Opinion
No. L-2.
February 5, 1934.
Albert L. Hopkins, of Chicago, Ill. (Harry B. Sutter, Jay C. Halls, Anderson A. Owen, Louis L. Stephens, and John L. Hopkins, all of Chicago, Ill., on the brief), for plaintiff.
James A. Cosgrove and W.W. Scott, both of Washington, D.C. (D. Louis Bergeron, of Washington, D.C., on the brief), for the United States.
Before GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by the Standard Oil Company (Indiana) against the United States.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. March 15, 1919, plaintiff, an Indiana corporation with principal office at Chicago, Ill., filed a tentative return of its income and profits tax for 1918 and on that date paid to the collector of internal revenue for the First district of Illinois the amount of $5,000,000, being one-fourth of the estimated amount of tax for 1918.
2. June 16, 1919, plaintiff filed a completed income and profits tax return for 1918 showing a tax of $21,323,497, and on that date delivered to the collector, First district of Illinois, a check for $5,330,874.25, being one-fourth of the tax due at that time as shown by the return. On the same date plaintiff delivered to the collector a check for $335,932.54. Attached to the check was a voucher in favor of the collector, with the following writing thereon:
Remittance to cover balance due on first installment of 1918 G.B. corporation income and excess-profits Income tax tax for the year reserve .. $330,874.25 1918. Interest ... 5,058.29
Total amount of income and excess-profits tax for the year 1918 amounted to $21,323,497.00.
One fourth of this amount equals .................... $5,330,874.25
On March 15, 1919, by our certified check #4999, Vo. 2885, we paid an estimated amount of ........................ 5,000,000.00 _____________ Leaving a balance due on first installment of ............ 330,874.25
Plus interest on balance due on first installment from March 15, 1919, to June 16, 1919, at 6% ............... 5,058.29 _____________ ____________ Total ............................................. $335,932.54
September 15, 1919, plaintiff delivered to the collector its check for $5,330,874.25, being one-fourth of the tax for 1918, due September 15, 1919.
December 15 plaintiff delivered to the collector its check for $5,330,874.25, being the fourth and final installment of the tax for 1918, due December 15, 1919.
3. March 15, 1920, plaintiff filed with the collector of internal revenue, First district of Illinois, a tentative 1919 return of income, and, on that date, paid $2,449,156.16 of the estimated tax shown therein.
June 15, 1920, it paid to the collector $2,449,156.16, being the second installment of the estimated tax shown on the tentative return.
July 15, 1920, plaintiff filed with the collector a completed return for 1919 showing an income and profits tax of $9,706,950.52.
September 15, 1920, plaintiff paid to the collector $2,404,319.10. Attached to the check was a voucher in favor of the collector as follows:
Remittance to cover third installment of corporation income and profits tax for the year 1919, due on or before September 15, 1920.
Our actual income and profits tax for 1919, as per report filed July 15, 1920, totaled ............................... $9,706,950.52
On March 15th we paid .... $2,449,156.16
On June 15th " " .... 2,449,156.16 _____________ 4,898,312.32 ------------- Leaving balance due, to be paid Sept. 15th Dec. 15th of ................... $4,808,638.20
One half of this amount is due on Sept. 15th, or .............................. $2,404,319.10
4. Between March 1, and March 15, 1921, plaintiff filed with the collector of internal revenue for the First collection district of Illinois, on behalf of itself and the Dixie Oil Company (Inc.), a consolidated income and profits tax return for the calendar year 1920. The amount of the consolidated net taxable income shown by the return was $51,667,660.62, of which $51,665,932.96 was reported as the taxable net income of plaintiff and $1,727.66 as the taxable net income of the Dixie Oil Company. The total tax shown upon the face of the consolidated return was $15,912,825.85.
Accompanying the 1920 return, or immediately thereafter, plaintiff filed a claim for credit of $3,978,206.46 income and profits taxes paid for 1918 and 1919 against the first installment of the 1920 tax. June 15, 1921, it filed a further claim requesting a credit of a further sum of $3,978,206.46, tax paid for 1918 and 1919, against the second installment of the 1920 tax. Following the filing of these claims plaintiff paid the third and fourth installments for the year 1920 by checks in the amounts of $3,978,206.46 on September 15 and December 15, 1921.
May 5, 1923, the Commissioner of Internal Revenue rejected the claims for credit which plaintiff filed in payment of the installments due on or before March 15, 1921, and June 15, 1921, and, on May 17, 1923, the collector sent notice and demand to plaintiff on form 1-21-A, upon which the words "rejected claims" were indorsed, demanding payment of the tax, together with interest.
May 29, 1923, plaintiff delivered to the collector its check for $81,836.65, including interest amounting to $10,705.26. Attached to the check was a voucher with the following writing thereon:
Your notice and demand for collection of income tax for year 1918, being additional assessment for that year ...................... $71,131.39
Interest on same as per notice and demand for collection .......... 10,705.26 ___________ $81,836.65
On the same day plaintiff delivered to the collector its check for $2,752,945.37, including interest of $348,626.27. Attached to this check was a voucher on which was written the following:
Your notice and demand for collection of income tax for year 1919 .................... $2,404,319.10
Interest on same as per notice and demand for collection ......... 348,626.27 _____________ $2,752,945.37
Accompanying the check was a letter of transmittal protesting the payment of the tax and a letter stating plaintiff's position, as follows:
"Standard Oil Company, an Indiana corporation, having heretofore, to wit, on May 19, 1923, received from the acting collector of internal revenue at Chicago, Illinois, a formal demand for the payment of the sum of $2,752,945.37, being the sum of $2,404,319.10 on account of said corporation's income and excess profits taxes for the calendar year 1919, together with the sum of $348,626.27 interest charged thereon, and the said acting collector of internal revenue at Chicago, Illinois, having threatened to collect the said alleged tax by seizing the property of the said corporation if the same is not paid, does now, under such duress, pay said tax under the following protest:
"1. The said tax was not lawfully assessed and is not lawfully due and payable.
"2. This taxpayer is entitled to special assessment of its said tax for the year 1919 under sections 327 and 328 of the Revenue Act of 1918, and to a reduction in its said tax under such special assessment.
"3. The said tax is assessed against this taxpayer on an income and excess profits tax return in which no allowance is given the taxpayer for depreciation in the value of patents owned by the taxpayer prior to March 1, 1913, on account of which depreciation this taxpayer is entitled to a reduction in its tax for the year 1919 in an amount exceeding $4,000,000.00, and this taxpayer has already overpaid the full amount of tax due from it as income and excess profits taxes for the calendar year 1919.
"Acting under said duress, and with the foregoing protest, the taxpayer does now make payment of the amount of the tax and interest as so demanded by the said collector, being No. June 401613 — 1920 List."
On the same date plaintiff delivered to the collector its check for $8,931,073.48, including interest of $974,660.56. Attached to this check was a voucher on which was the following writing:
Your notice and demand for collection of income tax for year 1920 ........... $7,956,412.92
Interest on same as per notice and demand for collection 974,660.56 _____________ $8,931,073.48
Accompanying the check was a letter of transmittal in which the plaintiff protested the payment of the tax.
The total amount of income and profits tax paid by plaintiff and the Dixie Oil Company for 1920 was $15,912,825.85.
5. By letter of March 28, 1927, the Commissioner of Internal Revenue transmitted to plaintiff the following certificate of overassessment:
"An audit of your income tax return, form 1120, and a consideration of all the claims (if any) filed by you for the year 1918 indicates that the tax assessed for this year was in excess of the amount due:
Previously assessed: June, 1919, account No. 401,800 ........ $21,323,497.00 Amended, June, 1920, No. 401,614 ....... 71,131.39 ______________ Total assessment ..................... 21,394,628.39 Revised tax liability ................... 19,378,929.68 ______________ Overassessment ....................... $ 2,015,698.71
"The details of the adjustments resulting in the above overassessment are shown in a separate communication from this office.
