Smale & Robinson, Inc. v. United States

Decision Date29 July 1954
Docket NumberCiv. No. 14531.
Citation123 F. Supp. 457
CourtU.S. District Court — Southern District of California
PartiesSMALE & ROBINSON, Inc. v. UNITED STATES.

COPYRIGHT MATERIAL OMITTED

Keatinge, Arnold & Zack and Ernest J. Zack, Los Angeles, Cal., for plaintiff.

Laughlin E. Waters, U. S. Atty., and Edward R. McHale, Asst. U. S. Atty., Chief of Tax Division, Los Angeles, Cal., for defendant.

MATHES, District Judge.

Plaintiff sues for a refund of excess profits taxes paid for the taxable year ending September 30, 1942. See I.R.C. § 322(b) (6), 26 U.S.C. § 322 (b) (6); I. R.C. §§ 710-736, 26 U.S.C. §§ 710-736, repealed by Act of November 8, 1945, § 122(a), 59 Stat. 568. Defendant denies liability contending that plaintiff's claim for refund, timely filed, does not cover the ground sued on. I.R.C. §§ 3772, 322 (b) (6), 26 U.S.C. §§ 3772, 322(b) (6).

Jurisdiction of this court is invoked under 28 U.S.C. §§ 1340, 1346(a) (1) (i). See 28 U.S.C. §§ 2006, 2402 and Reviser's Note following § 1346, 28 U.S.C.A.; 26 U.S.C. § 3772(d); Lowe Bros. Co. v. United States, 1938, 304 U.S. 302, 305, 58 S.Ct. 896, 82 L.Ed. 1362; Sage v. United States, 1919, 250 U.S. 33, 37, 39 S.Ct. 415, 63 L.Ed. 828.

The evidentiary facts are not in dispute. As shown by admissions in the pleadings and stipulations of the parties, the facts material to decision are these.

On December 15, 1944, plaintiff filed an excess profits tax return for the taxable year ending September 30, 1942. The tax shown on the return was paid. On July 9, 1947, plaintiff filed a timely claim for refund, 26 U.S.C. § 322(b) (6), based on the carry-back of an asserted 1944 net operating loss which, if allowed, would entirely eliminate the excess profits tax for 1942. Id. § 711(a) (2) (L).

On August 2, 1947, plaintiff's representative and defendant's Revenue Agent Burke held a conference on plaintiff's claim for refund. At this conference Burke proposed allowance of only $24,900 of a salary item of $40,900, which constituted part of the asserted net operating loss for 1944. With the net operating loss carry-back from 1944 thus reduced, a portion of the 1942 excess profits tax liability would have remained. So Burke proposed resort to plaintiff's unused excess profits credit carry-back from 1944. Until this proposed disallowance of a portion of the claimed 1944 net operating loss carry-back, it had not been necessary for plaintiff to invoke any part of the 1944 unused excess profits credit carry-back in order to eliminate all excess profits tax liability for 1942.

The 63-page report of Revenue Agent Burke, dated August 2, 1948, discloses that he audited plaintiff's affairs for the taxable years 1942 through 1945, and employed the unused excess profits credit carry-back from 1944 in computing the 1942 tax. A rough draft of this report was submitted to plaintiff, and on September 28, 1948, Revenue Agent Sullivan held a conference with plaintiff and reviewed Burke's report, but made no change in the use of the 1944 excess profits credit carry-back.

November 8, 1948, was the last day on which plaintiff could file a claim specifying the 1944 unused excess profits credit carry-back as a ground for refund of the 1942 tax previously paid. 26 U.S.C. § 322(g). On that day plaintiff delivered to defendant a "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment" T.D.Form 874 which adopted the assessment as computed in the conference report employing the unused excess profits credit carry-back for 1944. By executing Form 874 plaintiff accepted the recommended overassessment of excess profits taxes in the exact amount as computed in the conference report.

On July 29, 1949, after the statute of limitations had run, 26 U.S.C. § 322 (b) (6), plaintiff, in "amplification" of the timely claim for refund which had been presented in 1947, filed a "Supplemental Statement Perfecting and Completing the Refund Claim as Originally Filed", specifying the 1944 unused excess profits credit carry-back as a ground for refund.

On February 13, 1950, the Commissioner of Internal Revenue partially allowed plaintiff's claim, but eliminated as an allowable ground of refund the unused excess profits credit carry-back from 1944, for the reason that no claim asserting this unused credit carry-back as a ground for refund had been filed within the period of limitations specified in § 322(b) (6) of the Internal Revenue Code, 26 U.S.C. § 322(b) (6).

Notice of disallowance of the part of the claim in question was mailed by the Commissioner on September 5, 1951, and this suit was begun within two years thereafter. 26 U.S.C. § 3772(a) (2).

