[40-2 USTC ¶9745]C.T. Jaffray, R.H.M. Robinson, and S.M. Archer, as Trustees of the Estate of Minnesota and Ontario Paper Company, Debtor, Plaintiffs, v. United States of America, Defendant.

United States District Court, District of Minnesota, Fourth Division., No. 27 Civil., 11/07/40

Interest on overpayments.--In 1926, taxpayer and the government stipulated in a compromise tax settlement that (1) taxpayer's claim against the government should be accrued for the taxable year 1920, and (2) that if any part of such claim should be denied, the taxpayer would be entitled to a refund of additional tax imposed by reason of the stipulation. Also in 1926, taxpayer paid additional capital stock taxes for the year ending June 30, 19 21; by letter the Commissioner advised taxpayer that refund of overpayment of income tax for such year, because the additional capital stock tax had not been deducted in computing the income tax, would be limited to the amount of tax overpaid as such and "not to any amount paid as a penalty." The Court holds that if the partially denied claim against the government had not been included in income for 1920, $10,705.42 less in penalty and interest--not tax--would have been paid by taxpayer. Of this amount $8,776.54 was interest which is recoverable since the duty to refund the principal of the tax wrongfully collected extends to interest computed and collected thereon. Penalty of $1,928.88 is not recoverable since the taxpayer was on the accrual basis in 1920 and should have accrued the claim. The Court also holds that if the capital stock taxes had been deducted, $1,035.57 less in penalty and interest would have been paid by taxpayer. None of this is recoverable inasmuch as the Commissioner's letter referred to all exaction by reason of the negligent understatement of capital stock taxes, so that the parties are shown to have intended to allow recovery only of tax as such and not penalties. BACK REFERENCES: See Sec. 3771 at 402 CCH ¶1779.318.

J.B. Faegre and Hayner N. Larson (Messrs. Faegre, Benson & Krause of counsel), of Minneapolis , Minnesota , appeared in behalf of the plaintiffs. Samuel O. Clark, Jr., Assistant Attorney General, and Andrew D. Sharpe and John E. Garvey, Special Assistants to the Attorney General, all of Washington, D.C., and Victor E. Anderson, United States Attorney, of St. Paul, Minnesota, appeared in behalf of the defendant.

NORDBYE, District Judge:

The Court makes the following

Findings of Fact

 

I. This is a proceeding brought under the provisions of the Judicial Code, Section 24(20), as amended, for the recovery of internal revenue taxes. The taxes sought to be recovered were paid to and collected by one Levi M. Willcuts as Collector of Internal Revenue for the District of Minnesota. Since July 31, 19 33, Willcuts has not been and he is not now in office.

II. (a). Since July 11, 19 34, pursuant to an order of this Court entered that day under the Corporate Bankruptcy Act of 1934, plaintiffs Jaffray and Robinson have been trustees of the estate of Minnesota and Ontario Paper Company, debtor, hereinafter called the company, a corporation organized under the laws of the State of Maine . Plaintiff Archer has been such a trustee since September 29, 19 34, pursuant to an order of this Court entered that day under said Act.

(b). From November 30, 19 31, to July 11, 19 34, plaintiffs Jaffray and Robinson were receivers of the company.

(c). The principal office of the company is at 1100 Builders Exchange Building , Minneapolis , Minnesota , and is the office of the trustees.

(d). Plaintiffs Jaffray and Archer are residents of Minneapolis , Minnesota , and St. Paul , Minnesota , respectively. Plaintiff Robinson is a resident of Tuxedo Park , Long Island , New York .

(e). Plaintiffs bring this proceeding in their own behalf as trustees and in behalf of the company and its creditors and shareholders. Bringing of the proceeding is authorized by the orders wherein plaintiffs were appointed trustees.

III . In 1920, the company owned shares of capital stock in, and for income tax purposes was, affiliated with several corporations, included among which were Minnesota, Dakota and Western Railway Company, International Lumber Company, and Rainy River Improvement Company. The earnings of the company and its affiliates were consolidated for such purposes, and all taxes paid on such consolidated earnings have been paid by the company.

IV. On or about March 15, 19 21, the company filed with the collector a return of the consolidated net income of itself and affiliates for the year 1920. The amount of tax shown due thereon, $111,053.04, was paid in equal quarterly installments during the year 1921. The company and its affiliates kept their books and the return was made on the accrual basis of accounting.

V. On March 15, 19 20, Minnesota , Dakota and Western Railway Company filed with the Interstate Commerce Commission a claim against the United States for $105,923.44, under Section 209 of the Transportation Act of 1920. No part of this claim was reported as income in the return for 1920. The whole thereof was added by the Commissioner in making the determination of deficiency to which reference is made in Finding of Fact VI.

VI. (a). On January 23, 19 25, the Commissioner of Internal Revenue notified the company of his determination of a deficiency of $1,403,435.47 in taxes upon the 1920 consolidated net income. On March 19, 19 25, the company filed a petition for determination with the Board of Tax Appeals. The docket number of the petition was 2,699.