"In arriving at the above adjustment of tax liability careful consideration has been given to the statements contained in the following claims for 1918:
------------------------------------------------------ Kind | Date filed | Amount claimed -------------------------|------------|--------------- Refund ............... | 6/5/22 | 2,552,040.00 Refund ............... | 2/29/23 | 21,394,628.39 ------------------------------------------------------
"The amount of the overassessment will be abated, credited, or refunded as indicated below. (You will be relieved from the payment of any amount abated; if overpayment has been made and other taxes are due, credit will be made accordingly, and any amount refundable is covered by a Treasury check transmitted herewith.)"
This overassessment was scheduled to the collector of internal revenue at Chicago, and was adjusted by the credit of $1,596,315.75 to additional 1925 tax and $419,382.96 was certified as refundable. The amount of $419,382.96 and accrued interest of $833,611.99 on the total overassessment, totaling $1,252,994.95, were rescheduled to the collector and credited to the tax for 1926.
6. After an examination and audit of plaintiff's return for 1918, its consolidated returns for 1919 to 1921, inclusive, and the returns for 1922 to 1926, inclusive, the Commissioner on March 21, 1928, mailed to plaintiff a sixty-day deficiency notice in accordance with section 274 of the Revenue Act of 1926, notifying plaintiff of his determination of the correct tax liability for said years as follows:
------------------------------------------------------------------ Company | Year | Overassessment | Deficiency ---------------------------|------|----------------|-------------- Standard Oil | | | Company (Indiana) ...... | 1918 | $2,705,795.39 | ............. | 1919 | 1,898,825.36 | ............. | 1920 | .............. | $4,375,023.66 | 1921 | .............. | 520,972.21 | 1922 | 297,007.92 | ............. | 1923 | .............. | 565,998.44 | 1924 | .............. | 649,428.64 | 1925 | .............. | 609,132.13 | 1926 | .............. | 610,371.15 | |----------------|-------------- Total .................. | .... | $4,901,628.67 | $7,330,926.23 Net deficiency ......... | .... | .............. | $2,429,297.56 ------------------------------------------------------------------
Attached to and following the statement of returns and adjustment of tax liability were the following instructions to plaintiff:
"Certificates of overassessment for the amounts shown above will be issued through the office of the collector of internal revenue for your district and will be applied by that official in accordance with the provision of section 284(a) of the Revenue Act of 1926 (26 USCA § 1065(a).
"Payment of the amount of additional tax should not be made until a bill is received from the collector of internal revenue for your district and remittance should then be made to him in accordance with the terms of the notice.
"Revenue agents' reports covering all years involved have been made the basis of the above adjustments of tax liability."
Section 274(a), Revenue Act of 1926 (26 USCA § 1048), prohibited the Commissioner from assessing and collecting the proposed deficiencies until the expiration of sixty days after March 21, 1928.
7. Following the receipt of the letter of March 21, 1928, and on March 24, 1928, plaintiff paid to the then collector of internal revenue for the First District of Illinois the sum of $4,375,023.66 as additional income and profits tax for 1920 and $544,420.75 as interest due thereon, making a total of $4,919,444.41. The voucher attached to the check making payment of the $4,919,444.41 contained the following:
Additional income and excess-profits taxes for the calendar year 1920, with interest thereon, from February 26, 1926, to March 24, 1928, at 6% per annum: Income and excess-profits tax — year 1920 $4,375,023.66 Accrued interest at 6% per annum for two years, twenty-seven days, 544,420.75
Accompanying this check was a letter, which plaintiff delivered to the collector of internal revenue, as follows:
"We hand you herewith our check of $4,919,444.41, representing payment of $4,375,023.66 of additional income and excess-profits taxes for the calendar year nineteen hundred and twenty (1920), together with interest thereon in the amount of $544,420.75, interest being computed at the rate of six percent per annum from February 26, 1926, to date.
"We are making this payment of income and excess-profits taxes, together with interest thereon, being the amount due you by this company for the calendar year 1920, in accordance with the applicable revenue acts. We desire to prevent the running of further interest after this date on the additional income and excess-profits taxes for the calendar year 1920."
At the time the check for $4,919,444.41 and the letter were delivered to the collector, it was orally explained to the collector that the check was in payment of tax and interest for the year 1920, and a receipt was requested. The collector read the above-quoted voucher and the letter attached to the check and receipted for the amount paid upon a duplicate of the above-quoted letter accompanying the check and delivered the same to plaintiff as its receipt.
8. Between the date of receipt of the notice of additional taxes, dated March 21, 1928, and March 31, 1928, plaintiff's officials and counsel considered and checked in detail all the matters forming the basis of the Commissioner's proposed deficiencies for the years 1920 to 1926, inclusive, which matters were disclosed in the Commissioner's notice, with a view of deciding whether plaintiff would further contest the proposed deficiencies before the United States Board of Tax Appeals and the courts, and after such investigation and consideration concluded not to contest the matter further, but to consent to immediate assessment thereof if the proposed overassessments for 1918 and 1919 would be allowed in the amounts set forth in the notice. At that time plaintiff figured that the overassessments proposed, plus the interest thereon, would practically satisfy the remaining unpaid additional taxes and interest for 1921 to 1926, inclusive. Shortly before March 31, 1928, plaintiff requested a conference with the Commissioner of Internal Revenue with reference to the matter. This conference was granted and was held in the office of the General Counsel, Bureau of Internal Revenue, on March 31, 1928, with the government officials and attorneys designated by the Commissioner to act for him. The Commissioner's representatives numbered seven, including an assistant to the General Counsel, two attorneys of the Bureau, and an assistant deputy commissioner. Plaintiff was represented by its comptroller, its commissioner, and three attorneys. Plaintiff stated to the Commissioner's representative that, on March 24, 1928, it had paid the collector of internal revenue at Chicago all the balance of the unpaid tax for 1920 in the amount of $4,375,023.66 and interest on that amount from February 26, 1926, to date of payment, March 24, 1928, in the amount of $544,420.75. The representatives of the Commissioner stated that they had already been advised of such payment; thereafter the document hereinafter quoted, in which plaintiff waived its right to file a petition with the Board of Tax Appeals from the deficiencies proposed in the Commissioner's notice and consented to assessment of the deficiencies, was drafted at that meeting. This waiver of the right to appeal to the Board of Tax Appeals and consent to assessment, which was signed by plaintiff April 2, 1928, and filed with the Commissioner April 4, 1928, was as follows:
"The undersigned taxpayer hereby waives the right to file a petition with the United States Board of Tax Appeals under section 274(a) of the Revenue Act of 1926 from the deficiencies set out and proposed to be assessed in your 60-day letter dated March 21, 1928, for the years 1918 to 1926, inclusive, and consents to the assessment of the deficiencies upon the bases as to income, overassessments, and other adjustments set forth in said letter dated March 21, 1928; the years, amounts of deficiency, or overassessment as set forth in said letter being as follows:
------------------------------------------------ Year | Overassessment | Deficiency ----------------|----------------|-------------- 1918 .......... | $2,705,795.39 | ............. 1919 .......... | 1,898,825.36 | ............. 1920 .......... | .............. | $4,375,023.63 1921 .......... | .............. | 520,972.21 1922 .......... | 297,007.92 | ............. 1923 .......... | .............. | 565,998.44 1924 .......... | .............. | 649,428.64 1925 .......... | .............. | 609,132.13 1926 .......... | .............. | 610,371.15 |----------------|-------------- | $4,901,628.67 | $7,330,926.23 ------------------------------------------------
"This waiver of appeal and consent to assessment is given on the express condition that the overassessments shown above will be scheduled simultaneously with the assessment of the deficiencies shown above."
