F. Ardbern/Blenheim

One year later, the Board decided Ardbern Co. v. Commissioner, 41 B.T.A. 910 (1940), and Blenheim Co. v. Commissioner, 42 B.T.A. 1248 (1940). In Ardbern Co., the taxpayer was a foreign corporation that attempted to file Federal income tax returns for 1929 through 1932 in June 1937. The taxpayer tendered those returns to the Commissioner's revenue agent, but the agent refused to accept them, believing that the returns had to be filed with the Collector of Internal Revenue at Baltimore, Maryland. The agent did not inform the taxpayer how to file those returns properly. On July 3, 1937, the Commissioner issued a notice of deficiency to the taxpayer for the years in question and, 6 days later, prepared substitute returns for the taxpayer. On September 29, 1937, the taxpayer petitioned the Board with respect to the matter, and the Commissioner answered that petition on December 7, 1937. On October 28, 1938, the taxpayer filed its 1929 through 1932 Federal income tax returns with the Collector of Internal Revenue at Baltimore, Maryland, claiming deductions and reporting no tax due.

The Board applied Taylor Sec., Inc. v. Commissioner, supra, and sustained the Commissioner's disallowance of deductions. The Board stated:

Petitioner did not, by the lodgment of returns with *** [the revenue agent], discharge the duty which the statute laid upon it. Also, the action of petitioner in filing returns with the collector at Baltimore on October 28, 1938, was ineffective to bring it within the limitations of the statute so as to entitle it to the benefit of deductions. These returns were filed (a) after respondent had determined the deficiencies and prepared returns for petitioner under section 3176 of the Revised Statutes, as amended, and (b) after the petition and answer had been filed and the case was at issue before the Board, and only approximately two and one-half months prior to the hearing. Returns filed under such circumstances do not meet the requirements of section 233. Taylor Securities, Inc., 40 B.T.A. 696. On the point under discussion, the facts of the instant proceeding are not distinguishable in any material respect from those of the Taylor case. On authority of that decision and for the reasons therein stated, which need not be repeated here, respondent's action in computing the present deficiencies without the allowance of deductions is approved. [Ardbern Co. v. Commissioner, 41 B.T.A at 919-920.]

Upon appeal, the Court of Appeals for the Fourth Circuit modified and remanded the Board's decision on the authority

of Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938). The court stated:

fair dealing between the Government and a taxpayer would require the agent to whom the returns were improperly tendered for filing to advise the taxpayer as to the official and place where the returns should be filed. Here the agent Muller rejected the returns on the sole ground that they were improperly executed and did not notify the taxpayer that the returns could in no event be filed with him. Soon after the refusal to accept the returns the deficiency was determined against the taxpayer.

It is conceded that, if the return which taxpayer attempted to file before Muller in June 1937 had been properly filed before the Collector at Baltimore, taxpayer would have been entitled to the deductions claimed, which represented expense incurred in connection with the earning of the income taxed. The deductions are denied merely because they were not claimed in a return properly filed until after the deficiency assessment had been made against taxpayer upon a return filed for him by the Commissioner in which no deductions were allowed. We think, however, that when return was filed by the Commissioner for the taxpayer, he should have given him the benefit of proper deductions for expense of doing business, of which he had been notified by the return which taxpayer had attempted to file with his agent, or, at least, that taxpayer should be allowed such deductions when, upon the assessment of a deficiency against him, he shows that prior to its assessment he attempted in good faith to file a return in which such deductions were claimed. This is nothing but elementary justice, and we find nothing in the statute which forbids it. The return made by the Commissioner was clearly not based upon the best available information. While there is a specific penalty of 25 per centum fixed for failure to file tax returns, Section 291, Revenue Act of 1928, * * * there is no provision that there shall be an added penalty in the form of not allowing the delinquent taxpayer deductions to which it otherwise would be entitled. The Board held in Anglo-American Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711: "Inasmuch as separate sections deal with 'manner' and 'time,' we think it highly improbable that Congress ever intended to include the element of time in the section dealing primarily with the manner of filing. We hold, therefore, that the mere fact the return was not filed within the time prescribed by section 235 does not, under the circumstances here presented, preclude the allowance of deductions claimed."

[Ardbern Co. v. Commissioner, 120 F.2d at 426.]

The Board also followed Taylor Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939), in Blenheim Co. v. Commissioner, 42 B.T.A. 1248 (1940). There, the taxpayer was a foreign corporation that on June 15, 1935, filed a 1934 personal holding company return (Form 1120H) reporting income consisting only of dividends received from domestic corporations. The Commissioner learned that the taxpayer had not filed a corporate income tax return (Form 1120) for that year and

asked the taxpayer to do so. The taxpayer declined. On April 28, 1938, the Commissioner prepared a substitute return for the taxpayer and, on May 18, 1938, issued to it a notice of deficiency. On August 9, 1938, the taxpayer filed a Form 1120 for 1934.

The Board held that the filing of Form 1120H did not satisfy the requirements of section 233 of the 1928 and 1932 Revenue Acts because the personal holding company surtax was separate and distinct from the corporate income tax. Id. at 1251–1252. As to the Form 1120 filed by the taxpayer for 1934, the Board stated:

Undoubtedly a taxpayer may litigate a determination of respondent on the basis of a return made by *** [the Commissioner]. But, a "return" filed by a taxpayer after such a return has been prepared and filed for him by respondent, under the circumstances existing here, is a nullity and does not comply with section 233, supra. The taxpayer can not thus take advantage from an alleged return submitted by the taxpayer not only after respondent's filing of its return *** but also after the issuance of a notice of deficiency. Taylor Securities, Inc., 40 B.T.A. 696. *** [Id. at 1251.]