(b). On February 25, 19 26, the Commissioner and the company signed a stipulation in the proceeding pending before the Board. The first paragraph of the stipulation was as follows:

"It is hereby stipulated and agreed by and between the Commissioner of Internal Revenue, by his attorney, A.W. Gregg, Solicitor of Internal Revenue, and by the Minnesota & Ontario Paper Co., and its said affiliated corporations, hereinafter referred to as the 'taxpayer', by its counsel, that the deficiency in tax of said taxpayer for the taxable years 1917, 1918, 1919 and 1920, shall be determined and assessed in accordance with the following agreement."

Paragraph X of the stipulation was as follows:

"The claim of the Minnesota, Dakota & Western Railway Co. against the United States Government in the amount of $105,923.44 under Section 209 of the Transportation Act of 1920 should properly be accrued upon the books of the taxpayer for the taxable year 1920 and included in its taxable income for said year.

"It is agreed that the taxpayer may at any time before the said claim is barred by the Statute of Limitations after the payment of the tax as computed under this stipulation (and notwithstanding anything herein or in any other agreement between it and the Commissioner of Internal Revenue, or the Secretary of the Treasury to the contrary) file a claim for refund for the tax imposed upon it by reason of this claim of $105,923.44 being taxed as taxable income. In the event that the said claim of $105,923.44 filed under Section 209, or any part thereof, is disallowed by the United States Government or withdrawn by the taxpayer said claim for refund shall thereupon be allowed as provided by law, together with such interest, if any, as may be permitted under the statute." Paragraph XXVII of the stipulation was as follows:

"It is further stipulated and agreed that the understatement of the amount of the taxable net income as shown by the returns filed by the taxpayer herein for each of the taxable years 1917, 1918, 1919 and 1920, was due to negligence on the part of the taxpayer but without intent to defraud."

The stipulation was filed with the Board on February 26, 19 26.

(c). By letter dated February 25, 19 26, the Commissioner advised the company as follows:

"Confirming the agreement made with the Commissioner of Internal Revenue on February 24, 19 26, you are advised that the amount of the penalty to be assessed against you as the result of the negligent understatement of your tax liability for the taxable years 1917, 1918, 1919 and 1920 will be compromised by accepting a sum equal to 6 per cent per annum on the amount of the deficiencies determined and assessed in accordance with the stipulation this date entered into between the taxpayer and the representative of this office, from the date the deficiencies became due and payable to the date of payment."

(d). On February 26, 19 26, the Commissioner and the company signed and filed with the Board a further stipulation wherein they stated that the company's "deficiency in tax for * * * 1920 shall be determined by the Board of Tax Appeals in accordance with the agreement entered into between the taxpayer and the Commissioner on February 25, 19 26."

(e). On March 6, 19 26, the Commissioner and the company filed with the Board a further stipulation wherein they stated that "the amount of the deficiency due from the taxpayer * * * in the above-entitled appeals for * * * 1920 is as follows:

 

* * * * *

The amount designated "penalty" was calculated in accordance with the Commissioner's later referred to in paragraph (c) of this finding.

(f). On the same day, pursuant to the last-foregoing stipulation, the Board entered an order stating in part as follows:

"Now, therefore, it is considered and

"Ordered that the amount of tax deficiency due from the taxpayer in and for the said years be and the same is hereby re-determined for the year 1919 to be $491,360.53 and for the year 1920 to be $920,772.85 and in addition thereto penalty in the amounts respectively of $165,834.17 and $255,514.47, which said tax deficiencies and penalties shall be assessed and paid."

(g). On March 8, 19 26, the Commissioner assessed and on March 22, 19 26, the company paid to the collector $1,176,287.32, the sum of said amounts of $920,772.85 and $255,514.47, together with interest under Section 283(d) of the Revenue Act of 1926 in the further amount of $1,513.59, a total of $1,177,800.91.

(h). On November 28, 19 33, the Interstate Commerce Commission made a final determination allowing the claim of the Minnesota, Dakota & Western Railway Company in the amount of $21,486.01 and disallowing the balance thereof, $84,437.43. The claimant acquiesced in the determination, no proceedings have been instituted for review thereof, and payment has been made to the claimant of said amount of $21,486.01 and no more.

VII . (a). Under date of March 6, 19 26, the Commissioner sent to the company the following letter:

"Reference is made to the above-entitled appeal, lately pending before the United States Board of Tax Appeals, in which the Board on the 6th day of March, 1926, entered an order fixing your tax liability for the taxable years 1917 to 1920, inclusive, pursuant to the stipulation dated February 25, 19 26, and executed on behalf of the taxpayer and the Commissioner of Internal Revenue by their respective counsel.

"Inasmuch as the capital stock tax returns of your company and its affiliated companies for the taxable period in question will probably disclose additional amounts due the Government on account of capital stock taxes, and which amounts, if paid, are proper deductions from gross income for the respective taxable years 1917, 1918, 1919 and 1920, you are advised that claims for refund on account of any over-payment of income and excess profits taxes for each of the taxable years 1917 to 1920, inclusive, resulting from the correction of your capital stock tax returns for said period will be received, considered and allowed to the extent necessary to give effect to the proper adjustments of your capital stock tax liability, provided such claims for refund with a copy of this letter attached are filed with the Collector of Internal Revenue for your district within sixty days after the assessment of said capital stock taxes.