Between March 24 and March 31, 1928, the collector at Chicago, in accordance with the usual practice, sent to the Commissioner at Washington, a schedule of the 9-D account in which had been entered the payment of $4,919,444.41 on March 24, 1928, for assessment, and on April 5, 1928, the collector notified the Commissioner by letter that a check in the aggregate sum of $4,919,444.41, including interest, delivered by plaintiff to the collector on March 24, 1928, had been accepted by the collector and entered in the 9-D suspense account; the same being an account of the collector's office in which payments received prior to receipt of formal assessment lists are carried until such assessment lists are sent from the Commissioner's office.
On August 23, 1927, the Commissioner had issued the following ruling and instructions to collectors of internal revenue: "It has been brought to the attention of the Bureau that some collectors have refused to accept advance payments submitted by taxpayers covering additional taxes proposed in reports of internal revenue agents prior to the time such taxes are assessed. It is advantageous both to the Government and to the taxpayer that any monies tendered in payment of proposed additional assessments be accepted and deposited without delay. A suspense account (account 9-D) has been provided for the use of collectors in which to carry such advance payments pending the receipt of the list, or lists, containing the assessments. Collectors are, therefore, directed to accept all remittances tendered by taxpayers in payment of proposed deficiency assessments, and to promptly deposit same as internal revenue collections, holding the amounts in account 9-D pending assessment by the Bureau or by the collector under the provisions of Com. Min. Col. No. 3552."
At the time the check for the 1920 additional tax and interest was delivered to the collector, plaintiff had not received from the collector's office any notice and demand for the deficiency in tax for 1920.
9. April 24, 1928, an attorney for the plaintiff, and at that time representing it in tax matters, delivered to the Commissioner the following letter:
"Under date of March 21, 1928, the Bureau of Internal Revenue, in a sixty-day letter, informed the Standard Oil Company (Indiana) as to its findings for the years 1918 to 1926, inclusive, as follows:
------------------------------------------------ Year | Overassessment | Deficiency ----------------|----------------|-------------- 1918 .......... | $2,705,795.39 | ............. 1919 .......... | 1,898,825.36 | ............. 1920 .......... | .............. | $4,375,023.66 1921 .......... | .............. | 520,972.21 1922 .......... | 297,007.92 | ............. 1923 .......... | .............. | 565,998.44 1924 .......... | .............. | 649,428.64 1925 .......... | .............. | 609,132.13 1926 .......... | .............. | 610,371.15 |----------------|-------------- | $4,901,628.67 | $7,330,926.23 ------------------------------------------------
"Under date of April 2, 1928, the taxpayer filed with the bureau a letter of acquiescence in the findings, wherein the taxpayer waived the right to file a petition with the United States Board of Tax Appeals under section 274(a) of the Revenue Act of 1926 and consented to assessment of the deficiencies upon the express condition that the overassessments set forth in the 60-day letter of March 21, 1928, be scheduled simultaneously with the assessment of the deficiencies set forth in the same letter.
"To facilitate the work of the bureau in adjusting these liabilities, I am directed by the taxpayer, as its attorney to authorize you to apply the interest on the overassessments set forth in the 60-day letter of March 21, 1928, to taxes (or deficiencies) remaining due to the collector and the interest thereon.
"As you have been advised, immediately upon receipt of your letter of March 21, 1928, the taxpayer paid the collector of internal revenue at Chicago the amount of the additional tax shown in said letter for the year 1920, together with interest thereon from February 26, 1926, to the date of payment. It is obvious, therefore, that the taxpayer contends that inasmuch as the 1920 taxes and interest have been paid in full that there can be no credit of any overassessment or interest thereon applied to any taxes and/or interest for the year 1920."
The court finds from all of the evidence pertaining to the payment that at the time the waiver was executed plaintiff's attorney knew that the payment had not been applied upon its 1920 taxes and that the letter of April 24, 1928, was written by reason of such knowledge. On the same day that the letter from plaintiff was delivered the Commissioner of Internal Revenue signed an assessment list and certificate disclosing the full assessment of tax and interest against plaintiff, which may be tabulated as follows, omitting immaterial matter:
-------------------------------------------------------------- Year | Additional tax | Interest | Total debit --------------|-----------------|-------------|--------------- 1920 ........ | $4,375,023.66 | $567,734.22 | $4,942,757.88 1921 ........ | 520,972.21 | 179,203.73 | 700,175.94 1923 ........ | 535,998.44 | 126,079.40 | 692,077.84 1924 ........ | 649,428.64 | 103,245.81 | 752,674.45 1925 ........ | 609,132.13 | 73,997.04 | 683,129.17 1926 ........ | 610,371.15 | 37,525.28 | 647,893.43 --------------------------------------------------------------
Each of the above-mentioned accounts contained the following stamp:
"Collector: Withhold demand pending comparison with 1918-1919 and 1922 overassessment." The certificate signed by the Commissioner attached thereto recited that the amounts of "taxes," etc., stated in this list were due.
On the same day, April 24, 1928, the Commissioner approved a schedule of overassessments form 7920, known and designated as schedule IT:29775, embracing, among other overassessments, an overassessment for 1918 of $2,705,795.39, for 1919 of $1,898,825.56, and for 1922 of $297,007.92, and also making an interest adjustment on the additional tax for 1920 of $567,734.22. This schedule was transmitted to the collector of internal revenue for the First district of Illinois for action in accordance with directions appearing thereon, together with a letter of transmittal from the Commissioner dated April 25, 1928.
Thereafter, and on April 28, 1928, the collector made certain book entries in the accounts of plaintiff's taxes, transferring from the 9-D account the sum of $4,919,444.41 (the same being the amount of the 1920 additional tax and interest paid by plaintiff to the collector on March 24, 1928, with instructions to apply said amount on the 1920 taxes) to plaintiff's other tax accounts as follows: $160,785.36 was transferred to additional tax for the year 1923; $752,674.45 was transferred to additional tax for the year 1924; $683,129.17 was transferred to additional tax for the year 1925; $647,896.43 was transferred to additional tax for the year 1926; and $2,674,959 was transferred to the original account for the year 1926 — making a total of $4,919,444.41.
Thereafter on April 30, 1928, the collector certified to the Commissioner on schedule IT:29775 that plaintiff's overassessments for 1918 and 1919 had been credited to taxes for other years. Thereafter the schedule of overassessments accompanied by the certificates of overassessment was returned to the Commissioner and signed by him on May 2, 1928.
All assessments scheduled by the Commissioner as debits against the taxpayer for particular years, for which the collector must account to the Treasury, are listed on a separate sheet from the Commissioner's assessment certificate. Each schedule or list is divided into seven columns headed as follows: (1) Name and address of taxpayer. (2) Old balance. (3) Date. (4) Debit (this is the column which is filled in by the Commissioner and constitutes the charge for which the collector must account). (5) Credits. (6) New balance. (7) Remarks. Each schedule or list has ten lines, numbered 0 to 9, inclusive. These schedules or lists are not signed by the Commissioner, but one or more of them (if more than one is required by the Commissioner in making a particular assessment or charge by the taxpayer) is attached to a sheet entitled "Assessment Certificate, Commissioner's Assessment List," which is signed by the Commissioner, on which is entered the total of all debits listed on the schedules or lists attached as the amount to be collected from the person whose name appears on it, or otherwise accounted for by the collector by abatement or credit. The schedules on which the debits for which the collector must account are entered or made for insertion in the Pole binder of the collector's permanent record on which is shown his charges against him and his account with the Treasury for the amounts assessed by the Commissioner.
The overassessment schedule, form 7920, which is signed by the Commissioner and on which any overassessments for particular years are listed, is entitled "Schedule of Overassessments, Abatements, Credits, and Refunds," and contains the following instructions:
"The amounts listed in column 3 as overassessments (or reduction of tax liability) are hereby approved and allowed in the respective amounts indicated. The collector will immediately check such items against the accounts of the taxpayers and determine whether the amounts in which the tax liabilities have been reduced should be respectively abated in whole or in part and make such abatements as may be warranted by the condition of the taxpayer's accounts for the years involved. If any part of any such item is found to be an overpayment, the collector will examine all accounts of the taxpayer for other periods and apply the overpayment as a credit against income, war profits, or excess profits taxes due, if any, making the appropriate entries in his accounts. The amounts credited will be entered by the collector in column 6. The balance, if any, of the overpayment refundable will be entered in column 7 and an appropriate memorandum made upon the taxpayer's account showing the refund and the amount refunded. The collector will thereupon complete and certify this schedule and return the same, with the necessary copies, to the Commissioner of Internal Revenue."
