Commissioner of Internal Rev. v. Liberty Bank & Trust Co.

• Citation: 59 F.2d 320
• Decision Date: 12 May 1932
• Docket Number: No. 5780,5867.,5780
• Parties: COMMISSIONER OF INTERNAL REVENUE v. LIBERTY BANK & TRUST CO. LIBERTY BANK & TRUST CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

59 F.2d 320 (1932)

COMMISSIONER OF INTERNAL REVENUE v. LIBERTY BANK & TRUST CO.

LIBERTY BANK & TRUST CO. v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 5780, 5867.

Circuit Court of Appeals, Sixth Circuit.

May 12, 1932.

G. A. Youngquist, Ass't Atty. Gen. (Sewall Key, Hayner N. Larson, C. M. Charest, and Prew Savoy, all of Washington, D. C.), for Commissioner.

George M. Morris, of Washington, D. C. (KixMiller, Baar & Morris, of Washington, D. C., on the brief), for Liberty Bank.

W. A. Sutherland, of Atlanta, Ga., amicus curic.

Before MOORMAN, HICKS and HICKENLOOPER, Circuit Judges.

MOORMAN, Circuit Judge.

Petitions to review decisions of the Board of Tax Appeals by the taxpayer, the Liberty Bank & Trust Company, in No. 5867, and by the Commissioner in No. 5780.

The petitioner in No. 5867 contends that debts owing to it by the Kentucky Wagon Manufacturing Company and the Wolke Lead Batteries Company were recoverable only in part on December 31, 1921, and that deductions should have been allowed therefor from gross income for the year 1921 in the sum of $175,000. The Commissioner disallowed the deductions, and the Board of Tax Appeals sustained his ruling upon the ground that no part of the indebtedness was charged off by the taxpayer during the taxable year. The ruling of the Board was based on section 234(a) (5) of the Revenue Act of 1921 (42 Stat. 254), which provides that the taxpayer shall be allowed as deductions "debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part."¹

This statute deals with two classes of debts: Those that have become wholly worthless, and those recoverable only in part. It makes provision for the deduction of each from gross income, providing as to the first that, when "ascertained to be worthless and charged off," a deduction therefor "shall be allowed"; and as to the second, that, when "satisfied that a debt is recoverable only in part the Commissioner may allow such debt to be charged off in part." The allowance as to each class depends on the performance of a precedent act or acts. Those in the first are the ascertainment of worthlessness and the charging off, which must be done by the taxpayer, subject, of course, to the review of the Commissioner as to the reasonableness of the ascertainment. Sherman & Bryan v. Blair, Comm. (C. C. A.) 35 F.(2d) 713; Deeds v. Commissioner, 47 F.(2d) 695 (6 C. C. A.). In the other class the precedent act must be performed by the Commissioner. He must be "satisfied that a debt is recoverable only in part," and, until he is, there can be no charge off, and then only with his permission. The taxpayer being under no duty to make the charge off in this class until the Commissioner permits it to be done, it is sufficient to give him a right to have the Commissioner's ruling reviewed that his claim to a charge off was made and rejected. In this case claims were presented and disallowed. Whether the disallowances by the Commissioner were because of the failure of the taxpayer to charge off the debts in part or were made in the exercise of the discretion which the Commissioner has does not appear. See Stranahan v. Commissioner, 42 F. (2d) 729 (6 C. C. A.) as to the extent of discretion. The Board of Tax Appeals, as we have said, based its decision upon the failure of the taxpayer to charge off the debts in part. We think it should have considered and determined whether the Commissioner abused his discretion in not allowing the charge offs to be made.

The initial question in case No. 5780 is whether this court has jurisdiction and power to hear and determine the questions presented by the petition of the Commissioner. It is said that there is no such power because there is no "case or controversy" within the meaning of section 2 of article 3 of the Constitution. The theory of that view is that the Board of Tax Appeals is an executive or administrative tribunal of the government superior in authority to the Commissioner of Internal Revenue, and that when the Board acted favorably to the taxpayer on its appeal from the deficiency assessment there was an accord between the taxpayer and the highest administrative body, and no controversy remained. It is to be noted in connection with this contention that there are thirty-five reported cases, among them Commissioner v. Bingham, 35 F.(2d) 503 (6 C. C. A.), and Commissioner v. Leasing & Building Co., 46 F.(2d) 2 (6 C. C. A.), in which petitions in behalf of the Commissioner to review decisions of the Board of Tax Appeals have been accepted without question.² Among these cases are decisions from each of the Circuit Courts of Appeals, some of which were reviewed by the Supreme Court, and in none of them was the power of the Circuit Court of Appeals to review a decision of the Board of Tax Appeals upon petition of the Commissioner ever questioned or thought to be in doubt.