"If a claim is filed by the taxpayer it must be distinctly understood that same will be considered and allowed solely and only with respect to the capital stock tax adjustment and to no other, and will be limited to the amount of the tax overpaid as such and not to any amount paid as a penalty."

(b). In June, 1926, the Commissioner assessed against the company and the affiliates named above, and on August 11, 19 26, the company paid to the collector, additional capital stock taxes for the year ended June 30, 19 21, in the amount of $8,168.00. Said amount was not allowed as a deduction from gross income in computing the taxes paid by the company on March 22, 19 26.

(c). In 1934, the plaintiffs brought an action against the defendant in this Court for the recovery of internal revenue taxes other than those whose recovery is here sought. The judgment entered therein was reviewed by the Circuit Court of Appeals for the Eighth Circuit, which rendered its opinion that of the $255,514.47 denominated "penalty" by the Board, as set out above, only so much was penalty as equaled five per cent of the $920,772.85 in tax, and that the balance of the $255,514.47 was interest; the opinion is reported in 97 F. (2d) 488 [38-2 USTC ¶9402], and is by reference made a part hereof. Thereafter, a petition for the issuance of a writ of certiorari was filed with the Supreme Court and was granted. The petition did not ask for review of the holding of the Circuit Court of Appeals with respect to whether all or any part of said amount of $255,514.47 constituted penalty. The Supreme Court on February 27, 19 39, filed an opinion affirming the judgment of the Circuit Court of Appeals. United States v. Jaffray, 306 U.S. 276, 279 [39-1 USTC ¶9335].

VIII. (a). On March 14, 19 26, the company filed with the Commissioner a claim for refund of a part of the taxes assessed on March 8, 19 26, based on the inclusion in taxable income for 1920 of the claim of $105,923.44 filed by the Minnesota , Dakota and Western Railway Company against the United States .

(b). On September 14, 19 26, the company filed with the Commissioner a claim for refund of a part of the taxes assessed on March 8, 19 26, based on the failure to deduct from taxable income for 1920 the capital stock taxes paid on August 11, 19 26.

(c). On June 14, 19 34, the company filed with the Commissioner a claim amending the claims filed March 14, 19 26, and September 14, 19 26, and praying for refund of $54,176.56 together with interest thereon from March 22, 19 26. The amended claim was based on the grounds set out in the claims filed on March 14, 19 26, and September 14, 19 26. A copy of the amended claim is attached to the complaint as Exhibit 1 and is by reference made a part hereof.

IX. (a). On August 27, 19 38, defendant refunded to plaintiffs $73,802.26, which sum consisted of $42,379.06 in principal amount of the taxes paid by the company for the year 1920 and $31,423.20 in interest calculated on said principal amount from March 22, 19 26. Said amount of $42,379.06 was the amount by which the taxes paid by the company for the year 1920 were reduced by excluding from gross income the $84,437.43 representing that part of the claim of Minnesota, Dakota & Western Railway Company which was disallowed by the Interstate Commerce Commission on November 28, 19 33, and by deducting from gross income the $8,168.00 in capital stock taxes paid on August 11, 19 26. The refund made on August 27, 19 38, did not make any allowance for and did not include any part of the amount of $255,514.47 paid to the Collector on March 22, 19 26, or any interest on said amount.

(b). If the $84,437.43 representing that part of the claim of Minnesota, Dakota & Western Railway Company which was disallowed by the Interstate Commerce Commission on November 28, 19 33, had not been included in gross income in determining the deficiency ordered by the Board on March 6, 19 26, the amount of $255,514.47 paid on March 22, 19 26, would have been reduced in the amount of $10,705.42. Of this last amount, $8,776.54 was interest and $1,928.88 was penalty.

(c). If the $8,168.00 in capital stock taxes paid on August 11, 19 26, had been deducted from gross income in determining the deficiency ordered by the Board on March 6, 19 26, said amount of $255,514.47 would have been further reduced in the amount of $1,035.57. Of this last amount, $848.91 was interest and $186.66 was penalty.

X. On September 15, 19 38, the Commissioner sent to plaintiffs by registered mail a notice of disallowance or rejection of so much of the claims for refund referred to in Finding VIII as had not previously been allowed and refunded. This proceeding was begun on October 28, 19 38.

The Court makes the following

Conclusions of Law

 

1. This proceeding is a proceeding brought for the recovery of internal revenue taxes overpaid for the year 1920, together with interest on such over-payment from the date of payment thereof.

2. This Court has jurisdiction of the proceeding and of the whole thereof.

3. Claims for refund of the over-payment were filed in the manner and within the time therefor prescribed by the statutes relating thereto. They were disallowed and rejected, as respects the over-payment for whose recovery this proceeding was brought on September 15, 19 38. This proceeding was commenced within the period permitted by law for that purpose.