10. May 1, 1928, the collector at Chicago mailed to plaintiff a second notice and demand for payment of $3,018,064.24, representing unpaid original taxes for 1926 of $2,814,949.31, together with interest thereon from March 15, 1927, to May 1, 1928, and advised it that, if payment was not made, distraint would be levied. May 10, 1928, plaintiff delivered to the collector a check for $3,018,064.24, being the full amount demanded by the collector. Accompanying the check was the following letter from plaintiff:
"Enclosed you will find our check No. 3340, on the National City Bank of New York, to your order for $3,018,064.24, represented to be $2,814,949.31 of taxes and $203,114.93 of interest thereon, covered by your notice and demand dated May 1, 1928, and alleged to be due from this company and required to be paid to you on or before May 10, 1928.
"This company hereby protests against being required to pay said sum and/or sums or any part thereof; represents and declares that this payment is made under duress and only to avoid penalties and distraint of its property, the enforcement of which has been and is now threatened by you.
"Under date of May 5, 1928, this company received a letter from C.B. Allen, deputy commissioner (IT:C:CC:4-MTH), in which there purported to be set forth the adjustments made to the income and profits taxes of the company for the years 1918 to 1926, inclusive, after all allowable credits, interest, and prior payments had been applied, and showing an outstanding balance of $3,018,064.24 `representing original 1926 tax and interest due.' This letter shows a deficiency due for 1920 in the amount of $4,375,023.66 and shows this amount satisfied by $2,705,795.39 credited from taxes overpaid for 1918 and by $1,669,228.27 credited from taxes overpaid for 1919.
"The company wishes to call your attention to the fact that there are not now and there were not on May 1, 1928, the date your notice and demand was forwarded to us, any taxes whatever due from this company for 1920. As your records show, on March 24, 1928, the company wrote your and enclosed therewith its check to your order for $4,919,444.41, `representing payment of $4,375,023.66 of additional income and excess-profits taxes for the calendar year nineteen hundred and twenty (1920), together with interest thereon in the amount of $544,420.75, interest being computed at the rate of six percent per annum from February 26, 1926, to date.' It was also specifically stated on the check itself that the payment was 1920 taxes and interest on the taxes for 1920, and your acceptance of that check was an acceptance of payment of 1920 taxes and interest thereon. Accordingly, there is not and cannot be any basis or justification for crediting the amounts referred to above as overpaid for 1918 and 1919 against taxes which had been fully paid with interest for the year 1920 and prior to the time that the credit was applied.
"In the letter of May 5, 1928, it is further stated that interest has been allowed on the $2,705,795.39 of taxes overpaid for the year 1918 from December 15, 1919, to March 15, 1921, and that no interest was allowed on the $1,669,228.27 of taxes overpaid for 1919. In the letter of this company to the Commissioner of Internal Revenue dated April 24, 1928 (IT:CR:c-6-280-RED), the Commissioner was authorized to apply the interest on the overpayments of taxes for the years 1918 and 1919 to taxes for deficiencies remaining due for other years, but the Commissioner was specifically admonished that since all taxes and interest due for the year 1920 had theretofore been paid in full `that there can be no credit of any overassessment or interest thereon applied to any taxes and/or interest for the year 1920.' Under the circumstances your action, or the action of the Commissioner of Internal Revenue, in wrongfully applying taxes overpaid for 1918 and 1919 to taxes and interest fully paid and satisfied for the year 1920, is without warrant of law or justification in fact. By this unwarranted and illegal action, the company has been wrongfully, erroneously, and illegally deprived of interest at the rate of six percent per annum on the $2,705,795.39 of taxes overpaid for 1918 since March 15, 1921, at least to April 24, 1928, in an amount not less than $1,154,021.74; and of interest at the rate of six percent per annum on the $1,669,228.27 of taxes overpaid for 1919 from May 29, 1923, at least to April 24, 1928, in an amount not less than $491,031.32, a total interest due for 1918 and 1919 of not less than $1,645,053.06.
"And in sundry other particulars, both in form and in substance, said notice and demand for $3,018,064.24 is unjust, unreasonable, and illegal, and notice is hereby given that at such time and in such manner as may be advisable, appropriate proceedings, including any action at law or in equity that may be deemed suitable or desirable, will be taken against you, the United States, and all parties concerned to recover the interest properly due this company on the taxes referred to above as overpaid for the years 1918 and 1919, and to preserve and protect all the rights and interests of this company."
11. On May 5, 1928, the deputy commissioner wrote plaintiff by letter as follows:
"Reference is made to the adjustment of your income taxes for the years 1918 to 1926, inclusive.
"In accordance with the established practice of this office, the overpayments of your taxes for the years 1918, 1919, and 1922 have been credited to deficiencies for the years 1920, 1921, and 1923. The interest due on these overpayments under section 1116 of the Revenue Act of 1926 has also been credited to the 1923 deficiency. The payment made March 24, 1928, in the amount of $4,919,444.41 has been applied to the balance due for 1923, to the entire amounts due for the years 1924 and 1925, and a part of the tax due for 1926. According to records received from the collector there was on May 1, 1928, an outstanding balance of $3,018,064.24 representing original 1926 tax and interest, due after all allowable credits and prior payments had been applied.
"The details of the adjustment are as follows:
---------------------------------------------------------------------------------------------------- Year | | Deficiency | Credits and payments ---------------------------------------------------------------------------------------------------- 1920 | Tax ................. | $4,375.023.66 | $2,705,795.39 credited from 1918. | Interest ............ | 567,734.22 | 1,669,228.27 credited from 1919. | | | 567,734.22 abated. 1921 | Tax ................. | 520,972.21 | 229,597.09 credited from 1919. | Interest ............ | 179,203.73 | 275,329.68 credited from 1919. | | | 195,249.17 credited from 1922. 1923 | Tax ................. | 565,998.44 | 101,758.75 credited from 1922. | Interest ............ | 126,079.40 | 202,934.75 interest on 1918 overassessment. | | | 67,488.96 interest on 1919 overassessment. | | | 81,448.55 interest on 1919 overassessment. | | | 77,661.47 interest on 1922 overassessment. | | | 160,785.36 payment 3-24-28. 1924 | Tax ................. | 649,428.64 | 752,674.45 payment 3-24-28. | Interest ............ | 103,245.81 | 1925 | Tax ................. | 609,132.13 | 683,129.17 payment 3-24-28. | Interest ............ | 73,997.04 | 1926 | Tax ................. | 610,371.15 | 647,896.43 payment 3-24-28. | Interest ............ | 37,525.28 | 1926 | Orig. tax ........... | 6,782,542.82 | 1,252,994.95 previous abatement. | | | 39,639.56 previous credit from 1918. | | | 2,674,959.00 payment 3-24-28. 1926 | Balance ............. | 2,814,949.31 | To be collected. | Interest ............ | 203,114.93 | To be collected. ----------------------------------------------------------------------------------------------------"Interest on the overpayments for the years 1918, 1919, and 1922 was computed in accordance with section 1116 of the revenue act of 1926 as follows:
------------------------------------------------------------------ | | Interest computed | | |---------------------| | Amount | | | Year | credited | From: | To: | Interest ------------------------------------------------------------------ 1918 .... | $2,705,795.39 | 12-15-19 | 3-15-21 | $202,934.75 1919 .... | 1,669,228.27 | No Interest period. | None. | 229,597.09 | 5-31-23 | 4-24-28 | 67,488.96 | 275,329.68 | 5-19-23 | 4-24-28 | 81,448.55 1922 .... | 297,007.92 | 12-15-23 | 4-24-28 | 77,661.47 ------------------------------------------------------------------
"The credit in the amount of $275,329.68 allowed for the year 1919 is not on account of an overassessment of tax, but represents an allowance for interest paid by you in connection with the last payment of tax for that year and is in proportion to the overpayment of tax."
