Opinion
No. K-72.
June 1, 1931.
Suit by the Moore Shipbuilding Company against the United States.
Judgment for plaintiff.
This suit was brought to recover $156,828.25 alleged to be due as additional interest on overpayments of income and profits tax for 1918 and 1919, credited against an unpaid portion of an original tax, an additional assessment of tax, a penalty, and accrued interest for the year 1920. The unpaid portion of the original tax for 1920 had been made the subject of a claim for abatement of $1,745,673.10 and a claim for credit of $297,602.03 filed April 14, 1921.
By reason of the decision of this court in Riverside Dan River Cotton Mills, Inc., v. United States, 37 F.2d 965, 69 Ct. Cl. 70, all issues with reference to that portion of the overpayments for 1918 and 1919 credited against the unpaid portion of the original and additional tax, and accrued interest on such original tax, for 1920, have been eliminated except a claim for additional interest on $17,305.22 of the overpayment for 1919 from May 4, 1921, to June 24, 1926, credited against interest due upon a deficiency assessed for 1920, inasmuch as such tax and interest on the original tax for 1920 became due and accrued prior to the date on which the overpayments for 1918 and 1919 so credited were made.
The first remaining issue relates to plaintiff's claim for interest on that portion of the overpayment for 1919 used by the Commissioner as a credit against a 50 per cent. penalty for 1920 assessed June 22, 1926, from the date of the payment of the amounts so credited. The Commissioner of Internal Revenue allowed no interest on the amounts so credited on the ground that the due date of the penalty was the same as the due date of the first installment of the tax for 1920, and therefore was prior to the overpayment. The amount of interest claimed on this account is $134,060.24.
Another item in plaintiff's claim is interest on $17,305.22 of the overpayment for 1919 made on May 4, 1921, credited by the Commissioner to interest imposed by the Revenue Act of 1926 upon a deficiency for 1920 assessed June 22, 1926. The amount credited to the interest assessed by the Commissioner on the deficiency for 1920 was refunded by him December 23, 1926, inasmuch as the deficiency was paid by credit of a portion of the 1919 overpayment on which interest would otherwise have been payable. The Commissioner allowed interest on this item only from June 24, 1926, to December 23, 1926, the date of the allowance of the refund. Plaintiff claims that, when this amount was refunded, it should have been paid interest from May 4, 1921, the date of the overpayment. This claim is not controverted by the defendant.
Special findings of fact:
1. Plaintiff filed a consolidated income and profits tax return for 1918. An overpayment for that year of $167,894.03 made January 19, 1926, was credited by the Commissioner June 24, 1926, against interest due on delayed payments of tax for 1920. The interest against which this amount was credited accrued prior to the date of the overpayment. Since the due date of the interest on the 1920 tax was prior to the 1918 overpayment, plaintiff is not entitled to interest on this overpayment.
2. Plaintiff filed a consolidated income and profits tax return for 1919 showing a tax for itself and its subsidiary of $6,124,211.68, which was paid on various dates between March 11, 1920, and February 17, 1926.
On June 19, 1926, the Commissioner of Internal Revenue notified plaintiff of his determination of an overassessment for 1919 and on June 24, 1926, allowed an overpayment for this year of $1,675,943.38 and on that dated credited a certain portion thereof against the tax, interest, and penalty for 1920, as will be hereinafter set forth, and refunded $140,175.32, with interest.
3. March 15, 1921, plaintiff filed a tentative consolidated income and profits tax return for 1920 on which it paid $800,000. April 14, 1921, it filed a completed consolidated income and profits tax return for 1920 showing a tax for itself and its subsidiary of $5,618,707.14. On this return it made further payments between June 15, 1921, and December 15, 1921, of $2,775,432.01, leaving an unpaid balance of tax shown on the return of $2,843,275.13. On the date of the filing of this return it filed with the collector a claim for abatement of $1,745,603.10 and a claim for credit of $297,602.03.
The total tax shown to be due on the completed consolidated return for 1920 was paid by plaintiff on various dates between March 15, 1921, and February 15, 1926.
June 19, 1926, the Commissioner of Internal Revenue notified plaintiff of his determination of a deficiency in tax for 1920 of $890,261.66 and a 50 per cent. penalty thereon of $445,130.83. On June 22, 1926, the Commissioner made an additional assessment of the deficiency in tax and of the 50 per cent. penalty just mentioned, together with interest of $17,305.22, on the deficiency under section 283(d) of the Revenue Act of 1926, approved February 26, 1926 (26 USCA § 1064(d).
By reason of the delayed payment by plaintiff of the original tax shown by it to be due upon the return filed certain interest accrued upon that portion of the 1920 tax which was not paid at the time it was due; $89,184.11, a portion of the overpayment for 1919 made February 17, 1926, was credited to accrued interest in that amount on the 1920 original tax prior to the date of the overpayment, and the plaintiff is not entitled to interest on this credit.
