Commissioner of Internal Revenue v. Van Bergh, 25

• Decision Date: 06 January 1954
• Docket Number: Docket 22712.,No. 25,25
• Citation: 209 F.2d 23
• Parties: COMMISSIONER OF INTERNAL REVENUE v. VAN BERGH.
• Court: U.S. Court of Appeals — Second Circuit

209 F.2d 23 (1954)

COMMISSIONER OF INTERNAL REVENUE v. VAN BERGH.

No. 25, Docket 22712.

United States Court of Appeals Second Circuit.

Argued December 9, 1953.

Decided January 6, 1954.

Fred E. Youngman, Washington, D. C., H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott, Sp. Assts. to the Atty. Gen., for petitioner.

David Alter, Simons, Schur & Straus, New York City, Max Perl, New York City, of counsel, for respondent.

Before CHASE, Chief Judge, and L. HAND and MEDINA, Circuit Judges.

L. HAND, Circuit Judge.

This case arises upon a petition of the Commissioner of Internal Revenue to review an order of the Tax Court, deciding that the taxpayer, Van Bergh, had overpaid $1,369.32 upon his income tax for the year, 1945. The decision turns upon whether the overpayment by Van Bergh, who had a "net operating loss" in his income for 1946 which he was entitled to "carry back" to his income tax for 1945, should be computed without deduction; or whether the Commissioner might reassess his tax for 1945, and use as a set-off against any overpayment a deficiency that had escaped assessment in 1945. Two points are involved: (1) whether the Commissioner had power to reopen the assessment for 1945 at all; and (2) whether on the merits Van Bergh's tax, as assessed in 1945, was underpaid. As the Tax Court held that the statute of limitations barred any reassessment for 1945 even as a set-off, it did not decide the second point; nor shall we do so, although we differ on the first point. Nothing that we say is to be taken as indicating any opinion as to whether Van Bergh underpaid his tax for 1945.

The facts were as follows. Van Bergh filed his return for 1945 on or before January 15, 1946, reporting a tax of nearly $11,000 which he paid. More than three years later — that is, on February 1, 1951 — the Commissioner mailed a notice of deficiency of a little more than $10,000 for 1945; and, although at one time he asserted that this notice, being less than five years after March 15, 1946, was in season, on this appeal he appears to have abandoned that position, the Tax Court having ruled that the three years limitation barred the assessment. Before March 15, 1950: i. e. within three years after the due date of his return for 1946, Van Bergh filed a claim for refund of part of his payment for 1945, basing it upon § 122(b) (1) of the Internal Revenue Act¹ which authorizes a taxpayer "for each of the two preceding taxable years" to "carry-back" any "net operating loss". In 1946 he did in fact have a "net operating loss" of $3,294.23, which, if used as a loss in 1945, would, as the Commissioner concedes, have reduced his tax for that year by $1,369.32, the amount now claimed as a refund. In answer the Commissioner asserts that, although the three year statute may have barred the assessment of February 1, 1951, he is nevertheless free to treat as a set-off against the refund any underpayment of the tax due in 1945. He argues that, under the doctrine first laid down in Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293, the right to a refund depends upon the principles determining an action for money had and received, in which the question always is whether the defendant is entitled in good conscience to keep the money.² This is admittedly the doctrine, when a taxpayer sues under the Tucker Act to recover a tax wrongfully collected,³ and the Commissioner argues that it must apply to an order of the Tax Court; because, since that, as res judicata, would "probably" bar the defence, it would in effect obliterate the action. Van Bergh answers that the doctrine is to be confined to occasions when the refund arises out of the payment of a tax arising and assessable in the same years as the putative unassessed deficiency that is to be the set-off; and that here, although it is true that the money to be refunded was paid in 1945, the refund itself arose out of a "net operating loss" that had not existed in 1945.

We do not feel the force of this distinction. The purpose of the "carry-back," or "carry-over," privilege is to allow a taxpayer some equivalent for the fact that he has not been able to reduce his tax by a loss, because he has had no income in that year against which to credit it; and the only practicable equivalent is by a fiction to treat the loss as a deduction from his income in an earlier, or a later, year. There are two possible ways in which this might be done: (1) to allow the loss as a deduction from the net income as returned in the earlier, or the later, year; (2) to recompute the whole income for the earlier, or later, year, using the loss as a credit. While there is nothing in the statute that expressly adopts the second method, we can see no reason to suppose that, when Congress decided to allow the loss to be treated as though it had in fact occurred in the earlier, or later, year, it did not mean it to be so treated for all purposes. If this is not true, it will result that the taxpayer will be put in a better position, when the loss occurs in a later, or an earlier, year, than when it occurs in the year when it is allowed as a deduction. That obviously cannot have been the intention.

Van Bergh cites two decisions of the Tax Court⁴ which, he says, have held the contrary; but he is mistaken. In each the court was considering § 3780 of the Internal Revenue Act,⁵ subdivision (a) of which allows a taxpayer to file an "application for a tentative carry-back adjustment"; and subdivision (b) declares that on receiving it "the Commissioner shall make * * * a limited examination of the application * * * and shall determine the amount of increase or decrease in each tax attributable to such carry-back * * *. Each such increase shall be deemed determined as a deficiency and shall be assessed". It will be observed that the Commissioner's action not only is described as a "tentative carry-back adjustment", but that he need not make his "limited examination" at all except "to the extent he deems practicable" within the ninety days. Subdivision (c)...