Persistence in claim for a tax refund;

              Bulletin HASKINS & SELLS 13
Persistence in Claim for a Tax Refund
By H. W . ELLIS, New York Broad Street Office
A N interesting development in a federal
tax case recently has reached the point
of a satisfactory settlement, which illus­trates
the importance of persistently re­fusing
to accept an improper decision from
the Commissioner of Internal Revenue,
and of fully considering the possibility of
there being more than one basis of accom­plishing
the desired result when certain
features of the case have to be abandoned.
The " M " Company and the " N " Com­pany
were not affiliated during the year
1919, but during the year 1920 they were
affiliated and filed a consolidated return
for that year. This return included ap­proximately
375,000 net income of the " N "
Company and the tax was paid upon the
entire net income shown by this return.
It was later discovered that the " N "
Company had sustained a statutory net
loss for the year 1919 of approximately
3105,000 which had not been taken as a
deduction in the 1920 return. A claim for
refund was therefore filed, and while the
whole 3105,000 could not be claimed as a
deduction in the consolidated return, due to
the fact that the company had not been
affiliated with the " M " Company in 1919
when the net loss was incurred, it was
recognized that this loss could be allowed
as a deduction to the extent of the " N "
Company's income of 375,000 which was
included in the 1920 consolidated return.
But, while the Commissioner allowed the
deduction, he did so only in part, because in
auditing the net loss for 1919 a disallow­ance
was made for what was said to be
"capital expenditures" amounting to about
350,000 thus reducing the statutory net
loss from 3105,000 to 355,000, which
lacked 320,000 to eliminate the " N "
Company's entire net income of 375,000.
A second claim for refund was therefore
made, protesting the disallowance of the
"capital expenditures" for lack of sufficient
explanation and identification, and also
making claim for depreciation of 345,000
for each of the years 1919 and 1920, which
was admitted to be quite proper, but which
had not been previously claimed. Either
of these items would have eliminated the
remainder of the " N " Company's taxable
income of 320,000 for 1920 but for the fact
that the second claim for refund was filed
after the statute of limitations had expired.
For this reason the second claim was
entirely rejected by the Commissioner.
It was persistently claimed however
that the "capital expenditures" could not
properly be disallowed until they were
more fully identified, and it was also urged
that if the second claim must be rejected
because of the statute of limitation, that
the first claim be reconsidered and that
these items be given effect in connection
with that claim which had been filed
within the statute of limitation. After
much delay this appeal was also formally
denied, upon the ground that no issues
could be considered other than those
mentioned in the claim.
A further demand was then made, either
for a satisfactory explanation of the
"capital expenditures" or that they be
allowed as a deduction. The matter was
considered again, but another formal letter
of rejection was eventually received.
Still, we refused to accept this as final,
and at a later conference the matter was
presented in a different way, by claiming
that even if depreciation had not been one
of the points mentioned in the first claim
for refund, the statutory net loss had been
claimed, and that there was no reason why
the computation of this net loss should not
be correctly made by including deprecia-