shall be paid on or before the time fixed by law for filing the return, or, where an extension of time for filing the return has been granted, on or before the expiration of the period of such extension." PROBLEM 246 Illustrating Effect Upon Subsequent Installments in Case of Non-Payment of Installment of Tax When Due FACTS: The Monroe Biscuit Company filed their tax return for the fiscal year ending August 31, 1921 on November 14, 1921, and paid the first installment of the tax at the same time the return was filed. The second installment of the tax became due February 15, 1922 but the company was unable to meet the payment as its liquid capital was exhausted and it failed to obtain further credit from its bankers. The company was solvent but was unable to make collections rapidly enough to meet its current obligations. QUESTION: What effect, if any, will the fact, that the second installment is not paid when due, have upon the third and fourth installments which are payable May 15 and August 15, 1922, respectively? ANSWER: The whole amount of the tax unpaid shall become due and payable upon notice and demand by the collector as soon as any installment is not paid when due. REFERENCE: Sec. 250 (a): "... If any installment is not paid when due, the whole amount of the tax unpaid shall become due and payable upon notice and demand by the collector. . . ." PROBLEM 247 Illustrating Case in Which Taxpayer Finds That Excessive Amount of Tax Has Been Reported, and Method of Ad FACTS: justing Error The Cardigan Lumber Company filed an income and profitstax return February 15, 1922 for the fiscal year ending November 30, 1921. The return showed a total tax due of $25,980, and the company paid the first installment thereof, $6,495, on the date the return was filed. During the month of April a firm of certified public accountants audited the books and tax return of the company and found that the income and excess-profits tax for the fiscal year 1921 had been erroneously computed, and that the correct amount of the total was $16,256. QUESTION: How may the company adjust the error? ANSWER: The company should file a claim for abatement of the excessive amount reported on the return, or $9,724. The installments should be recomputed and $2,431, representing the excessive amount paid on the first installment, should be applied against the payment of the second installment of the tax due May 15, 1922, leaving a balance of $1,633 to be paid on this installment. The corrected amounts of the third and fourth installments, due August 15 and November 15, 1922, respectively, will be $4,064 each. REFERENCES: Art. 1061 (a), Regulations 62: "Refund, credit, and abatement adjustments. Reduction of internal revenue assessments and adjustments of overpayments of revenues will be accomplished in one of three ways: "(a) On the basis of an application submitted by a taxpayer on Form 843, together with appropriate supporting evidence to be filed in the office of the collector of internal revenue of the district in which the tax is assessed. . . ." Sec. 250 (b): "As soon as practicable after the return is filed the Commissioner shall examine it. If it then appears that the correct amount of the tax is greater or less than that shown in the return the installments shall be recomputed. If the amount already paid exceeds that which should have been paid on the basis of the installments as computed, the excess so paid shall be credited against the subsequent installments; . . .” Sec. 3220 of the Revised Statutes: "The Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed o excessive in amount, or in any manner wrongfully collected; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him in any court, for any internal revenue taxes collected by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance of his official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section." PROBLEM 248 Illustrating Case in Which, Due to an Error in Judgment on the Part of the Taxpayer, the Amount of Tax Paid is Less Than That Which Should Have Been Paid FACTS: The Speedking Automobile Company operated about fifty taxicabs in the city of New York. In preparing its income and excess-profits tax return for the taxable year 1921 it claimed as a deduction from gross income, depreciation at the rate of fifty per centum per annum upon all its cars, which depreciation the auditor of the company had written off as a matter of conservative accounting. Representatives of the Bureau of Internal Revenue found upon investigation that some of the cars were discarded in two years but the average life of all the cars was four years. They, therefore, reduced the depreciation allowable as a deduction from the taxable income of the company to 25 per centum per annum on all cars. The officials of the Bureau of Internal Revenue are convinced that the depreciation adjustment of the company was not due to negligence or intentional disregard of authorized rules and regulations with knowledge thereof. QUESTION: Will the company be required to pay more than the additional tax due as a result of the depreciation adjustment? ANSWER: Yes, the company will be required to pay interest at the rate of one-half of one per centum per month on the deficiency in the tax from the time the tax was due. REFERENCE: Sec. 250 (b): "... If the amount already paid is less than that which should have been paid, the difference, to the extent not covered by any credits due to the taxpayer under section 252 (hereinafter called deficiency), together with interest thereon at the rate of one-half of 1 per centum per month from the time the tax was due (or, if paid on the installment basis, on the deficiency of each installment from the time the installment was due), shall be paid upon notice and demand by the collector." PROBLEM 249 Illustrating Case in Which, Through Negligence, Less Tax Is Reported Than the Amount Actually Due FACTS: The Oriental Silk Company, a corporation organized under the laws of the State of New York, imports raw silk from China and Japan and sells it to manufacturers of silk thread. In preparing its income and excess-profits tax return for the taxable year 1921, the treasurer took as a deduction from income the income and excess-profits tax paid by the company in 1921 for the taxable year 1920. QUESTION: May the above company be subject to a penalty for reporting less taxable income than it should have reported? ANSWER: Yes, the Bureau has regarded the taking of income and excess profits taxes as a deduction from gross income as due to negligence or intentional disregard of authorized regulations with knowledge thereof, and the company may therefore be required to pay a penalty of 5% of the total amount of the deficiency in the tax reported, together with interest at the rate of one per centum per month on the amount of such deficiency in the tax from the time it was due. This penalty may be compromised. REFERENCE: Sec. 250 (b): "... If the amount already paid is less than that which should have been paid, . . . (and) if any part of the deficiency is due to negligence or intentional disregard of authorized rules and regulations with knowledge thereof, but without intent to defraud, there shall be added as part of the tax 5 per centum of the total amount of the deficiency in the tax, and interest in such a case shall be collected at the rate of 1 per centum per month on the amount of such deficiency in the tax from the time it was due (or, if paid on the installment basis, on the amount of the deficiency in each installment from the time the installment was due), which penalty and interest shall become due and payable upon notice and demand by the collector." PROBLEM 250 Illustrating Liability in Case of Fraudulent Return FACTS: Mr. William A. Bragg, a real estate dealer, purchased a tract of land in 1917, known as Pinehurst Park, for $10,000. On August 16, 1921, he sold the above land for $20,000 to a British subject who was not required to file an income tax return in the United States. In preparing his income tax return for the taxable year, 1921, Mr. Bragg failed to report the profit on the above sale. Later he boasted of the fact to two salesmen who were in his employ, stating to them that he had "put one over" on the government and had succeeded in avoiding the payment of a tax on $10,000 profit derived from the sale of Pinehurst Park. In the latter part of March, 1922, Mr. Bragg had a quarrel with the above salesmen and discharged them. They immediately reported to the Commissioner of Internal Revenue at Washington, |