UHL ESTATE CO. v. COMMR. OF INTERNAL REVENUE

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Docket Number

No. 9529.

Attorney(S)

Paul A. McCarthy, of San Francisco, Cal., for petitioner. Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch, Carlton Fox, and Newton K. Fox, Sp. Assts. to Atty. Gen., for respondent.

Judges

William Denman
Clifton Mathews

Acts

Crimes And Criminal Procedure — Civil Disorders — Crimes — Civil Disorders

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Smart Summary

Factual and Procedural Background

This case arises from a petition by the Uhl Estate Company to review a decision of the United States Board of Tax Appeals. The Board had affirmed a determination and proposed assessment by the Commissioner of Internal Revenue of a deficiency in income taxes and excess profits taxes for the tax year 1933, including a 25 percent penalty. The petitioner contested the assessment on grounds including the statute of limitations, the disallowance of a bad debt deduction, and the imposition of the penalty under the Revenue Act of 1932.

Legal Issues Presented

Whether the proposed tax assessment was barred by the statute of limitations due to the filing of an unverified return.
Whether the Board erred in refusing to recognize a deduction for a bad debt ascertained to be worthless in 1933.
Whether the 25 percent penalty under §§ 291 and 52(a) of the Revenue Act of 1932 was properly imposed given the nature of the return filed.

Arguments of the Parties

Petitioner’s Arguments

The proposed tax assessment was barred by the statute of limitations because the Commissioner did not make the assessment within two years after the filing of the return.
The Board erred in refusing to allow a deduction for a bad debt owed by Adolph Uhl, which petitioner claimed was worthless in 1933.
The penalty was unwarranted because the return filed, although unsigned by a treasurer and unverified, constituted the required return under §§ 291 and 52(a) of the Revenue Act of 1932.
Petitioner relied on a resolution stating that Adolph Uhl’s indebtedness was only half of the joint indebtedness with George Uhl, arguing that the release of Adolph’s half justified the deduction.

Respondent’s Arguments

The statute of limitations did not bar the assessment because the return filed was unverified and thus did not commence the running of the limitation period, as established by Supreme Court precedent.
The bad debt was a joint obligation of both Adolph and George Uhl, and since George remained liable, the deduction was not proper.
The penalty was justified because the return failed to meet the statutory requirements of § 52(a), which mandates that the return be sworn to by both the president and treasurer or assistant treasurer.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Lucas v. Pilliod Lumber Co., 281 U.S. 245, 248	Statutory period for assessment does not begin to run on an unverified return; mandatory nature of verification and signatures on corporate returns.	Held that the unverified return filed by petitioner did not trigger the statute of limitations and that the failure to file a properly verified return justified the penalty.
White v. United States, 305 U.S. 281, 292	Burden of proof on taxpayer to clearly establish deductions within the statute.	Supported the court’s finding that petitioner failed to prove the bad debt deduction was proper.
New Colonial Co. v. Helvering, 292 U.S. 435, 440	Taxpayer’s burden of proof regarding deductions.	Reinforced the principle that petitioner did not meet the burden to justify the deduction.
Helvering v. National Grocery Co., 304 U.S. 282, 295	Deference to Board’s factual findings and credibility determinations.	Affirmed the Board’s decision to reject petitioner’s evidence and uphold the disallowance of the deduction.
Edmonds v. Commissioner, 90 F.2d 14, 17-18 (9th Cir.)	Mandatory character of signature and verification requirements on tax returns.	Supported the court’s view that the verification requirements are not mere formalities but essential.
Noteman v. Welch, 108 F.2d 206, 215 (1st Cir.)	Mandatory nature of tax return verification and signature requirements.	Reinforced the court’s conclusion on the necessity of proper verification.
Sabatini v. Commissioner, 98 F.2d 753, 756 (2d Cir.)	Strict enforcement of verification requirements on returns.	Supported imposition of penalty for failure to file a properly verified return.
Fidelity Columbia T. Co. v. Commissioner, 90 F.2d 219, 223 (6th Cir.)	Verification requirements are mandatory and must be strictly complied with.	Used to justify upholding the penalty assessment.
National Contracting Co. v. Commissioner, 105 F.2d 488, 492 (8th Cir.)	Verification and signature requirements on returns.	Confirmed the court’s interpretation of § 52(a) and § 291.
American Milk Products Corp. v. United States, 41 F.2d 966, 969 (Ct.Cl.)	Strict construction of penalty provisions against the government.	Considered in the court’s analysis but rejected petitioner’s interpretation.
United States v. John Bailey, 9 Pet. 238, 255	Sanction of perjury as a necessary aid in tax return verification.	Supported the court’s reasoning on the importance of sworn returns for tax assessment.
Louisville Nashville R.R. Co. v. Layton, 243 U.S. 617	Importance of statutory compliance in tax returns.	Reinforced the mandatory nature of verification requirements.
Caha v. United States, 152 U.S. 211, 218	Necessity of strict compliance with statutory requirements in tax matters.	Supported the court’s conclusion that failure to verify justifies penalty.