A further overpayment of $1,000,000 made by plaintiff January 7, 1926, on its 1919 tax was credited, $98,900.58 against accrued interest for 1920, $890,261.66 to additional tax for 1920 assessed June 22, 1926, and $10,837.76 was applied as a credit against that amount of the 50 per cent. penalty assessed on the deficiency in the tax for 1920 on June 22, 1926. No interest was due on the $98,900.58, inasmuch as it was applied against interest which accrued prior to the overpayment, nor is any interest due on $890,261.66 because the tax against which it was applied was due in 1921, which date was prior to the date of overpayment.
A further overpayment of $591,773.61 made by plaintiff May 4, 1921, on its 1919 tax was credited, $434,293.07 to the remainder of the 50 per cent. penalty assessed June 22, 1926, on the deficiency for 1920, $17,305.22 to interest assessed June 22, 1926, upon the deficiency for 1920, and the balance of $140,175.32 was refunded. Interest was paid upon the amount refunded, and is not in controversy.
When the Commissioner assessed the deficiency in tax and the penalty for 1920, he determined and assessed interest on the deficiency from February 26, 1926, the date of the enactment of section 283(d) of the Revenue Act of 1926, to June 22, 1926, in the total amount of $17,305.22, which is the amount above mentioned as having been satisfied by a credit of that amount of the overpayment for 1919. After this credit had been made, the Commissioner decided that for the period February 26, 1926, to June 22, 1926, the interest on that portion of the 1919 overpayment in the amount of $890,261.66 credited to the additional assessment of tax for 1920 would counterbalance the interest due on the additional assessment collected by credit. The full amount of $17,305.22 so credited to interest was therefore refunded to the plaintiff December 23, 1926, with interest thereon from June 24, 1926, the date of the credit, to December 23, 1926, the date of the reversal of the credit and allowance of the refund.
The question here is with reference to interest on this item of the overpayment for 1919 from the date of the payment thereof on May 4, 1921, to and including June 24, 1926.
Gregory A. Harrison, of San Francisco, Cal. (Brobeck, Phleger Harrison, of San Francisco, Cal., and Vogelsang, Brown, Cram Feely, of Washington, D.C., on the brief), for plaintiff.
Charles R. Pollard, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (D. Louis Bergeron, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The question of interest on the overpayment for 1918 and that portion of the overpayment for 1919 credited to the unpaid original tax and accrued interest for 1920 is governed by the decisions of this court in Riverside Dan River Cotton Mills, Inc., v. United States, 37 F.2d 965, 69 Ct. Cl. 70, and Andrews Steel Co. v. United States, 42 F.2d 573, 70 Ct. Cl. 235. Since the 1920 original tax which was satisfied by a portion of these overpayments and the interest on the 1920 tax became due and accrued prior to the date of the overpayments for 1918 and 1919, no interest is allowable on the credits.
The next question is whether plaintiff is entitled to interest on $10,837.76 of the overpayment for 1919 on January 7, 1926, and $434,296.07 of the overpayment for 1919 on May 4, 1921, totaling $445,130.83, credited against a 50 per cent. penalty assessed by the Commissioner on June 22, 1926, on a deficiency in tax for 1920. This penalty was included in an additional assessment made under the Revenue Act of 1918 within the meaning of section 1116, Revenue Act of 1926 ( 26 USCA § 153 note). Interest on the credit is therefore payable only to the due date of the amount to which the overpayments were credited.
The Commissioner of Internal Revenue refused to allow and pay any interest upon these overpayments credited to the penalty on the ground that the 50 per cent. penalty imposed by section 250 of the Revenue Act of 1918 ( 40 Stat. 1082), assessed on the deficiency for 1920, became a part of the tax and the due date thereof was the same as the date on which the first installment of the tax for 1920 became due, to wit, March 15, 1921. The position of the plaintiff is that the 50 per cent. penalty which the Commissioner is authorized to assess and collect in certain circumstances is not due under the statute until it is determined and assessed, and therefore it is entitled to interest on that portion of the overpayment for 1919 credited against this penalty from the date on which the 1919 tax so credited was overpaid to June 22, 1926, the date of the assessment of the penalty; the interest claimed on $10,837.76 being $297.99 and on $434,293.07 being $133,762.25, or a total of $134,060.24.