Three separate causes of action are asserted in plaintiff's amended complaint. All are based upon the same facts. The first cause of action is grounded upon the contention that "defendant * * * waived the formal requirements of a claim for refund specifying the unused excess profits tax credit carry-back as a ground. * * *"

The second cause of action is predicated upon the theory that the "supplementary claim" filed July 29, 1949, served as a permissible amendment of the timely claim.

And the third cause of action is grounded upon the contention that defendant "is now estopped from asserting the failure of plaintiff to include within its claim for refund the unused excess profits tax credit carry-back."

26 U.S.C. § 322(b) (1) states the general rule that: "Unless a claim for credit or refund is filed by the taxpayer * * * within the required time * * * no credit or refund shall be allowed * * *."

While 26 U.S.C. § 322(b) (6), entitled "Special period of limitation with respect to net operating loss carry-backs and unused excess profits credit carry-backs", sets forth the exception applicable at bar that: "If the claim for credit or refund relates to an overpayment attributable to a net operating loss carry-back or to an unused excess profits credit carry-back, in lieu of the three-year period of limitation prescribed in § 322(b) (1), the period shall be that period which ends with the expiration of the fifteenth day of the thirty-ninth month following the end of the taxable year of the net operating loss or the unused excess profits credit which results in such carry-back * * *."

26 U.S.C. § 3772(a) (1) provides that: "No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax * * * or of any penalty * * * or of any sum alleged to have been * * * in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof."

The regulations supplement § 3772(a) (1) with the requirement that: "No refund or credit will be allowed after the expiration of the statutory period of limitation * * * except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a refund is claimed, and facts sufficient to apprise the Commissioner of the exact basis thereof." 26 C.F.R. § 39.322-3(b).

Here it is important to distinguish the statute, 26 U.S.C. §§ 322(b) (1, 6), 3772(a) (1), from the regulations particularizing the formal requirements of a claim for refund. As explained in United States v. Memphis Cotton Oil Co., 1933, 288 U.S. 62, 53 S.Ct. 278, 77 L.Ed. 619: "The line of division must be kept a sharp one between the function of a statute requiring the presentation of a claim within a given period of time, and the function of a regulation making provision as to form. The function of the statute, like that of limitations generally, is to give protection against stale demands. The function of the regulation is to facilitate research." 288 U.S. at page 71, 53 S.Ct. at page 281.

The Commissioner is powerless to waive the substantive requirements of the statute, United States v. Garbutt Oil Co., 1938, 302 U.S. 528, 533-535, 58 S.Ct. 320, 82 L.Ed. 405, but he may waive the formal requirements of the regulations. Tucker v. Alexander, 1927, 275 U.S. 228, 48 S.Ct. 45, 72 L.Ed. 253. Sound reason for holding that the Commissioner has power to waive such formalities, even though specified in regulations having "the force of law" and binding the Commissioner as well as the taxpayer, United States ex rel. Accardi v. Shaughnessy, 1954, 347 U.S. 260, 265, 74 S.Ct. 499; Chapman v. Sheridan-Wyoming Co., 1950, 338 U.S. 621, 629, 70 S.Ct. 392, 94 L.Ed. 393; Bridges v. Wixon, 1945, 326 U.S. 135, 153, 65 S. Ct. 1443, 89 L.Ed. 2103, is found in the fact that requirements as to form are designed for the benefit of "the officers charged with the collection of the revenue." Nichols v. United States, 1869, 7 Wall. 122, 126, 74 U.S. 122, 126, 19 L.Ed. 125.

Authorized tax officials have the power then to waive regulatory requirements as to procedure and form which are shown to be intended solely for the benefit of their convenience in the administration of the revenue laws. Cf. Angelus Milling Co. v. Comm'r, 1945, 325 U.S. 293, 296-298, 65 S.Ct. 1162, 89 L.Ed. 1619; United States v. Felt & Tarrant Mfg. Co., 1931, 283 U.S. 269, 272-273, 51 S.Ct. 376, 75 L.Ed. 1025; Tucker v. Alexander, supra, 275 U.S. at pages 230-232, 48 S.Ct. at pages 45-46; Kings County Savings Institution v. Blair, 1886, 116 U.S. 200, 205-206, 6 S.Ct. 353, 29 L.Ed. 657.

Proof of waiver must be such as to establish "an intentional relinquishment * * * of a known right", Johnson v. Zerbst, 1938, 304 U.S. 458, 464, 58 S.Ct. 1019, 1023, 82 L.Ed. 1461, so the fact of waiver is not to be lightly inferred. In the complaint at bar plaintiff alleges that: "At all times * * * from * * * July 5, 1947, to and including September 5, 1951, the availability of the unused excess profits tax credit carry-back to plaintiff was known to, considered and acted upon by defendant, and defendant through the...

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