Court's Reasoning and Analysis

The court first addressed the statute of limitations issue, relying on Supreme Court precedent holding that an unverified return does not start the running of the limitation period. Since the petitioner’s return was unverified, the Commissioner was not barred from making the assessment.

Regarding the bad debt deduction, the court examined the evidence that the debt was a joint obligation of Adolph and George Uhl under California law, which presumes joint obligations unless proven otherwise. The Board found that George Uhl remained liable, and petitioner failed to meet its burden of proof to show the deduction was proper. The court deferred to the Board’s factual findings and credibility determinations.

On the penalty issue, the court analyzed §§ 52(a) and 291 of the Revenue Act of 1932, which require that corporate returns be sworn to by both the president and treasurer or assistant treasurer. The petitioner’s return was signed only by the president and was not verified by oath, failing the statutory requirements. The court emphasized that these requirements are mandatory, not merely administrative, and serve to ensure accuracy and accountability under penalty of perjury. The court rejected petitioner’s argument for strict construction of the penalty provision in a manner that would negate these essential requirements, affirming the Board’s imposition of the 25 percent penalty.

The dissenting judge agreed that the return was not sufficient to trigger the statute of limitations but argued that the return nevertheless qualified as a "return required by this title" for purposes of § 291, and thus no penalty should be imposed. The dissent emphasized the distinction between strict construction of statutes of limitation against the government and penal statutes against the government.

Holding and Implications

The court affirmed the Board of Tax Appeals’ decision, holding that:

The Commissioner’s proposed assessment was not barred by the statute of limitations because the return filed was unverified.
The disallowance of the bad debt deduction was proper because the debt was a joint obligation and petitioner failed to prove otherwise.
The 25 percent penalty was properly imposed due to failure to file a return meeting the mandatory verification and signature requirements under §§ 52(a) and 291 of the Revenue Act of 1932.

The direct effect of this decision is to uphold the tax deficiency and penalty assessments against the petitioner. The court’s ruling reinforces the mandatory nature of verification requirements on corporate tax returns and clarifies that unverified returns do not trigger the statute of limitations for tax assessments. No new precedent beyond the application of established principles was set.

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UHL ESTATE CO. v. COMMISSIONER OF INTERNAL REVENUE.

DENMAN, Circuit Judge.

This case arises on a petition to review a decision of the Board of Tax Appeals affirming a determination and proposed assessment of the Commissioner of a deficiency of $8,974.75 in income taxes and $2,951.05 in excess profits for the tax year 1933 and of a 25 percent penalty. Petitioner's position is that: (1) The proposed assessment was barred by the statute of limitation; (2) the redetermination was erroneous because the Board refused to recognize a deduction validly claimed for a bad debt ascertained to be worthless in the year 1933; and that (3) the penalty was not warranted by the provisions of § 291 and § 52(a) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, pages 566 and 500, it claiming that the filing of a so-called return not signed by a treasurer, or corresponding officer, and not verified by anyone, is the filing of the return required by those two provisions.