March 18, 1929, plaintiff filed with the Commissioner its claim in writing for the payment of additional interest on the overpayments of tax for 1918 and 1919. The Commissioner rejected this claim on April 22, 1929.
12. Had the Commissioner and the collector computed the interest due plaintiff by treating the cash payment of March 24, 1928, in the sum of $4,919,444.41, as having satisfied the deficiency in tax for the year 1920, the amount of interest due and payable to plaintiff under section 1116 of the 1926 act on the overpayments for 1918 and 1919 would have been $1,915,843.97. According to the method followed by the Commissioner and the collector in making application of the credits, plaintiff received the sum of $270,423.71 as interest on the 1918 and 1919 overpayments, making a difference in the interest account of $1,645,420.26, the amount claimed in this suit.
13. December 28, 1928, plaintiff executed an agreement as to final determination of tax liability covering the years 1918 to 1926, inclusive, in accordance with the provisions of section 606 of the Revenue Act of 1928. This agreement was signed by the Commissioner on February 11, 1929, and approved by the Secretary of the Treasury on the same date. The agreement expressly reserved and left open the claim involved in this case in the following language:
"It is understood and agreed, however, that the foregoing agreement as to the principal amount of tax liability for the years named does not affect the taxpayer's claim to interest upon the overassessments for the years 1918 and 1919, nor the amount of interest, it being understood that the taxpayer's claim for unpaid interest and the denial of such claims by the Commissioner of Internal Revenue are in no way affected by this agreement."
14. During all of the times involved in this action plaintiff elected to pay and did pay its income and profits taxes in four equal installments due on or before March 15, June 15, September 15, and December 15 of each year.
This action is begun to recover $1,645,420.26 as additional interest due on overpayments made by plaintiff on its taxes for the years 1918 and 1919.
The facts connected with the case may at first seem to be very complicated, but the issue involved and the manner in which it arose can be stated quite simply. On March 21, 1928, the Commissioner of Internal Revenue, having had under consideration the taxes of plaintiff for the years 1918 to 1926, inclusive, sent out a so-called "sixty-day letter" and notice that he had determined the correct liability of plaintiff to be as shown in the table, which set out the amount of overassessments and deficiencies for each year in parallel columns, showed the total thereof, and the net deficiency. The table listed overassessments of nearly $5,000,000, of which $2,705,795.39 was for the year 1918 and total deficiencies of $7,330,926.23, of which $4,375,023.66 was for 1920. A balance was struck which showed that the net deficiency or liability of the plaintiff at that time was $2,429,297.56. (See finding 6.) This notice further stated that —
"Payment of the amount of additional tax should not be made until a bill is received from the collector of internal revenue for your district and remittance should then be made to him in accordance with the terms of the notice."
After the receipt of this letter and on March 24, 1928, the plaintiff paid by check to the proper collector of internal revenue the amount of the deficiency for 1920 together with interest thereon, making a total of $4,919,444.41, and at the same time in various ways the plaintiff's attorney stated that the check was in payment of taxes and interest for the year 1920. The collector accepted the check and acknowledged the payment, but, following instructions previously given by the Commissioner, did not apply the payment to the 1920 deficiency and kept it in a suspense account. Subsequently, as will be shown further on, the amount so paid was applied on other taxes then due, and the overassessments for 1918 and 1919 were applied on the deficiency for 1920, with the result that plaintiff was allowed $1,645,420.26 in interest less than it would have been had the payment been applied as directed by its attorney. How this difference in the calculation of interest arose will appear when the statutory provisions applicable thereto are considered.
It will be observed that at the time the payment was made overassessments for the years 1918, 1919, and 1922, and deficiencies for 1920, 1921, 1923, 1924, 1925, and 1926 had been determined. The overassessments had not been finally allowed nor the deficiencies finally assessed. The amount of interest to be allowed plaintiff on the final adjustment of its tax account was controlled by the provisions of the Revenue Act of 1926, as hereinafter stated. Section 283(d) thereof (26 USCA § 1064(d) provided that in case of assessments made after the enactment of the act, under acts prior to November 23, 1921 (which was the date of the enactment of the 1921 act), interest should be collected as part of such tax "from the date of the enactment of this act [February 26, 1926] to the date such tax is assessed." Section 284(a), of the Revenue Act of 1926 (26 USCA § 1065(a) further provided:
"(a) Where there has been an overpayment of any income, war-profits, or excess-profits tax imposed" by prior acts "the amount of such overpayment shall * * * be credited against any income, war-profits, or excess-profits tax or installment thereof then due from the taxpayer."
Section 1116, of the same act ( 26 USCA § 153 note), as applied to this case, provides that upon the allowance of a credit upon an additional assessment interest shall be allowed to the due date of the amount against which the credit is taken, and, if that is an additional assessment, then to the due date of the assessment of that amount.
It will be seen that under these provisions overassessments drew interest from the time of their payment, while under section 283(d) deficiencies imposed by acts prior to November 23, 1921, drew interest only from February 26, 1926. The evident purpose of the payment was to prevent any of the overassessment for 1918 or 1919 being applied on the deficiency for 1920, as such application would prevent the amount so applied from drawing interest beyond the time of its application; otherwise interest would continue to run thereon until this amount had been satisfied in the manner required by law. To state it briefly, if the overassessment had been so applied, the interest payments would have been equalized between plaintiff and defendant; on the other hand, if plaintiff could have its payment applied upon the 1920 deficiency, it would, as before stated, get interest on the overpayments from the time they were made, notwithstanding it was indebted to the government at that time, and pay interest on the deficiency only from February 26, 1926. Plaintiff's contention is that it had the right to direct the application of the payment which it made to the collector, and when it was made it absolutely extinguished the indebtedness on the 1920 deficiency; that the overpayments could not afterward be applied on a deficiency for 1920 because there was nothing "then due" as specified in section 284(a) of the 1926 act quoted above; and for the same reason, after the payment was made, there remained no taxes for 1920 against which a credit could be taken under the provisions of section 1116 of the same act.
It will be seen as the discussion proceeds that, if plaintiff's theory is sustained, there will not only be cases where the taxpayer will be entitled to interest for a period during which he is indebted to the government as in the instant case, but in some instances the taxpayer will be able to sue the government for a refund and obtain a judgment, although he is actually owing a balance to the defendant at the time when suit is begun and when judgment is rendered. Certainly Congress never intended such a result, and we do not think a court should lend its support to a doctrine which would bring it about unless required so to do by clear and unambiguous provisions in the statutes applicable thereto.
The defendant, on the other hand, insists that plaintiff had no right to direct the application of the payment upon the 1920 taxes, and, as it was not so applied, this item of indebtedness to the government was not extinguished, but continued in full force and effect until the overpayments were allowed and applied upon it.
These contentions of the several parties constitute the issue in the case.
Ordinarily when a debtor makes a payment to a creditor he can direct how the payment shall be applied if there is more than one debt, and this rule has been applied to payments on taxes. In the absence of some provision in the statute or of circumstances that modify the original directions, we think it may be conceded that the plaintiff was entitled to have the payment applied on the 1920 deficiency as directed by its attorney. The argument of defendant is, in effect, that the statutes with reference to refunds of overpayments and interest thereon were not intended by Congress to be so construed or applied as to permit a refund of overpayment to taxpayers unless there was a net balance in favor of the taxpayer, or to require the payment of interest by the government when the net balance was against him, and, if a payment is made upon a deficiency under such circumstances as to show that it was made to defeat the government's right to set off overpayments against deficiencies and thus require the payment of interest upon overpayments although the balance of the tax account was in favor of the government, the taxpayer should not be permitted to so direct the application of the payment as to accomplish this result. There have been no less than five decisions by federal courts announcing this rule and none to the contrary. As it is insisted on behalf of plaintiff that four of these decisions are not in point because the facts are not similar to those in the case at bar and that the remaining one is erroneous, it will be necessary to review these decisions and consider their application.