4. The grounds on which recovery of the over-payment is sought in this proceeding were specified as grounds for refund in the claims for refund filed as aforesaid.

5. Of the amount of $255,514.47 paid to the Collector on March 22, 19 26, $10,705.42 was computed on and was attributable to the inclusion in gross income, in determining the deficiency ordered by the Board on March 6, 19 26, of the $84,437.43 representing that part of the claim of Minnesota, Dakota & Western Railway Company which was disallowed by the Interstate Commerce Commission on November 28, 19 33.

6. Of said amount of $255,514.47, $1,035.57 was computed on and was attributable to failure to deduct from gross income, in determining the deficiency ordered by the Board on March 6, 19 26, the $8,168.00 in capital stock taxes paid on August 11, 19 26. Said amount of $1,035.57 constituted penalty to the extent of $186.66 and interest to the extent of $848.91.

7. That the interest portion of the sum of $10,705.42, to wit, $8,776.54, was a single liability with the principal amount of tax to which it was added and on account of which it was computed and paid, and overpayment of the principal amount of tax by reason of the inclusion of the amount disallowed by the Interstate Commerce Commission entitled the company and these plaintiffs to refund in the sum of $8,776.54, together with interest thereon from time of payment.

8. The plaintiffs, by reason of the specific limitation in the letter of March 6, 19 26, written by the Commissioner in reference to the refund with respect to the capital stock tax adjustment, are not entitled to recover any part of the so-called penalty interest item for the reason that the Commissioner in said letter used the term "penalty" to include any portion of the sum of $255,514.47 which might be attributable to the negligence of the taxpayer in failing to state correctly the company's capital stock tax return.

9. The plaintiffs are entitled to judgment against the defendant for recovery and refund of the sum of $8,776.54, together with interest thereon according to law from and after March 22, 19 26.

Let judgment be entered accordingly. An exception is reserved to the defendant.

Memorandum

 

The Government has refunded and concedes the taxpayer's right to obtain a refund of the tax assessed by reason of the inclusion of the Interstate Commerce Commission claim in the 1920 consolidated return. It denies, however, that the taxpayer is entitled to a refund of any part of the so-called penalty interest item, which was collected from the taxpayer and a portion of which was obviously attributable to the negligent understatement of the tax due on the Interstate Commerce Commission claim. It is recognized that the so-called penalty was a compromise and that the Commissioner agreed to accept a sum equal to six per cent per annum on the amount of the deficiency determined in accordance with the stipulation. The question as to whether the so-called penalty is all penalty, or part penalty and interest, has been set at rest by the Circuit Court of Appeals in United States v. Jaffray, 97 F. (2d) 488 [38-2 USTC ¶9402]. That action between the same parties involved the determination of this specific question. The court held that only so much thereof as did not exceed five per cent of the deficiency assessed for the year 1920 was penalty. The balance of the so-called penalty assessment has been legally designated as interest.

It is apparent, therefore, that the total amount of the penalty assessment was dependent upon the amount of the negligent understatement; that is, if the Interstate Commerce Commission claim had not been included in computing the deficiency, the tax penalty would have been correspondingly decreased. The fact that the Government could have demanded a greater penalty is not controlling. The persuasive fact is that the inclusion of the Interstate Commerce Commission claim as taxable income figured proportionately in the amount of penalty interest assessed; that is, six per cent per annum was computed on such sum in obtaining the $255,514.47 figure. A consideration of all the circumstances fully justifies the finding that the Government collected an unwarranted tax and certain penalty interest in connection with the Interstate Commerce Commission claim. It is conceded that subsequent events demonstrate that the tax collection in that regard was wrongful. If there is a duty to refund the principal of the tax which was wrongfully collected, it necessarily follows that interest computed thereon should also be refunded. In other words, there were not two liabilities--one for a tax and one for interest. The two are inseparable. See, Phelps v. United States, 105 F. (2d) 904 [39-2 USTC ¶9583]. No cogent reason is suggested why the taxpayer should not be made whole if it developed that there had been a wrongful exaction of tax by reason of the disallowance or withdrawal of the Interstate Commerce Commission claim. The taxpayer cannot be made whole unless the interest is refunded.