On the question of the claimed bar of the proposed assessment under § 275 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 565, because not made within two years after filing, on March 15, 1934, of an unverified return of the petitioner's income, the Supreme Court has held that the statutory period does not begin to run on a "so-called" return which is unverified. The specific ground of the decision is the lack of verification. Lucas v. Pilliod Lumber Co., 281 U.S. 245, 248, 50 S.Ct. 297, 74 L.Ed. 829, 67 A.L.R. 1350. The Commissioner was not barred by § 275 from making the assessment here proposed.

On the proposed assessment of the income and excess profits tax the petitioner complains that the Commissioner was not justified in refusing a deduction for a bad debt owed by one Adolph Uhl for moneys previously borrowed from petitioner. The Board held that the debt was a joint obligation of two brothers, George and Adolph Uhl, and that George continued to owe the amount of the claimed deduction. Petitioner having the burden of proof that the claimed deduction is clearly within the statute attempted to show that Adolph Uhl, who admittedly owed a large debt to the petitioner, had become unable to pay more than $10,000 on an indebtedness claimed to be $113,169.52, which was written off the books in 1933. For the purposes of this decision we assume that Adolph Uhl so became insolvent and that as to him the debt became valueless in that year, and that he was properly discharged from it by petitioner. However, there was also evidence to show that Adolph Uhl and George Uhl had used in joint ventures at least part of the indebtedness claimed to be deducted.

White v. United States, 305 U.S. 281, 292, 59 S.Ct. 179, 83 L.Ed. 172; New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348.

Petitioner charged the claimed deduction in its books to an account of Adolph and George Uhl or as the "A. and G. Uhl Account," to which were entered many cash loans during a period of ten years from 1923 to 1933. This entry the Board considered as evidence of a joint obligation which the solvent George Uhl owed to the petitioner. The California law here controls. In the absence of evidence to the contrary, an obligation of two or more persons is presumed to be a joint obligation rather than several. Civil Code of California § 1431. Cf. Spangenberg v. Spangenberg, 19 Cal.App. 439, 126 P. 379. The release of one of the joint obligors does not extinguish the obligation. Civil Code of California § 1543; Northern Ins. Co. v. Potter, 63 Cal. 157, 158; Wristen v. Curtis, 76 Cal. 6, 18 P. 81; Brown v. Pacific Coast Agency, 53 Cal.App. 788, 200 P. 977.

Petitioner contends that a self-serving statement in the resolution of petitioner made in November 1933, when Adolph Uhl was released from the balance of his indebtedness, that his indebtedness was one-half the amount "Adolph Uhl and George Uhl are indebted to this corporation" controls the many years of entry of the indebtedness as a joint one. Hence, petitioner claims, George Uhl owed only half of the $226,339, and the Adolph Uhl settlement and release for his half warrants the claimed deduction. George Uhl gave no testimony as to the character of his indebtedness to petitioner, although he owned all the stock of the company. Adolph Uhl did not corroborate the statement that he only owed half. His testimony is vague and uncertain. If ignored by the Board that heard his testimony, we are not warranted in concluding that the Board erred in so doing. Helvering v. National Grocery Co., 304 U.S. 282, 295, 58 S.Ct. 932, 82 L.Ed. 1346; O'Laughlin v. Helvering, 65 App.D.C. 135, 81 F.2d 269, 271. The Board's decision that petitioner had not sustained its burden of proving the deduction was improperly disallowed by the Commissioner is affirmed.

The Commissioner proposed a penalty assessment of 25 percent. This the Board upheld on the ground that no proper return was made because what was filed failed "to meet the statutory requirements." The return was signed only by the president, instead of both president and treasurer, and was not "sworn to" by anyone, as required by § 52(a) of the Revenue Act of 1932, providing:

"§ 52. Corporation Returns.

"(a) Requirement. Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. * * *" (Emphasis supplied)

That the failure to file such a return satisfying the requirement of § 52(a), that it "shall be sworn to" by the two officers, warrants the imposition of a proposed 25 percent additional assessment is shown in the provision for the penalty, § 291. This is that 25 percent " shall be added to the tax" by the Commissioner if there is not made and filed the return "required" by the 1932 Act. Section 291 of the 1932 Act provides:

"§ 291. Failure to File Return.

