Woodworth v. Kales

• Citation: 26 F.2d 178
• Decision Date: 10 May 1928
• Docket Number: No. 5052.,5052.
• Parties: WOODWORTH, Collector of Internal Revenue, v. KALES.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

26 F.2d 178 (1928)

WOODWORTH, Collector of Internal Revenue, v. KALES.

No. 5052.

Circuit Court of Appeals, Sixth Circuit.

May 10, 1928.

John A. Baxter, Asst. U. S. Atty., of Detroit, Mich., C. M. Charest, General Counsel, Bureau of Internal Revenue, of Washington, D. C., and Earl J. Davis, Herbert W. Clark, W. Hall Trigg, and A. W. Gregg, Sp. Asst. Attys. Gen., for plaintiff in error.

Beaumont, Smith & Harris, of Detroit, Mich., and Charles E. Hughes, of New York City, for defendant in error.

John W. Davis, of New York City, Sidney T. Miller, of Detroit, Mich., Joseph E. Davies, of Washington, D. C., Arthur J. Lacy and Clarence E. Wilcox, both of Detroit, Mich., Herbert Pope, of Chicago, Ill., and Luman W. Goodenough, of Detroit, Mich., amici curiæ.

Before DENISON, MOORMAN, and KNAPPEN, Circuit Judges.

DENISON, Circuit Judge.

The court below directed a verdict in favor of the plaintiff, Mrs. Kales, in her suit against the collector to recover that part of her income tax for 1919 which she had paid under protest. The critical question — one of fact — was as to the fair value on March 1, 1913, of certain Ford Motor Company stock which Mrs. Kales had then owned, and which she sold in 1919.¹ The trial court thought each one of three grounds to be sufficient to support the directed verdict. They were: (1) That, upon a fixing of this value by the commissioner and a sale by Mrs. Kales in reliance on that valuation, an estoppel arose in her favor as against the later attempted revaluation; (2) that the assessment of the tax which the commissioner made upon the return of 1919, and which was based upon this 1913 valuation, and the later approvals of that assessment by the commissioner (and his successors), established that valuation beyond the power of that officer — except for a good cause non-existent here — to reopen and reconsider, and this by analogy to a thing adjudicated; and (3) that the deficiency assessment of 1925 which had required the payment now in dispute was void for lack of jurisdictional basis. While we rest our affirmance upon the second of these grounds, the three are not without effect upon each other; and they require a fuller statement of facts — including not only those stated in the declaration, but some things assumed as true by all counsel in the case. Blodgett v. Holden, 275 U. S. 142, 146, 48 S. Ct. 105, 72 L. Ed. ___.

In 1919 Mrs. Kales owned stock in the Ford Motor Company, and was asked to sell it for $12,500 per share. She would have to pay as an income tax about two-thirds of whatever taxable profit she realized on the sale; and the amount of such profit would depend upon the fair value as of March 1, 1913. Hence whether the offer should be accepted would depend largely upon that fair value. There had been in 1913 no market price; and so it was evident that the antedated valuation as of this earlier period would depend upon what should then have been considered the reasonable prospect of future earnings, and that six years later the best that could be done would be to make an honest and intelligent estimate of the 1913 value. In this situation, the buyers applied to Commissioner of Internal Revenue Roper, and requested official inquiry and action, fixing the 1913 valuation for the guidance of those who were asked to sell. Accordingly, and (it may be assumed) after such inquiry by the experts of the Department as he thought proper, he fixed upon a figure of about $9,500 per share as the fair 1913 value. Mrs. Kales was informed of this action, and, relying thereon, sold her stock, and included in her 1919 return a profit of about $3,000 per share. She filed this return on March 25, 1920, and paid one-quarter of the tax shown by the whole return, which included also other items. Later that year the return was examined and the tax assessed by (acting) Commissioner Meyers upon the $3,000 basis, a notice of such assessment was by him given to her, and she paid the remaining installments. In January, 1921, the return was further examined, and a deficiency assessment was levied by Commissioner Williams, based upon some other items of income. The assessment which included the Ford stock sale was not disturbed, but the correctness of the return in this respect was approved and confirmed by this commissioner. Later in 1921, the return was again examined by the agents of the department. A report was made approving the stock valuation which had been fixed by Commissioner Roper, and the correctness of the return and the resulting income in this respect was again approved and confirmed by Commissioner Williams. Once more, in 1922, the return was further examined by Commissioner Blair, and a deficiency assessment levied as to other items, but the correctness of the return as to this item was again confirmed. Mrs. Kales' claim of abatement as to this second deficiency assessment was denied and, after payment, a refund was refused, but in both cases Commissioner Blair confirmed and approved the return based upon the Ford stock sale and its 1913 valuation.