From the stipulation on file herein, it appears that if the sum of $84,437.43, representing the part of the Interstate Commerce Commission claim which was disallowed, had not been included in the gross income upon which the penalty interest item was computed, the amount of $255,514.47 would have been reduced in the sum of $10,705.42, and applying the method adopted by the Circuit Court of Appeals in United States v. Jaffray, supra, in determining which part of that sum was penalty and which was interest, it follows that, of said sum, $8,776.54 was interest and $1,928.88 was penalty. Plaintiff urges that the penalty as well as the interest should be refunded, and that such was the intention of the parties if the Interstate Commerce Commission claim was disallowed or withdrawn. There may be merit to this position; however, the books of the Railway Company were kept on an accrual basis. The company was therefore delinquent in understanding its gross income in this regard. Regardless of future events with reference to this claim, the gross income should have reflected this income in making up the 1920 return. Is it not reasonable to find under these circumstances that, when the Commissioner agreed to refund the tax collected upon the disallowance or withdrawal of the claim, such refund should include only the tax and the interest computed thereon and exclude the penalty. The penalty portion of the payment is, as expressed in United States v. Jaffray, "the cost of delinquency." That the taxpayer was delinquent is conceded by the stipulation. It is entirely reasonable, therefore, to find that it should not be relieved of the penalty imposed on account of its delinquency, and to find that in order to carry out the intent of the parties the entire tax and interest computed thereon, which is generally held to be compensation for delay, should be refunded to the taxpayer. Certainly, when one speaks of a refund of the tax, it necessarily includes the interest accumulated thereon which had been paid to the Government by the taxpayer. Penalty, however, falls into a different classification, and in view of the unusual situation with reference to the Interstate Commerce Commission claim, it being in fact proper and necessary to include it in the gross income, and the taxpayer being delinquent in not doing so, I am inclined to give the Government the benefit of the doubt as to this phase of the controversy, and limit the right of recovery herein to that portion of the tax which, according to the method employed in United States v. Jaffray, consists exclusively of interest.

Emphasis is placed by the Government on Backus v. United States, 59 F. (2d) 242 [1932 CCH ¶9326], but that case has no bearing on the issues here presented. See , United States v. Jaffray, supra. The only difference between the Government and the taxpayer in this present proceeding is, first, the question of jurisdiction, and second, whether in addition to the principal of the tax, any part of the so-called penalty item is recoverable.

Does a different situation apply to the capital stock taxes? The letter of the Commissioner of March 6, 19 26, is explicit that refund thereon would be "allowed to the amount of the tax overpaid as such and not to any amount paid as penalty." Apparently, the Commissioner in regard to this item recognized the probability of a claim of refund of the amount of penalty attributable thereto. The parties evidently were referring to the term "penalty" as it was used in the stipulation of March 6th. "Penalty" as used therein designated a compromise of the penalty and interest items. The explicit language used in the Commissioner's letter would negative any intention to refund anything but the "tax overpaid." While it may be urged that the taxpayer should have the benefit of the construction given by the court in United States v. Jaffray, supra, to this penalty item and refund to the plaintiff the amount allocable to interest, it would seem that the term "penalty" as used by the parties was intended to refer to all exaction by reason of a negligent understatement of taxes. The court in United States v. Jaffray, supra, used the following language (p. 493 of 97 F. (2d)):

In using the words "penalty interest" and "penalty", the Commissioner, the taxpayer and the Board evidently had in mind the exaction authorized by statute in case of a negligent understatement of taxes. It is not unreasonable to refer to the entire statutory exaction as a "penalty", although that portion of it which is interest at 1% a month has been held to be mere compensation for delay.

Consequently, it is fair to assume that in using the term "penalty" in the letter of March 6th, the Commissioner, with the acquiescence of the taxpayer, intended to deny refund of the entire "statutory exaction" which was assessed on account of delay. In determining the intention of the parties, reference must be had to the situation as of the date the letter was written. At that time, the construction of the situation as found in the decision of United States v. Jaffray, supra, was not known, and while, strictly speaking, the so-called penalty item was not exclusively penalty, it is entirely reasonable to find that the Commissioner in his letter was using the term "penalty" with the same import as the term was used in the stipulation of the same date. The entire transaction with reference to the 1920 tax was a compromise. The Commissioner did not demand the full "statutory exaction" on account of negligence. The limitations, therefore, with reference to the refund of the capital stock taxes may have been entirely fair and just. At least, this Court should endeavor to ascertain the intention of the parties, and a consideration of the entire circumstances inclines the Court to the view herein expressed.

In considering the question of jurisdiction, due effect must be given to the circumstances of the compromise between the Government and the taxpayer. As before stated, the affiliated Railway Company kept its books on an accrual basis. It was recognized, therefore, that the Interstate Commerce Commission claim was properly included in the 1920 consolidated income tax return. But, as an integral part of the compromise, it was agreed that if any part of that claim was disallowed or withdrawn by the taxpayer, the latter might file a claim for refund. The intent of the parties was to treat the inclusion of the Interstate Commerce Commission claim as a wrongful collection of taxes by the Collector if and when the claim was subsequently disallowed or withdrawn. It would seem that, under these circumstances, the taxpayer should be given the benefit of a liberal construction of the statute which gives it a right to proceed against the Collector for a refund of taxes paid to him and to which he is not entitled. This taxpayer is not in this proceeding suing on an account stated, and probably could not sustain a suit on that basis. It is a proceeding against the Government because the Collector to whom the tax was paid is not now in office, and during the time he was in office, he received certain moneys from the taxpayer, the collection of which, upon the happening of a certain event, the Government concedes was unwarranted. In brief, therefore, it now appears that the Collector received more money from the taxpayer than the latter was legally required to pay. Whether the illegality of the collection was due to a condition precedent or subsequent is immaterial. In either event, the retention of the collection is wrongful, and a claim of refund having been timely filed, the taxpayer had a right to proceed against the Collector who received in taxes more than the Government has a right to retain.