We are of opinion that plaintiff is entitled to the interest claimed on the overpayments credited against the penalty. The tax and penalty for 1920 were imposed by the Revenue Act of 1918, which was retained in force by the subsequent Revenue Acts for the purpose of assessment and collection of taxes, penalties, and interest accrued thereunder. Section 250(a) and (e) of the Revenue Act of 1918, fixes the due date of the tax and provides the circumstances under which interest thereon shall become due. Nothing is said about the date on which a penalty becomes due, other than that it shall be added to the deficiency in tax and paid upon demand by the collector. If the entire tax has been paid before discovery of a false understatement, the penalty is to be collected in the same manner as the tax. See, also, section 250(e) and (h) of the Revenue Act of 1921 ( 42 Stat. 264). Section 250(b) of the 1918 act provides that, as soon as practicable after the return is filed, the Commissioner shall examine it, and, if it then appears that the correct amount of the tax is greater or less than the amount 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 recomputed, the excess so paid shall be credited against the subsequent installments; and, if the amount already paid exceeds the correct amount of tax, the excess shall be credited or refunded to the taxpayer. If the amount already paid is less than that which should have been paid, the difference shall, to the extent not covered by any credits then due to the taxpayer, be paid upon notice and demand by the collector. This subdivision further provides that, "if the understatement [in the return] is false or fraudulent with intent to evade the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns willfully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the amount of the deficiency." This penalty for a willfully false or fraudulent understatement or valuation in any return or list was first fixed in the amount of 100 per cent. of the duty by section 14 of the Act of June 30, 1864, 13 Stat. 223, 226, and has ever since been continued with certain amendments in section 3176 of the Revised Statutes (26 USCA §§ 97, 98). Upon the advent of the income tax the penalty was made specifically applicable to income taxes, and these Taxing Acts provided for its assessment and collection in the same manner as the tax. In the Revenue Act of 1918 the penalty was fixed at 50 per cent. of the deficiency in tax.
The 50 per centum which the statute directs the Commissioner to add to the deficiency in tax when he determines that the understatement in the return was willfully false or fraudulent is designated a penalty by the statute when it directs such an assessment "in lieu of the penalty provided by section 3176 of the Revised Statutes" and "in addition to other penalties," and when it provides that, if an understatement is made without fault, "there shall be no penalty." The amount thus added under the section for a willful understatement is a penalty rather than a tax. Wright v. Blakeslee, 101 U.S. 174, 25 L. Ed. 1048; Thome v. Lynch (D.C.) 269 F. 995. The 50 per centum does not relate to income, but is founded solely upon fraud and is not payable by reason of income but by reason of fault. There must be a finding of a false and fraudulent omission whereby the penalty was incurred without which it can neither become due nor be added. Michigan Central R. Co. v. Slack (Circuit Court, Mass.) Fed. Cas. No. 9527.
The requirement that the penalty shall be "added as part of the tax" means merely that it be assessed and collected as though it were a tax; without this provision the Commissioner could not assess and collect the penalty by the summary proceeding of distraint. In the very nature of things, therefore, the reason for the penalty does not exist until the Commissioner has determined that the return was willfully false or fraudulent with intent to evade the tax and the taxpayer is not required to pay it until demand is made. The statute fixes the due date of the tax imposed upon the income as the date for filing the return, unless paid in installments. At the taxpayer's option the tax is due in four installments and, upon the exercise of that option, there are different due dates for each of the four quarters of the tax. It directs that the Commissioner shall then recompute the tax, or the installments, shown on the return, and then requires the assessment of penalties upon certain specified contingencies. Only after the exercise of the power thus conferred upon the Commissioner to find fraud does the statute provide for payment of the penalty. It is then for the first time due, and is payable upon demand by the collector.
As pointed out in Riverside Dan River Cotton Mills, Inc., v. United States, supra, the purpose of the interest provisions of the Revenue Act of 1926 is to allow interest upon an overpayment only during the time that the taxpayer is not indebted to the United States in a like amount. Carrying out that purpose, we hold that the plaintiff became indebted to the United States for the penalty at the time it was assessed on June 22, 1926, and that date must be used as the due date of the penalty for the purpose of the allowance of interest upon the overpayment for 1919 credited against it, notwithstanding for administrative purposes the penalty, like an additional assessment, is not required to be paid by the plaintiff until notice and demand by the collector. This is the view which the plaintiff takes of the matter, and it sues to recover interest on the overpayment for 1919 credited against the penalty from the date of the overpayment to the date on which the commissioner assessed the penalty. The penalty in this case was paid by the credit made on the second day after its assessment. Plaintiff is entitled to recover the interest sued for, totaling $134,060.24.
The last item relates to interest on $17,305.22 of the overpayment made on May 4, 1921, for 1919, which was first credited on June 24, 1926, to interest assessed on June 22, 1926, on a deficiency for 1920 under section 283(d) of the Revenue Act of 1926 and later, on December 23, 1926, refunded, inasmuch as the interest to which the plaintiff was entitled upon $890,261.66 made on January 7, 1926, for the year 1919, counterbalanced the interest on the deficiency from February 26, 1926, to the date of the assessment on June 22, 1926. See Riverside Dan River Cotton Mills, Inc., v. United States, supra. The amount of $17,305.22 was therefore an overpayment which should have been refunded along with the $140,175.32, and interest thereon should have been paid from the date of the overpayment on May 4, 1921, to June 24, 1926, the date of the allowance of the refund. Plaintiff is therefore entitled to recover interest of $5,341.55 from May 4, 1921, to June 24, 1926.
Judgment in favor of the plaintiff for $139,401.79 will be entered. It is so ordered.