"In case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * *" (Emphasis supplied).

The requirement of verifications by both president and treasurer is mandatory. The return "shall be sworn to." That this requirement is not a mere administrative direction but mandatory in character has been held by the Supreme Court in Lucas v. Pilliod Lumber Co., 281 U.S. 245, 248, 50 S.Ct. 297, 299, 74 L.Ed. 829, 67 A.L.R. 1350, where the court says: "That the so-called return of May 31, 1919, unsupported by oath, did not then meet the definite requirements of section 239 [identical as the requirements of 52(a), 26 U.S.C.A. Int.Rev.Acts, page 500] is manifest. * * *" (Emphasis supplied.)

Cf. on mandatory character of the requirements of signature and verification. Edmonds v. Commissioner, 9 Cir., 90 F.2d 14, 17, 18 certiorari denied 302 U.S. 713, 58 S.Ct. 32, 82 L.Ed. 551; Noteman v. Welch, 1 Cir., 108 F.2d 206, 215; Sabatini v. Commissioner, 2 Cir., 98 F.2d 753, 756; Fidelity Columbia T. Co. v. Commissioner, 6 Cir., 90 F.2d 219, 223, certiorari denied 302 U.S. 723, 58 S.Ct. 44, 82 L.Ed. 558; National Contracting Co. v. Commissioner, 8 Cir., 105 F.2d 488, 492; American Milk Products Corp. v. United States, Ct.Cl., 41 F.2d 966, 969.

A "so-called return" not verified by anyone and not signed by a "treasurer or assistant treasurer" is not the return "required by this title", that is by the requirements of § 52(a).

Appellant correctly contends that since § 291 imposes a penalty it should be strictly construed against the Government. Applying this rule of construction, we cannot agree that the failure to have the signature of a treasurer or equivalent agent, who is customarily the one familar with the corporate accounts, and the absence of any verification, much more that of two of the corporate officers, do not go to the essence of the "required" return. We cannot construe out of the statutes their meaning on matters that go to the essence.

However lightly some persons may deem the taking of an oath in verification of an accounting, Congress must have regarded as necessary for tax assessment and collection that the taxpayer assume the risk of a charge of perjury as a sanction for great care in his return. Congress must have considered it an essential aid to the Commissioner of Internal Revenue in determining the many doubtful and border line items of an account. To fail to give the Commissioner such a required aid is a proper reason for the penalty. The fact that in a particular case all the items of the accounting appear in the "so-called return" does not give to the Commissioner the assurance required by § 291 and § 52(a) and does not warrant an exception to the application of a general rule of essential requirement in the return. The Board's decision upholding the Commissioner's proposed assessment of the 25 percent additional tax is affirmed.

R.S. 5392, 18 U.S.C.A. § 231; United States v. John Bailey, 9 Pet. 238, 255, 9 L.Ed. 113; Louisville Nashville R.R. Co. v. Layton, 243 U.S. 617, 37 S.Ct. 456, 61 L.Ed. 931; See Caha v. United States, 152 U.S. 211, 218, 14 S.Ct. 513, 38 L.Ed. 415.

Affirmed.

MATHEWS, Circuit Judge (dissenting in part).

The return filed by petitioner on March 15, 1934, was "a return required by this title," within the meaning of § 291 of the Revenue Act of 1932, and was filed "within the time prescribed by law." Hence, there was no ground for imposing a penalty. This conclusion is not inconsistent with the holding that the return filed by petitioner was not "the return" contemplated in § 275(a) of the Act. Section 275(a) is a statute of limitations and should be strictly construed against the taxpayer invoking it. Section 291 is a penal statute and should be strictly construed against the Government. The majority opinion recognizes, but fails to give effect to this distinction. The Board's decision, insofar as it holds petitioner subject to a penalty, should be reversed. In other respects, it should be affirmed.

Title I (§§ 1-322) of the Revenue Act of 1932, 26 U.S.C.A.Int.Rev.Acts, page 482 et seq.