With reference to the right of the taxpayer to recover interest as well as principal where an unwarranted collection of taxes has been made, the cases are in accord with the views herein expressed. Phelps v. United States, supra; Big Diamond Mills Co. v. United States, 51 F. (2d) 721 [2 USTC ¶791]; Colorado Milling and Elevator Co. v. Howbert, 57 F. (2d) 769 [1932 CCH ¶9411].

Let this memorandum be made a part of the foregoing findings of fact and conclusions of law.

 

 

[37-1 USTC ¶9046]Charles J. Castle v. The United States

Court of Claims of the United States, No. 42041, 17 FSupp 515, 84 CtCls 300, Decided January 11, 19 37Plaintiff is denied recovery of civil ad valorem penalties paid for 1917 to 1921 on taxes for those years after he had been subjected to criminal penalties (fine and imprisonment) with reference to his returns for 1921 and 1922. Without finding it necessary to pass upon the issue of former jeopardy raised by plaintiff, the Court bases its denial upon the following facts: (1) that the claim for refund set forth grounds entirely different from those on which this suit is based; (2) that the Board of Tax Appeals had settled plaintiff's tax liability for the years involved, its decision having become final under Section 1005(a)(1) of the 1926 Act; (3) that an offer in compromise had been made and accepted, precluding further litigation.

Mr. Roscoe M. Ewing for plaintiff. Mr. Walter A. Bolinger was on the briefs. Mr. Joseph H. Sheppard, with whom was Mr. Assistant Attorney General Robert H. Jackson, for defendant.

Conclusion of Law

Upon the foregoing special findings of fact, which are made part of the judgment herein, the court decides, as a conclusion of law, that the plaintiff is not entitled to recover, and it is therefore ordered that his petition be dismissed.

Judgment is rendered against the plaintiff in favor of the United States for the cost of printing the record in this case, the amount thereof to be ascertained by the clerk and collected by him according to law.

Opinion

GREEN, Judge, delivered the opinion of the court:

There is no dispute as to the facts. The plaintiff failed to file income tax returns for the years 1917 to 1922, inclusive. In June 1923, plaintiff filed delinquent tax returns upon which taxes and penalties were assessed. Plaintiff paid these taxes and settled the penalties pursuant to an offer to compromise accepted by defendant. Later, and on March 3, 1924, the Commissioner assessed additional taxes and penalties against plaintiff in the total amount of $440,276.45. In the same year he was indicted for violation of the statute with reference to making income tax returns for the years 1921 and 1922. The indictment was in two counts and on June 15, 1925, he withdrew his plea of "not guilty" and entered a plea of "guilty." On September 15, 1925, he was sentenced on each count to one year in the workhouse and fined $10,000. After some proceedings with reference to the taxes and penalties last imposed upon him, plaintiff took an appeal to the Board of Tax Appeals. On June 29, 1927, pursuant to a stipulation of the parties, the Board entered an order fixing the amount of taxes and penalties against plaintiff for the years 1917 to 1922, inclusive, in the total sum of $122,467.95. Subsequently an agreement for compromise and settlement of the civil and criminal liabilities of plaintiff to the government was entered into between the parties under which the President made an order remitting the $10,000 fine under the second count of the indictment and further criminal proceedings against him were dismissed. The plaintiff complied with his part of the agreement by paying on September 12, 1928, all taxes and penalties assessed against him and the fine of $10,000 imposed under the first count of the indictment and making a settlement of the interest claimed by the government. Later, on September 4, 1930, plaintiff filed claims for refund of taxes and penalties for the years 1917 to 1921, inclusive, aggregating $83,854.89. These claims were rejected by the Commissioner on the ground that the taxes and penalties for these years had been closed by a stipulation and order entered by the Board of Tax Appeals and plaintiff now brings this suit to recover the amount paid. The argument on behalf of plaintiff, however, concedes that the plaintiff has no valid claim for a refund of the taxes paid and proceeds with the action only so far as it may relate to the recovery of penalties.

[Double Jeopardy]

The contention of the plaintiff is that the penalties imposed for the years 1921 and 1922 were for the same offense for which he had previously been fined and imprisoned and consequently were collected in violation of the provision of the Fifth Amendment to the Constitution providing--

Nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb.

With reference to the years 1917 to 1920, inclusive, the plaintiff claims that in June 1923, defendant assessed and plaintiff paid income taxes and penalties for violation of the statutes with reference to making returns; that plaintiff made an offer to compromise the liability so created, which offer was accepted by the defendant and the amount so assessed was accordingly paid. The plaintiff also alleges that on September 12, 19 28, further penalties for negligent failure to file returns were assessed against him for the years 1917 to 1920 in the total amount of $16,668.06, which sum was subsequently collected. Plaintiff contends as to these years 1917 to 1920, inclusive, that defendant having imposed penalties for failure to make a return of the taxes first assessed was prohibited from collecting further penalties on a later assessment for failure to file returns by reason of the inhibition of the Fifth Amendment as to double jeopardy and also because the plaintiff had made a compromise settlement of the taxes and penalties first imposed.