On appeal, the Court of Appeals for the Fourth Circuit affirmed. The court first quoted section 233 of the 1928 and 1932 Revenue Acts and then stated with respect thereto: “It is true that this section contains no reference to a time element." Blenheim Co. v. Commissioner, 125 F.2d at 908. The court then noted that section 233 of the 1928 and 1932 Revenue Acts applied only to foreign corporations and explained that Congress intended to impose special conditions on foreign corporations vis-a-vis domestic corporations. The court stated:

The difficulty here encountered by the Commissioner in attempting to ascertain the petitioner's correct income tax is a striking example of the many administrative problems inherent in the application of the federal income tax to foreign corporations. This has prompted Congress to impose special conditions on such corporations. Indeed, unless a foreign corporation is induced voluntarily to advise the Commissioner of all of its income attributable to sources within the United States and of the exact nature of all deductions from such income, the Commissioner may never learn even of the corporation's existence, and, in any event, he will probably be unable to determine the correct amount of its taxable income.

The situation is pregnant with possibilities of tax evasion. In express recognition of this fertile danger to the orderly administration of the income tax as applied to foreign corporations, Congress conditioned its

grant of deductions upon the timely filing of true, proper and complete returns. This is in addition, of course, to the 25% penalty provided by Section 291 of the 1934 Act for both foreign and domestic corporations which either file no return or a late return unless "reasonable cause" for the failure to file a timely return is shown. * * *

[Id. at 909.]

As to the "terminal date" that the Board had adopted in Taylor Sec., Inc. v. Commissioner, supra, the Court of Appeals for the Fourth Circuit explained that this date was justified notwithstanding the absence in the statute of a time element. The court stated:

The conclusion that the preparation of a return by the Commissioner a reasonable time after the date it was due terminates the period in which the taxpayer may enjoy the privilege of receiving deductions by filing its own return, is consistent not only with the intention of Congress * * * but also with considerations of sound administrative procedure and the generally accepted rule concerning the number of returns which may be filed. This terminal date, which the Board of Tax Appeals first adopted in Taylor Securities v. Commissioner, 40 B.T.A. 696 (1939), is directed against those foreign corporations which instead of being induced voluntarily to advise the Commissioner of their domestic operations, might find their interests best served by filing no return whatever, and then waiting until such time, if any, as the Commissioner discovers their existence and acquires sufficient information about their income on which to base a return. Unless they are precluded from then obtaining the deductions and credits under such circumstances, such foreign corporation can, if detected, come in for the first time after the Commissioner has made a return and suffer no economic loss other than the general 25% late filing penalty which applies to domestic as well as foreign corporations.

Without prescribing an absolute and rigid rule that whenever the Commissioner files a return for a foreign corporation the taxpayer is completely and automatically denied the benefit of deductions or credits, we yet hold that the facts of the instant case justify a disallowance of deductions which petitioner might otherwise have been entitled to claim, had it filed a timely return in compliance with the statutory requirement. [Blenheim Co. v. Commissioner, 125 F.2d at 910.]

The Court of Appeals for the Fourth Circuit also found in the legislative history of section 217 of the Revenue Act of 1918 further support for that conclusion and its reading of the statute to the effect that a foreign corporation was entitled to deduct its expenses upon the filing of an accurate and complete return:

It will thus be noted that Section 233 relating to foreign corporations, which made its first appearance in the Revenue Act of 1928, 26 U.S.C.A.

Int. Rev. Acts, page 419, is almost verbally identical with this section governing nonresident aliens which has been a part of the revenue laws since 1918. The application of Section 217 of the 1918 Act is clear. From the outset the Treasury Regulations have expressly provided that no deductions were allowable to nonresident aliens unless an accurate and complete return was filed, and the filing of the return by the Commissioner fixed the tax liability. *

*

* * *

The foregoing regulation [Article 311 of Treasury Regulations 45] states specifically that deductions are allowable to a nonresident alien only if a return is filed, and, if no return has been filed at the time the Commissioner prepares a return for the taxpayer, the tax shall be assessed with no allowance for deductions. Congress may be presumed to have adopted this longstanding administrative construction when it enacted and reenacted Section 233. Brewster v. Gage, 1930, 280 U.S. 327, 50 S. Ct. 115, 74 L.Ed. 457, Morgan v. Commissioner, 1940, 309 U.S. 78, 626, 60 S. Ct. 424, 84 L.Ed. 585, 1035.

[Id. at 910.]

The Court of Appeals for the Fourth Circuit distinguished its holding in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir. 1941), stating:

A substantially different factual situation is presented in the case before us. Here the Commissioner prepared a return only after he had unsuccessfully made repeated requests to the taxpayer to do so, and only after the taxpayer had flouted all of these requests. Then, after the Commissioner had assessed a deficiency on the basis of his return, but only then, the petitioner filed its petition for review by the Board and also a return.

Unless the deductions are here denied, Section 233 will become a meaningless provision, for if, after the Commissioner has earnestly attempted to obtain a return by the taxpayer and has waited a reasonable time before filing his own return, the taxpayer may still enjoy the privilege of all deductions and credits, there is then no inducement to foreign corporations voluntarily to file timely returns. In the absence of demonstrable fraud, they will, by self-serving uncooperative conduct, suffer no loss other than the general late filing penalty which is applicable to domestic as well as foreign corporations. Such a construction of the statute would put a premium on tax evasion and would reduce the administration of the tax laws to mere idle activity.

[Id. at 909-910.]

G. Georday Enters.

In Georday Enters. v. Commissioner, 126 F.2d 384 (4th Cir. 1942), affg. a Memorandum Opinion of the Board of Tax Appeals, a companion case to Blenheim Co. v. Commissioner, 125 F.2d 906 (4th Cir. 1942), the Court of Appeals for the