In McCarl v. Leland, 59 App. D.C. 362, 42 F.2d 346, 347, the taxpayer sought by mandamus to compel a refund for one year while a deficiency asserted by the Commissioner for another year was pending before the Board of Tax Appeals. The ultimate question was whether the taxpayer was entitled to a mandamus, and the court held that he was not; but, in construing section 284 of the 1926 act (26 USCA § 1065) and holding that it did not sustain the taxpayer's contention, the court said that any other interpretation would permit the taxpayer "to exact from the government interest when the net balance was against him," and further that —
"Such a result would be inequitable and inconsistent with the obvious purpose of the statute."
In Tull Gibbs v. United States (C.C.A. 9th) 48 F.2d 148, 150, the plaintiff brought a suit to recover overpayments of income and excess profits taxes for the year 1919, but there were deficiencies claimed by the Commissioner, and the judgment largely depended on whether the Commissioner had the right to apply the refund on deficiencies not finally determined. The court held that the Commissioner had the authority to determine "that the amount of the refund should or would be applied or credited on claimed deficiencies for other years * * * even though the amount of the deficiencies had not yet been ascertained." (Italics ours.) The court gave as a reason for this ruling that "To hold otherwise would entitle the appellant to interest on the amount of the refund while the government would receive no interest on the deficiencies which might equal or exceed the refund."
In this case, had the taxpayer's contentions been sustained, it would have recovered judgment, although when the deficiencies were finally determined it appeared that it was indebted to the government at the time the judgment was rendered.
In Lucas v. Blackstone Mfg. Co., 59 App. D.C. 389, 45 F.2d 291, 292, the taxpayer contested the right of the Commissioner to refuse to receive payment of the deficiency of the year 1918 and instead of so doing to apply certain overpayments for the years 1917 and 1919 against such deficiency, and again the court was required to construe section 284(a) of the Revenue Act of 1926. The case closely parallels the one at bar, as the taxpayer claimed that, when the overpayments for the years 1917 and 1919 were scheduled by the Commissioner, there was no tax deficiency due for 1918 for the reason that the deficiency had been fully settled by a payment made by the taxpayer on October 8, 1927, but the court said:
"The Commissioner was right in refusing to accept that payment as a settlement of the deficiency * * * inasmuch as otherwise the government would have been paying interest to the taxpayer upon the overpayments from the date of payment, whereas it would have collected interest upon the deficiency only from February 26, 1926. We have already held that such a result would contravene the plain intent of Congress."
It is true that in this case the deficiency had been finally determined, but the overpayments had not been finally allowed; that is, the payment was made before the overpayments were finally scheduled. The ultimate question, therefore, was whether the deficiency had been extinguished by payment at the time the overpayment was definitely allowed, which is the same question as arises in the case at bar. The holding was in effect that, if an overpayment had been disclosed by the returns and existed at the time when the payment was made, the taxpayer had no right to direct the application of the payment to a deficiency, that the Commissioner was right in refusing to so accept it, and that he correctly returned it to the taxpayer instead of applying it on the deficiency.
In Noyes v. United States (C.C.A. 9th) 55 F.2d 870, 872, the Commissioner applied an overpayment for 1918 to a deficiency for 1917, of which the taxpayer had been notified by a sixty-day letter, but which had not been finally determined and assessed. In this case the controversy related to a deficiency which had not been definitely determined, while in the former it was as to an overpayment not finally allowed. Whether the overpayment had been allowed at the time the application had been made does not appear from the opinion of the court, but the court held in effect that the Commissioner had the right to so apply overpayments as to prevent a recovery on the part of the taxpayer when "the taxpayer owes the government a like amount." While this case applies only to one phase of the case at bar, the court again had occasion to pass on the construction of section 284(a) of the act of 1926 and the meaning of the words "then due" used therein.
It will thus be seen that in all of these cases the various courts, in order to sustain their decisions, have laid down principles which are quite inconsistent with those upon which plaintiff bases its case, and if these principles are followed must defeat it.
The case of United States v. Pacific Midway Oil Co. (D.C., N.D. Cal.) CCH 32, par. 9072, is one in which the facts were parallel with the case at bar, but additional circumstances made it stronger in favor of the taxpayer than the one we now have under consideration. In that case, as in the case at bar, the taxpayer was notified that it had made overpayments for the years 1917, 1918, and 1919, and that there was a deficiency for the year 1920. The taxpayer immediately made payment of the deficiency and interest thereon, giving directions that it should be applied on the 1920 deficiency, which was accordingly done. Subsequently, the government began a suit to recover back what was claimed to be an overpayment of interest on the overpayments resulting from this action and alleging that the collector had no right or authority under the circumstances to apply the payment on the 1920 deficiency, but, on the contrary, the deficiency should have been satisfied by applying the overpayments thereto. The court took under consideration the cases above cited, and in accordance therewith held in substance that, when a payment was made in such a manner as "to defeat the Government's right to set-off overpayments against deficiencies and thus require the payment of interest upon overpayments, such payment should be applied only to the net balance of the deficiency." The government was therefore awarded judgment for the interest improperly paid.
Not for publication.
It is not contended on behalf of plaintiff that the case last cited is not directly in point, but it is said that the decision is erroneous. The other cases cited above are said not to be in point because based on different facts, but a careful reading of these cases will show that they announced principles as the basis of each decision which were in line with the decision in the case of the Pacific Midway Oil Co., supra, and wholly inconsistent with the argument made on behalf of plaintiff. In all of them the same statute was being construed, and the basis of the decision in each of these cases was the intent of Congress as manifested by the statutes to which reference has been made.
It is insisted on behalf of plaintiff that there is nothing in the language used from which an inference of such intent can be drawn. With this we do not agree, but, on the contrary, think it is manifest from the several sections of the statute which direct the application of refunds and determine the manner in which interest can be computed that the general purpose of these provisions and the object which was sought to be attained by Congress was to require a mutual set-off of overpayments and deficiencies and to prevent the allowance of interest to the taxpayer for a period during which he was indebted to the government. Whether the statutes accomplish such a purpose depends upon their wording. They are not entirely clear, especially section 284(a) of the 1926 act. If Congress had intended the construction which plaintiff gives to this section, it would have been much easier, shorter, and plainer to have said: "When an overpayment * * * has been allowed * * *, the amount of such overpayment shall * * * be credited against any deficiency * * * due at the time of such allowance." It did not use the word "when"; it said, "where there has been an overpayment," and made no reference to its allowance, or requirement that it should be allowed, but provided only that it should be credited against a tax "then due."
The words "where there has been an overpayment" evidently refer to a case where the Commissioner has determined that the returns disclose an overpayment in manner and amount as announced by him, and the court must hold that such a condition existed at the time when he made a statement to that effect and so notified the taxpayer. In this particular case it was at the same time when he announced the finding of a deficiency for 1920. Counsel for plaintiff contend, and we think rightly, that the application of the overpayment cannot be made until it is finally allowed. They also assert that a credit cannot be applied upon an indebtedness that does not exist. We think this is self-evident, but it does not tend to support plaintiff's construction of the section under consideration. The argument of plaintiff is, in effect, that the words "then due" refer solely to the time when the credit is made, although the statute does not so state and Congress must have well understood that it was unnecessary to provide that the credit could only be made upon an indebtedness which was "then due." Such a limitation on the application of the credit would be entirely unnecessary, as the section would be so understood without any special provision to that effect. We think the words "then due" refer to the time when the deficiency was first determined and found to exist. It will be noticed that plaintiff itself claims in argument that the deficiency was due on that date (March 21, 1928, when the sixty-day letter and notice were sent out), and it will also be observed that by the same notice and at the same time the overpayments were determined. The case was therefore one "where there has been an overpayment of any income, war-profits, or excess-profits tax," and by the other provisions of section 284(a) the Commissioner was required to credit the overpayments upon a deficiency. Where there was more than one, he would have the right to select the deficiency or deficiencies upon which the overpayments should be applied. If, as we think, the statute directed the application of the credit at the time when it was first determined, the taxpayer had no right to so direct the application of the payment as to prevent the law from being obeyed. In other words, its attempted direction was wholly inconsistent with the provisions of the statute and would have no force and effect. If we are correct in the conclusions stated above, it follows that the attempt of plaintiff to direct the application of its payment had no effect. The collector and Commissioner were right in refusing to so apply it, and the 1920 deficiency was still due when the Commissioner finally allowed the overpayments and credited them thereon.