It is not necessary, however, to consider whether the claim of the plaintiff last stated with reference to penalties being twice assessed and collected is based on any legal foundation as the defense set up by the defendant applies to this claim equally with the claim of double jeopardy first made. But it may be said in this connection that the Commissioner doubtless acted upon the theory that as the penalties imposed were a certain percentage of the taxes assessed, the assessment of additional taxes warranted the assessment of additional penalties.

It will be observed that if the contention of plaintiff as to double jeopardy is sustained it would be impossible to enforce against a violator of the law a sentence for a criminal offense and also a penalty in a civil case for the same violation. The decisions of the courts upon the question so raised do not seem to be entirely harmonious, at least in the language used, but we think the cases cited in behalf of plaintiff involved a different question than is now before the court. Ex Parte Lange, 18 Wall. 163, was not a case where a civil penalty and a criminal punishment were imposed for the same offense, but one in which the accused was tried twice on the same criminal charge. In Coffey v. United States, 116 U. S. 436, the criminal offense involved the forfeiture of the property used in its commission and, unless a criminal offense had been committed, the property could not be forfeited. In the case at bar the penalty could be imposed without a criminal prosecution. In United States v. Chouteau, 102 U. S. 603, it was held that a compromise entered into with the Government released the defendant from liability for the offenses charged and further punishment for them. In United States v. La Franca, 282 U. S. 568, the decision seems to have been based largely on the special provisions of the act declaring that a conviction under the National Prohibition Act should be a bar to prosecution under other acts, and it was finally concluded by the court to so construe the law that there would be no question about its constitutionality.

On the other hand, in Hanby v. Commissioner, 67 Fed. (2d) 125, the Circuit Court of Appeals for the fourth circuit sustained the position of the defendant in the case at bar, which is, as stated in People v. Stevens, 13 Wend. (N. Y.) 341, 342, that:

It is undoubtedly competent for the legislature to subject any particular offense both to a penalty and a criminal prosecution; it is not punishing the same offense twice. They are but parts of one punishment; they both constitute the punishment which the law inflicts upon the offense. That they are enforced in different modes of proceeding, and at different times, does not affect the principle. It might as well be contended that a man was punished twice, when he was both fined and imprisoned, which he may be in most misdemeanors. [Italics ours.]

The Board of Tax Appeals has had before it two cases which involved the same question which is now raised in the case at bar. These cases were Scharton v. Commissioner, 32 B. T. A. 459, and Mitchell v. Commissioner, 32 B. T. A. 1093. In the last named case, the authorities were considered and reviewed at length and the Board held adversely to the contention now made by plaintiff. Two members dissented: one on the ground that the judgment rendered in the criminal prosecution against Mitchell was res adjudicata as to the civil case; the other member held that it was an absolute bar. The Board did not place its decision on the same grounds as were set forth in Hanby v. Commissioner, supra, but its decision is well reasoned.

We think it is not without weight in considering a case of this nature that Congress and the legislatures of the several States for more than a hundred years have shown by almost innumerable enactments that they did not consider the Fifth Amendment to the Constitution as preventing the imposition of both a civil and criminal liability for a violation of the law. This also seems to be the view of learned commentators on this branch of the law. Paul and Mertens in their service entitled "Law of Federal Income Taxation," Vol. 5, par. 48.50, state the rule to be as follows:

Payment of Tax and Payment of Ad Valorem Penalty Does Not Discharge Criminal Liability. A person does not escape criminal responsibility by paying additional taxes claimed by the Commissioner * * *. Nor does the imposition of an ad valorem penalty relieve him from a criminal prosecution. * * * Conversely, the criminal conviction does not bar the assessment of the ad valorem penalty. [Citing cases.]

To this we will add that the imposition of the penalty merely established a debt to the government. If the plaintiff failed to pay, nothing could be done that affected his person and it is difficult to see how he was "put in jeopardy of life or limb." We do not, however, find it necessary to pass on the issue of former jeopardy raised by plaintiff in view of our conclusion upon the affirmative defenses set up by defendant.

[Grounds in Claim]

The defendant presents several defenses to the claim made by the plaintiff. One defense is that the basis of the suit was not stated in any claim for refund filed by the plaintiff.

No claim for refund was filed for the year 1922. The only claims for refund filed were for the years 1917 to 1921, inclusive. Plaintiff's contention that he was subjected to double jeopardy by the imposition of a penalty in addition to the tax was not asserted as a basis of the refund in any claim filed by him with the Commissioner. The claim for the year 1917 asserted that the tax and penalty for that year were barred from collection by the statute of limitations and that such collection was erroneous because a compromise had been previously effected as to the year 1917. The claims for the years 1918, 1919, and 1920, were identical except as to amounts claimed and asserted that penalties collected for those years were erroneous because of compromises previously effected in accordance with the decision of the Board of Tax Appeals and the statutes. The claim for the year 1921 referred to alleged errors in the method of computing the tax. That the taxpayer cannot recover on a claim for refund of a tax paid when the grounds set forth in the refund claim are entirely different from those upon which the suit is based is well settled. United States v. Felt & Tarrant Co., 283 U. S. 269. Rock Island &c. R. R. v. United States, 254 U. S. 141. In the last case cited it is said:

If the [the government] attaches even purely formal conditions to its consent to be sued those conditions must be complied with.