On March 13, 1925, Commissioner Blair (by deputy) levied a further deficiency assessment upon the income from this Ford stock sale, and upon the theory that the fair value of the stock in March, 1913, had been about $2,500 per share — thus indicating an additional profit of about $7,000 per share.² This 1925 assessment was made without notice or hearing, but in claimed pursuance of the statute which permits so-called jeopardy assessments (section 274d, Revenue Act of 1924; Comp St. § 63361/6zz(1) (d), but there was no theory or claim of jeopardy, or any jeopardy in fact, except that the five-year statute of limitations was about to expire. It also appears that as to the first valuation by Commissioner Roper, as well as to the subsequent confirmations thereof, there is no claim of fraud or misleading or of new evidence, or of mistake of law or of specific fact, but that the new estimate of value is only a variant inference from the same evidential facts upon which the earlier estimate was founded — the language of counsel for the Government stating the only claim of justification for the reassessment to be that it was "a new and better view of the same facts" based upon a "matured and better judgment."

This 1925 deficiency assessment was paid, and this suit was brought.

We pass without consideration the theory of estoppel, intimating no opinion. The full exercise of the governmental power of taxation doubtless requires that the authority of the taxing officer to do tax limiting acts should itself be limited; but, however that rule of limitation should be here applied, the same considerations which are urged to make out estoppel have also much force in deciding as to the finality of an assessment once made.

Where the Revenue Act itself determines the essential elements of the tax liability and leaves to the officers only the duties of computing and collecting, there would be no finality, if they leave these ministerial acts half done or wrongly done; but, where the ascertaining of an essential fact is left to their discretionary judgment, where they exercise that discretion in good faith, and where thereupon the tax is computed and paid, it seemingly must be the theory of normal operation that the matter is closed. If not closed, it must be for some reason which makes the case abnormal. When assessing officers fix the value of real estate as a basis for ad valorem taxation, and the tax is paid, may they, after one or two years, reassess, and then again and again? When they ascertain and fix the value of property as a basis of an inheritance tax, and the tax is computed and the estate closed, may they much later reopen and reassess? They may; but on one condition only — that the statutes give them authority therefor; and it is obvious, we think, that the authority must be by express words or by clear implication, in order to confer a power so extraordinary and so pregnant with danger of official oppression.

Coming to the present case, we must observe that the question of authority is much narrowed. When this return was filed, it was the duty of the commissioner to "examine * * * as soon as practicable." Section 250b of the Revenue Act of 1918, 40 Stat. p. 1082 (Comp. St. § 6336 1/8tt(b). The whole section seems to contemplate an assessment by the commissioner, and subdivision (d) expressly provides that the "amount of tax due under any return shall be determined and assessed by the commissioner." If he had done nothing except to receive without objection the payment tendered, we would have a broader question not now involved. According to the admitted facts, he examined the return and assessed the tax based upon the return; and this assessment necessarily approved and confirmed the $9,500 valuation. It may be of importance that this assessment was not merely pro forma, by a hasty acceptance of the return. It may, we think, rightly be assumed that the commissioner then had in his files the report of his experts upon this exact question, and that this gave him knowledge of every essential foundation fact which has even yet been thought to be important. It is not to be supposed that any return — much less this one — would be approved and adopted as the basis of assessment without as thorough an examination as the commissioner thought proper. No reason can be suggested why, in this case and after the filing of the return, he should do the valuation work over again, or why he might not adopt as and for his examination and appraisal subsequent to the return those which he had made in anticipation of it. The legal effect of Commissioner Meyers' action is at least as important as if, after return filed, he had made this study and appraisal, and thereupon "determined and assessed the tax."

The question of the authority to make the 1925 assessment may be, for the purposes of this case, still further narrowed by the repeated approvals and...