Counsel for plaintiff cite a large number of decisions to show that there could be no credit of 1918 and 1919 overpayments until they were determined and allowed, and it is argued because the final allowance did not occur until April 24, 1928, that these overpayments could not be applied on the deficiency for 1920, but we think these decisions have no application to the case now before us. The argument for plaintiff assumes that the rule contended for by defendant required the credit of the overpayment to be made upon the deficiency prior to the allowance thereof. No such claim is made on behalf of defendant, but the defendant does argue that under the law as applied to the facts in the case the plaintiff could not direct the application of the payment which it undertook to make on the 1920 tax, and we think an examination of the law will show sufficient basis for this contention. The statute that directed where the overpayment should be applied went into force as soon as the Commissioner determined that an overpayment had been made and that a deficiency existed, for an overpayment would exist when the Commissioner made his determination thereof although it had not been finally allowed, just as a deficiency would exist when the Commissioner so determined although the assessment had not been finally made. It is true that the Commissioner could not make an application of the overpayment until it was finally allowed, but the question in this case is not when the overpayment was allowed, but where it was to be applied under the statute. It should be kept in mind that the Commissioner did not make the credit until after the overpayment had been allowed pursuant to the agreement contained in the waiver, and then computed the interest according to the provisions of the statute. There is nothing in the cases cited on this point that appears to us to support plaintiff's claim that it had the absolute right to direct the payment involved. There were cases in which overpayments and additional assessments had been determined and certified, but in none did it appear that the taxpayer made any payment after notice that an overpayment for one year and a deficiency for another had been disclosed by the returns, nor did any issue arise as to the application of any payment or credit. In all of them the manner in which the application was made was conceded to be proper, and the question to be determined was merely as to the time when the credit was finally allowed or as to the time it was taken as forming a basis for the computation of interest.
It is urged on behalf of plaintiff that the doctrine invoked by the defendant would have resulted in a different interest calculation if applied to the cases of U.S. v. Boston Buick Company, 282 U.S. 476, 51 S. Ct. 206, 75 L. Ed. 470, and Pottstown Iron Co. v. U.S., 282 U.S. 479, 51 S. Ct. 205, 75 L. Ed. 472. No explanation is given for this, and here again we think there is a confusion on the two questions of where the overpayment should be applied and how the interest should be computed. It will be observed that the application of the overpayment is controlled by section 284(a), which points out where the application should be made, and this is all it does. It makes no reference to the matter of interest. Section 1116 of the 1926 act directs and controls the manner in which interest should be computed upon the allowance of a refund or credit after the determination of the place where the credit shall be applied under section 284(a). Under its terms the interest could not be calculated until after the credit had been actually allowed for many reasons, and especially for the reason that until the amount of the credit was definitely fixed by the allowance thereof there would be no way of knowing how much should be credited. So also when a refund is to be made the interest is allowed up to the date of the refund. In the case before us, as a credit was to be made, interest is allowed only up to the date when the taxes upon which the credit was to be applied became due. This would have to be done in all cases, and, instead of being inconsistent with the rule applied in the cases cited on behalf of plaintiff, is directly in accordance therewith.
The rule stated above would not delay the settlement of tax accounts appreciably, as it applies only to cases where both deficiencies and overpayments have been found by the Commissioner, and the final determination of the overpayment or deficiency as the case might be was only a matter of a few weeks at most. It would not interfere with the practice of the Department, which so far as we are aware has been entirely consistent therewith. This is shown by the cases that we have already cited. Tull Gibbs v. United States, supra, was a case in which the deficiency had not been finally determined, but the principle applied is the same. Lucas v. Blackstone, supra, was a case in which the deficiency had been finally determined and it was held that the commissioner might refuse to apply a payment on a deficiency pending the final determination of an overassessment. In United States v. Pacific Midway Oil Co., supra, the facts were precisely similar to those in the case at bar. So far as this matter has reached the courts, the practice of the Department has been that which was followed in the case at bar.
Where a statute is ambiguous, the courts are permitted to consider the report of the congressional committee which reported the bill carrying the provisions in controversy. In the report of the Senate Finance Committee upon the Revenue Act of 1926, reference was made to the fact that the previous law made an unfair discrimination in favor of the taxpayer in the matter of interest, and it was said that "it did not seem fair at this late date to equalize the situation entirely," but what followed showed that this statement referred to a provision not in controversy herein. Further on the report stated that under the act of 1921 "it frequently happens that a taxpayer who owes the Government money upon which he is paying no interest is collecting interest upon money which the Government owes him." It then showed how this situation had been remedied by one of the provisions under consideration in the case at bar. We think this clearly shows an intent not to permit a taxpayer to collect interest from the government for a period during which he is shown to be indebted to it.
If, however, the construction which we have placed upon the statute following the decisions of the several courts which have so far passed upon the question be incorrect, it by no means follows that plaintiff's case is sustained. Conceding for the purposes of the argument that plaintiff had the right to direct the application of the payment in the first instance, any such direction could be revoked or modified before the application of the payment was made, and we think that the evidence shows such a revocation.
After the payment had been made, plaintiff's attorneys came to Washington, and there was a long conference with the officials in the Commissioner's office. As a result of this conference, a waiver of the right to appeal to the Board of Tax Appeals from the decision of the Commissioner as to deficiencies as stated in the so-called "sixty-day letter" and a consent thereto, together with the overassessments set forth in the same letter, was signed by the plaintiff on April 2, 1928, and filed with the Commissioner of Internal Revenue on April 4, 1928. This waiver contained a list of the overassessments and deficiencies agreed to in parallel columns, specifying the year. It was the same as was contained in the sixty-day letter, except that it did not set out the balance or net deficiency, which was merely a matter of addition and subtraction. To this statement of the tax account of plaintiff was appended the following:
"This waiver of appeal and consent to assessment is given on the express condition that the overassessments shown above will be scheduled simultaneously with the assessment of the deficiencies shown above."
At the time of the execution of this waiver, the plaintiff was in a somewhat peculiar position. Its attorney knew that the payment made had not been applied on the 1920 deficiency and that the Commissioner intended to apply the overpayments thereon. This is shown by the transactions between the parties and in particular by the fact that shortly after the filing of the waiver and without any further notice being received plaintiff's attorneys wrote the Commissioner a letter to which reference will hereinafter be made, in which it was contended that the overassessments could not be applied to the taxes of 1920. It could not well go on with its appeal to the Board of Tax Appeals on the 1920 assessment and at the same time claim that this assessment had been fully paid and the debt extinguished. It would practically give up nothing by executing the waiver on this matter, but it was important to finally and definitely secure the overassessments which had been listed in the preliminary schedule sent plaintiff by the Commissioner and which aggregated nearly $5,000,000, and the waiver was probably executed by plaintiff's attorney with this in view. The government, on the other hand, had nothing to gain by the execution of a mere waiver, as the plaintiff had already practically admitted the correctness of the assessment by attempting to pay it, and naturally the Commissioner did not want to bind himself absolutely to the allowance of these huge refunds unless he got something in return for such an agreement. We think both parties were successful.
