year the amount of $369,079.04 was allowed as a deduction from gross income. The allowance of the Cuban excise tax as a deduction from gross income did not cause any portion of the overassessments determined for the years in question, since the elimination of the amounts claimed as foreign tax credits tended to increase tax liability rather than cause an overassessment. 3 and 4. Special assessment and invested capital.-The taxpayers contended that the profits axes for the fiscal years 1918 and 1919 should be computed under the special assessment sections of the Revenue Acts of 1917 and 1918. The grounds asserted as a basis for special assessment were briefly as follows: (a) Time and manner of organization. (b) Understatement of invested capital due to failure to include any value for Juan Claro Concession and sufficient value for investment in San Manuel Sugar Co. (c) Understatement of invested capital due to failure to include any amount for improvements on and adjacent to Island of Juan Claro. (d) Failure to include in invested capital the cost of clearing lands. (e) Failure to include in invested capital the cost of canals, cuts, and dams. (f) Failure to include in invested capital various experimental and construction costs. (g) Insufficient amortization. (h) Abnormal borrowed capital. (i) Substantial amount of the goodwill to which profits are attributable not reflected in invested capital. During the year 1929 the Audit Review Division of the Bureau determined overassessments of $2,300,647.60 and $90,443.69 for the fiscal years 1918 and 1919, respectively, the major portion of the overassessments resulting from the computation of the profits tax liabilities under the special assessment sections of the Revenue Acts of 1917 and 1918. The proposed overassessments were referred to this office for review and were disapproved upon the ground that it was not believed, at the time, that the taxpayers had fully met the burden of establishing a cause for special assessment. Deficiency notices were mailed to the taxpayers denying special assessment and appeals were filed with the Board of Tax Appeals. The former special advisory committee after careful consideration and analysis of the various alleged abnormal conditions found itself strongly impelled to the conclusion that in the event of trial before the Board of Tax Appeals the taxpayers quite probably would be allowed special assessment. However, a settlement was reached with the taxpayers whereby it was agreed that a lump-sum addition of $11,000,000 would be made to the investment capitals for the fiscal years 1918 and 1919, as set forth in the 60-day letters. The following summary indicates certain of the additions to invested capital which were considered in arriving at the lump-sum addition of $11,000,000 which was allowed in the settlement of the case: Time and manner of organization. Canals, cuts, dams.. Construction costs. $3, 929, 340. 28 854, 549. 67 350, 000. 00 4, 532, 700. 00 354, 000. 00 750, 000. 00 The lump-sum addition of $11,000,000 to the invested capitals reflected in the 60-day letters resulted in the determination of an invested capital of $40,988,661.58 for the fiscal year 1918 and $44,688,634.81 for the fiscal year 1919, after making proper adjustments for the correct proration of the Federal income and profits taxes for prior years. 5. Statute of limitations. In the settlement negotiated by the former special advisory committee, $157,391.38 of the overassessment determined for the fiscal year 1918 in favor of the Cuban-American Sugar Co. was held to be barred from allowance by the statute of limitations. This issue has already been discussed in detail in this memorandum and a further discussion does not appear to be necessary. In the final settlement of the case an additional amount of $101,788.63 was allowed as an overpayment for the fiscal year 1918 leaving only $55,602.75 of the total overassessment determined for that year which was not allowed, instead of $157,371.38 as determined by the special advisory committee. The consummation of the final closing agreement for the fiscal year 1918 is decidedly to the advantage of the Government as the taxpayers will be prohibited from entering suit and undoubtedly securing judgment for a refund of $$55,602.75, plus interest, more than the overpayment now allowed for that year, unless the Government was successful in obtaining a set-off of $16,254.91, the overpayment allowed for the fiscal year 1919 under section 284 (c), Revenue Act of 1926, which was apparently barred from allowance at the time of the settlement, but was approved by this office in order to carry out the settlement recommended by the special advisory committee. The approval of the final closing agreement for the fiscal year 1919 is necessary in order to carry out the settlement agreement reached with the taxpayers whereby they were assured that there would be no attempt on the part of the Government to recover the above-mentioned overpayment of $16,254.91 