It seems to be assumed by counsel for plaintiff that the acts of defendant's officials were unconstitutional, null, and void in that they imposed double jeopardy on the plaintiff. Conceding here for the sake of the argument that the penalty involved was imposed on the plaintiff in violation of the Constitution, this does not prevent the Government from prescribing the terms upon which it may be sued, providing these terms are reasonable and afford a complete remedy to the party aggrieved as they do in this case. Plaintiff having failed to comply with these terms can not recover. It is contended on the part of the plaintiff that the penalty exacted is not a tax and that the statute with reference to refunds of taxes unlawfully collected does not apply. We think this contention also is not well founded. In the case of Bankers Reserve Life Co. v. United States, 70 C. Cls. 379, the plaintiff set up that under the decision of the Supreme Court in National Life Ins. Co. v. United States, 277 U. S. 508, the section of the revenue act under which the tax in controversy was imposed was held to be unconstitutional and void and it was contended that the money which had been collected under it was not in legal contemplation a tax, but this court applied the taxing statutes nevertheless.

We are inclined to think the penalty is merely an addition to the tax. At all events, it can only be refunded upon compliance with the same conditions that are attached to the refunding of a tax. Section 3226 of the Revised Statutes with reference to the filing of claims for refund and suit thereon makes it clear that the law was intended to apply to penalties as well as taxes. It reads:

No such suit or proceeding shall be begun before the expiration of six months from the date of filing such claim * * * nor after the expiration of five years from the date of the payment of such tax, penalty, or sum, * * *

and section 3228 further provides:

(a) All claims for the refunding or crediting of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty alleged to have been collected without authority, * * * or in any manner wrongfully collected must * * * be presented to the Commissioner of Internal Revenue within four years next after the payment of such tax, penalty, or sum.

[Finality of Board Decision]

This is not all that stands in the way of the recovery of the plaintiff. As above stated, the plaintiff took an appeal to the Board of Tax Appeals for a redetermination of the deficiency assessed against him by the Commissioner of Internal Revenue for the years 1917 to 1922, inclusive. His petition was filed subsequent to the enactment of the revenue act of 1926. When the cause came on for hearing the parties stipulated the deficiencies in taxes for these years and amount of penalties, and in accordance with the stipulation, the Board, on June 29, 19 27, entered its order of final determination that the plaintiff owed taxes and penalties for the years 1917 to 1922, inclusive, aggregating $122,467.95. Without setting out in detail the provisions of the statute, it may be said that it is plain that upon the failure of the plaintiff to take an appeal to the Circuit Court of Appeals the decision of the Board became final under section 1005(a)(1) of the act of 1926.

[Finality of Compromise]

There is still another reason why plaintiff cannot recover in this case.

On July 23, 19 28, the Union Trust Company, acting for the plaintiff, advised the collector that they were holding in escrow $88,121.47 available for payment to the collector of internal revenue upon the delivery of a receipt in full for all taxes, penalties, and interest for the years 1913 to 1922, inclusive, and the year 1924, due and payable by Charles J. Castle, together with a receipt in full for the payment of the $10,000 fine imposed against him under count one of the indictment previously referred to. This payment was also conditioned on the remission of the fine of $10,000 imposed under count two of the indictment and the dismissal by nolle prosequi of other criminal proceedings pending against him. On July 26, 19 28, the attorneys for the plaintiff wrote a letter to the collector stating an offer in compromise in substantially the same terms. This offer of compromise was accepted on September 7, 19 28, and the President issued an order remitting the $10,000 fine under count two on the condition that the $10,000 fine imposed under count one be paid and the plaintiff pay the government a sum of money equal to the total tax and penalty due and compromise the interest, all of which was accordingly done by the plaintiff, the total taxes and penalties being paid on September 12, 19 28, and the indictment against him for the year 1924 was nolle prossed.

The compromise offer made by the plaintiff, the acceptance thereof on the part of the defendant, and the compliance of both parties therewith constituted a contract of settlement fully carried out. The plaintiff availed himself of important favors which constituted full consideration for the contract, and is now precluded from repudiating it. Authorities to support this conclusion, we think, are unnecessary.

[Conclusion]

We concluded that three matters appear in the case, each of which is sufficient to prevent a recovery on the part of the plaintiff.

(1) The failure to file a claim for refund stating the grounds upon which suit is now brought;

(2) The judgment of the Board of Tax Appeals fixing the amount of taxes, penalty, and interest due from him;

(3) An executed contract of settlement. It is therefore ordered that plaintiff's petition be dismissed.

WHALEY, Judge; WILLIAMS, Judge; LITTLETON , Judge; and BOOTH, Chief Justice, concur.