By the instrument which was signed containing the waiver the plaintiff got the overassessments definitely allowed and the Commissioner got the statement appended to the waiver, and also an agreement that the plaintiff "* * * consents to the assessment of the deficiencies upon the bases as to income, overassessments, and other adjustments set forth in said letter dated March 21, 1928; the years, amounts of deficiency, or overassessment as set forth in said letter being as follows:" (Here followed a similar statement of plaintiff's account for taxes as was contained in the Commissioner's letter of March 21, 1928, except that no balance was computed and listed as in that letter.)
By reference to finding 8 it will be seen that the amounts of overassessment for each year were listed in one column and the amounts of deficiencies for each year in another parallel column. In other words, it was a complete statement of the debit and credit items of plaintiff's tax account all agreed upon by both parties. It will be observed that not only were the deficiencies listed therein, including the deficiency for 1920, agreed to, but it was also agreed that they should be assessed, and when they were so assessed the overassessments were to be "scheduled simultaneously" with the assessment of the deficiencies.
We think this agreement clearly constituted a revocation or at least a withdrawal or modification of whatever directions or understanding accompanied the 1920 payment. But it is immaterial what it is called. The covenants of the agreement cannot be reconciled with plaintiff's claim that the 1920 deficiency was paid and that no indebtedness existed thereon. One of the bases of the former statement was that the deficiency for 1920 was due. It was specially agreed that the same bases should be used and that this particular deficiency for 1920 should be assessed, which could mean nothing but that it stood as a liability on the part of plaintiff. Moreover, the plaintiff agreed that this deficiency should be included in a schedule of overassessments and deficiencies which the statute made final.
On April 24, 1928, the attorney for the plaintiff, apparently fearing that the result of the agreement would not be what his client desired, delivered to the Commissioner of Internal Revenue a letter at considerable length, the substance of which was that the plaintiff renewed its demand that the payment which had been made should be applied on the 1920 deficiency, and contended that this deficiency had been extinguished by such payment, by reason of which fact (as plaintiff claimed) there could be no credit of an overassessment on this deficiency. On the same day this letter was delivered the Commissioner scheduled the overpayments upon, and deficiencies in, plaintiff's taxes exactly in the manner agreed upon. The deficiencies, however, were placed in one list, which also showed the amount of interest charged against the plaintiff on the deficiency for each year. This was followed by a certificate that the deficiencies were due, and the whole signed by the Commissioner. The schedule of overassessments was in another list, separately made, and included the overassessments as stated in the waiver, and also made an interest adjustment on the additional tax for the year 1920 of $567,734.22.
We think it will be seen that the waiver agreement provided for the recognition of the existence of the deficiency for the year 1920 and its assessment and final determination, together with a simultaneous allowance of the overpayments. The whole proceeding as prescribed by the agreement was utterly inconsistent with plaintiff's claim that the 1920 deficiency had been extinguished, for, if the tax for that year had been wiped out by the payment, it could not be assessed, determined to be a deficiency, and made a debit item against plaintiff. No further discussion seems to be needed when attention is called to the fact that the agreement of the parties did not merely provide for the assessment of the tax for 1920, which would have been done as a matter of course, but also provided that it should be listed as a deficiency in the Commissioner's schedule of deficiencies and overassessments which definitely determined both. The Commissioner carried out the agreement to the letter, determined the deficiency for 1920, and made the final allowance of the overassessment simultaneously as stipulated. This having been done, it was entirely immaterial that the plaintiff had made no express agreement that the overpayment should be credited on the 1920 tax. The law determined this, and the statute imperatively required that such a credit should be made.
Our conclusion, therefore, is that when the schedule was made in accordance with the agreement, the deficiency was due and the overpayments allowed. Such being the case, the statute, even under the construction contended for by plaintiff, left the Commissioner no discretion in the matter. It required him to credit the overpayments upon a deficiency, and he accordingly apportioned them among the several deficiencies against plaintiff listed in the schedule, including the deficiency of 1920. We think it clear that, even if plaintiff originally had the right to direct the application of the payment, such right was lost under the provisions of the so-called "waiver." It follows that the application of the overpayments for 1918 and 1919 to the deficiency of 1920 must be approved and the interest calculated accordingly.
It is urged on behalf of plaintiff that even under defendant's theory of the case there is additional interest due the plaintiff in excess of the amount allowed it, and this claim is not disputed. Each of the parties submits calculations of what it claims should be the proper amount of additional interest. Neither of these calculations is correct, although the error in the defendant's calculation is caused only by using the 4 per cent. rate (which is not now in force) instead of 6 per cent., the correct rate. The method of calculating the interest is practically settled by the case of the Irving Trust Co. v. United States, 72 Ct. Cl. 578. In accordance with the rule laid down therein we hold that the due dates of the 1920 taxes under section 250 of the 1918 act ( 40 Stat. 1082), by reason of the fact that the plaintiff had not elected to pay in one sum, were March 15, June 15, September 15, and December 15, 1921, and one-fourth of the deficiency was due at each of said dates. The case last above cited does not decide the precise question involved in the case at bar, but when the due date of the 1920 tax is fixed we think the remainder of the computation follows as a matter of course.
Under section 1116(a), Revenue Act 1926 ( 26 USCA § 153 note), the whole of the overassessment for 1918 would draw interest from the date when paid. It was applied to the deficiency for 1920 which, as has already been stated, came due in installments. $1,093,755.91 was credited upon each of the first and second deficiency installments in satisfaction thereof, and the balance of $518,283.57 in partial satisfaction of the third deficiency installment. Under the statute in each case interest would run from the time the overpayment was made to the time when the deficiency installment became due. The remainder of the third deficiency installment as well as the fourth installment was satisfied from the 1919 overpayment, as to which there is no controversy in regard to the matter of interest. We append a note showing the computation of interest accordingly. The error on the part of the plaintiff is in allocating one-fourth of the 1918 overpayment of $2,705,795.39 to each of the 1920 deficiency installments and then computing interest in accordance with such application. We think there is neither reason nor authority for this proceeding, and that correctly computed the plaintiff is entitled to $31,954.75 in addition to the amount allowed by the Commissioner for which judgment will be rendered accordingly.
Interest computation:
Interest on — $1,093,755.91 from 12/15/19 to 3/15/21 (1 yr. and 3 mos. at 6%) .......................... $ 82,031.69 $1,093,755.91 from 12/15/19 to 6/15/21 (1 yr. and 6 mos. at 6%) .......................... 98,438.03 $518,283.57 from 12/15/19 to 9/15/21 (1 yr. and 9 mos. at 6%) .......................... 54,419.78 ___________ Total ..................................... $234,889.50 Less: Amount allowed by the Commissioner ..... 202,934.75 ___________ Deficiency in interest which plaintiff is entitled to recover ................ $ 31,954.75
WHALEY and WILLIAMS, Judges, concur.
BOOTH, Chief Justice, took no part in the consideration or decision of this case.
I am of opinion that plaintiff is entitled to judgment for $1,655,420.26, being interest provided by law upon the overpayments for 1918 and 1919 from the dates paid to April 24, 1928, the date of the allowance of the overpayments and the credit thereof against taxes for 1921 and subsequent years. (1) A credit, within the meaning of the statute, does not occur until an overpayment is allowed. The allowance of the credit in this case was therefore April 24, 1928. (2) The liability for any tax in excess of that shown on the return for 1920 was a continuing obligation of the plaintiff and under the statute it had a right to pay the same and to direct its application. The payment and the directions that it be applied to the tax for 1920 were therefore valid, and the collector and the Commissioner were not authorized to ignore such directions and treat the payment as a payment on account of a tax for some other year. (3) The waiver of restrictions on assessment and collection filed April 4, 1928, was not a consent or agreement that the overpayments be credited against 1920 and that the payment made for 1920 be treated as a payment on account of taxes for other years. See Senate Finance Committee Report No. 52, Sixty-Ninth Congress, First Session, page 27, on the Revenue Act of 1926.