for the fiscal year 1919. On the basis of the foregoing adjustments, the tax liabilities as shown in the closing agreements are as follows: 1 The total overassessments allowed the taxpayers amounted to $2,167,463.33, however deficiencies amounting to $6,710.66 were assessed against 4 subsidiaries leaving a net overassessment of $2,160,752.67, as above indicated. The total tax liability of $2,716,794.91 for the fiscal year 1918 represents a tax liability of $2,694,677.62 for the Cuban-American Sugar Co., the parent company, and a total tax liability of $22,117.29 for its subsidiary companies. The liability of $2,694,677.62 for the parent company is $55,602.75 greater than the tax liability shown for that company in the statement of recomputation attached to the recommendation of the former special advisory committee. The reason for difference of $55,602.75 has been stated previously in this memorandum. Assistant General Counsel for the Bureau of Internal Revenue. Hon. EUGENE KEOGH, House Office Building, Washington, D. C. BUCKLEY & BUCKLEY, MY DEAR CONGRESSMAN: In connection with the claim of the Cuban American Sugar Co., I would like to call your attention to some very important data which appears in the memorandum of July 26, 1934, which was submitted by Government counsel at the hearing before you on the above claim. On page 5 of the memo there appears this statement: "The former Special Advisory Committee in a forty-one page memorandum, approved by the Commissioner on September 27, 1932, recommended as an acceptable basis of settlement, that there be added to invested capital as determined in the Bureau sixty-day letters, the lump sum of $11,000,000.00." On page 19 of the memo there appears the following: "The following summary indicates certain of the additions to invested capital which were considered in arriving at the lump sum addition of $11,000,000.00 which was allowed in the settlement of the case: Time and manner of organization.. Canals, cuts, dams. $3,929, 340. 28 854, 549. 67 350, 000. 00 4, 532, 700. 00 354, 000. 00 750, 000. 00" These two statements furnish an absolute refutation of the Government's contention made before the Court of Claims, and before yourself, that the $11,000,000 added to invested capital of the company was purely an arbitrary figure and added for settlement basis. The statements above show that the $11,000,000 was not only not arbitrary nor a lump sum but had been arrived at as a proper addition even from the Government's viewpoint by the special advisory committee, after an investigation, and, also, that it was made up of several items set forth on page 19 in detail. I am submitting the above for your consideration in regard to this claim. Sincerely yours, DANIEL D. O'CONNELL AND ALMON B. STEWART FEBRUARY 9, 1945.-Committed to the Committee of the Whole House and ordered to be printed Mr. JENNINGS, from the Committee on Claims, submitted the following REPORT [To accompany H. R. 1303] The Committee on Claims, to whom was referred the bill (H. R. 1303) for the relief of Daniel D. O'Connell and Almon B. Stewart, having considered the same, report favorably thereon without amendment and recommend that the bill do pass. A similar bill was favorably reported by this committee in the Seventy-eighth Congress and passed the House, but no action was taken in the Senate before final adjournment. The facts will be found fully set forth in House Report No. 1236, Seventy-eighth Congress, which is appended hereto and made a part of this report. [H. Rept. No. 1236, 78th Cong., 2d sess.] The purpose of the proposed legislation is to pay to Daniel D. O'Connell and Almon B. Stewart, both of Bangor, Maine, the sums of $544.16 and $1,732.22, respectively, in full satisfaction of all claims against the United States for damages sustained by them by failure of George E. Glunt, of Altoona, Pa., to pay them for labor and materials furnished as subcontractors under said George E. Glunt, who held a contract with the Civil Aeronautics Administration for the construction of an airways communication station building at Bangor, Maine. STATEMENT OF FACTS The first regional office of the Civil Aeronautics Administration located at LaGuardia Field, Long Island, N. Y., contracted with George E. Glunt, successful bidder, under Invitation No. 1-41-357 for the erection of a 16- by 24-foot prefabricated steel-frame watch-house building furnished by the Government at Bangor, Maine. The estimated cost of the work was $1,688. After the Government acceptance of the lease, Mr. Glunt, the contractor, was issued the usual notice to proceed with the work commencing September 22, 1941, and was required to complete the job under the terms of the contract within 60 days, or by November 21, 1941. Mr. Glunt sublet the contract to two subcontractors, Daniel D. O'Connell and Almon B. Stewart. Mr. Stewart's bill to Mr. Glunt for the erection amounts to $1,732.22, while Mr. O'Connell's bill for labor and material for the foundation amounts to $544.60. |