The offer in compromise was accepted by respondent prior to placing the amounts of the proposed deficiencies for the years 1917 to 1920, inclusive, on the assessment list. No notice of assessment was given *39 and no demand for payment was made with respect to any of the aforementioned proposed deficiencies by the collector.
The petitioner filed its income and profits-tax return for 1921 and reported therein a taxable net income and invested capital of $26,781.32 and $148,141.76, respectively. The total tax computed on the return was $4,801.78.
The respondent held that the petitioner was not affiliated with the Hamilton Garment Co. or the Kleva Klad Dress Co. during 1921. He excluded from its invested capital for that year the $95,000 paid under the compromise agreement, and determined the petitioner's taxable net income and invested capital for*2373 1921 to be $26,781.32 and $49,391.76, respectively. He determined the total income and profits tax to be $8,116.49, of which $4,801.78 had been previously assessed, leaving a deficiency of $3,314.71.
OPINION.
MORRIS: Petitioner's contention in regard to the reduction of invested capital by the amount of the compromise settlement is that section 1207 of the Revenue Act of 1926 and article 845 of Regulations 62 relate to adjustments of invested capital for income and profits taxes for the year immediately preceding the taxable year and that no additional income and profits taxes have been established at any time to be due from or payable by the petitioner for any of the years 1917 to 1920, inclusive, and no such additional taxes were paid for said years, the payment of an amount in compromise not being the payment of a tax.
It is difficult to see any distinction in principle between this case and our decision in the , wherein we expressly held that the adjustment of invested capital by reason of income and profits taxes for the preceding years, when made in accordance with the regulations, must be approved. Obviously, *2374 the payment which petitioner made precluded the collection of the proposed taxes. It offered a lump sum in accord and satisfaction of any liability for additional taxes which were then due or might subsequently be determined to be due.
It can not be said that we are going behind the terms of the compromise agreement, since we are not concerned with taxes for any one of the years 1917 to 1920, inclusive. Our concern is directed to the determination of whether an amount paid in satisfaction of proposed tax assessments can be included in petitioner's statutory invested capital. The principal distinguishing element between these facts and the majority of tax cases is that petitioner was able to settle the question of its tax liability through the acceptance of an offer in compromise prior to an actual assessment.
*40 No payment in this case was made, because of any contract right or obligation, or because of a judgment, or in satisfaction of damages inflicted, but in order to satisfy the burden or charge imposed on income by the Federal taxing statute. The fact that the proposed taxes had not been reduced to judgment, or that no notice and demand had been made, or that*2375 no suit or proceeding had been initiated to collect the proposed taxes, can not alter the fact that the $95,000 was paid in satisfaction of a statutory tax liability. No other reason can be advanced for the payment of this $95,000 than the satisfaction of the proposed tax assessments. Whether the amount paid completely discharged the burden imposed by the taxing statute for each of the years 1917 to 1920, is immaterial, since the respondent, with the advice and consent of the Secretary of the Treasury, had the authority to accept an offer in compromise. Had there been proof that the true additional tax liability was less than the amount of the compromise payment, an interesting question would have arisen as to the extent of the reduction of invested capital for the taxable year in question, but no such showing was made. The petitioner's offer in compromise was accepted, and thereby whatever tax liability that might or might not have been ultimately determined was eliminated from further consideration. This amount was actually paid out in settlement of a tax liability and, regardless of bookkeeping entries, surplus should be reduced in the amount of such payment.
Nor do we think*2376 that the time element is material. Invested capital is a creature of the statutes, and as errors made in reporting income for prior years are corrected, it necessarily follows that these corrections are often reflected by adjustments to invested capital for subsequent years. The true tax liability for any particular year or any amount paid in satisfaction thereof, even though discovered or paid in later years, must be reflected in an adjustment to invested capital for the next succeeding taxable year. See section 1207 of the Revenue Act of 1926 and article 845 of Regulations 62.
The second issue raises the question whether petitioner is entitled to special assessment for the reason that the respondent is unable to determine its invested capital. The argument advanced is that, since the respondent has held the companies were not entitled to affiliation for 1921, and since the $95,000 compromise payment was for the affiliated group, and because of the nature of the compromise agreement, there is no basis upon which a division of the $95,000 may be made among the three companies.
The $95,000 was paid in compromise of proposed tax liabilities. We are not satisfied that a division*2377 of this payment could not be made either on the basis of an agreement between the companies *41 or upon the basis of net income. We are of the opinion the petitioner has failed to sustain the burden of showing that invested capital can not be determined. It is, therefore, not entitled to have its tax computed under section 328 of the Revenue Act of 1921.
Judgment will be entered for the respondent.