Whatever may have been assumed heretofore, it is, however, true that, unless a decision against the government by the Board of Tax Appeals presents a "case or controversy" within the judiciary article, there is no power of review in a constitutional court. We inquire therefore, into the statutory functions of the Board, which, as pointed out in Old Colony Trust Co. v. Commissioner, 279 U. S. 716, 49 S. Ct. 499, 502, 73 L. Ed. 918, was established by the Revenue Act of 1924 (43 Stat. 253). Under that Act it became the duty of the Board to hear and decide whether deficiencies reported by the Commissioner were rightly determined. It was provided in the act that, if the Board determined there was a deficiency, the amount so determined should be assessed and paid upon notice and demand from the collector, and no part of the deficiency assessed by the Commissioner but disallowed as such by the Board could be assessed. The Commissioner, however, was given the power notwithstanding the decision of the Board, to bring a suit in a proper court against the taxpayer to collect as a deficiency the difference between his assessment and that allowed by the Board. See United States v. Cleveland Co., 42 F.(2d) 413 (6 C. C. A.). The Revenue Act of 1926 (44 Stat. 9) enlarged the original jurisdiction of the Board to consider deficiencies beyond those shown in the Commissioner's notice if the Commissioner made claim therefor at or before the hearing. It further provided for a direct judicial review of the Board's decision by the filing by either the Commissioner or the taxpayer of a petition for review. Thus there is full statutory authority for the review here under consideration, and the sole question is whether it was within the power of Congress to confer such authority upon the courts.

The question would seem to depend first upon who is the United States' "authorized official" or "its representative" for the purpose of asserting its right to the payment of the tax. If the Board is such representative, there is, of course, no controversy between the government and taxpayer after the Board has made a determination in favor of the taxpayer. But the sole function of the Board "consists in reviewing, on appeal, determinations of the Commissioner under the revenue laws." It is not concerned with the collection of taxes and "is not a part of the Bureau of Internal Revenue," but is "an independent agency * * * `in the executive branch of the government.'" Williamsport Wire Rope Co. v. United States, 277 U. S. 551, 564, 48 S. Ct. 587, 591, 72 L. Ed. 985. While it is not a court but is an executive or administrative board, it nevertheless exercises "appellate powers which are judicial in character." Goldsmith v. United States Board of Tax Appeals, 270 U. S. 117, 46 S. Ct. 215, 70 L. Ed. 494; Blair v. Oesterlein Mach. Co., 275 U. S. 220, 227, 48 S. Ct. 87, 89, 72 L. Ed. 249. The Commissioner, on the other hand, has "general superintendence of the assessment and collection of all duties and taxes imposed by any law providing internal revenue." 26 USCA, § 2. He is designated by Congress to represent the government before the Board and is a party to the proceeding before it. Thus, when a taxpayer seeks a review before the Board of a deficiency assessment, the controversy is between the taxpayer and the government as represented by the Commissioner, and the Commissioner by statutory designation thereafter continues as the government's representative to prosecute its claims from adverse decisions of the Board. 26 USCA § 1224(a).

It makes no difference that the Board is an executive or administrative tribunal. There are certain matters involving public rights which "admit of legislative or executive determination, and yet from their nature are susceptible of determination by courts." Den ex dem. Murray's Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284, 15 L. Ed. 372; Fong Yue Ting v. United States, 149 U. S. 698, 714, 13 S. Ct. 1016, 37 L. Ed. 905; Ex Parte Bakelite Corporation, 279 U. S. 438, 451, 49 S. Ct. 411, 73 L. Ed. 789. The mode of determining matters of this class is completely within congressional control. Congress may reserve the power to itself, may delegate it to executive officials, or may commit it to judicial tribunals. Ex Parte Bakelite Corporation, supra. The latter course can only be adopted as to constitutional courts in matters which take such form that the judicial power is capable of acting upon them. That power is capable of acting when there are parties whose adverse contentions are submitted to the court in the form prescribed by law, and where the determination involves neither advisory nor executive action. In re Pacific Ry. Commission (C. C.) 32 F. 241, 255; Osborn v. Bank of United States, 9 Wheat. 738, 6 L. Ed. 204. In passing upon matters such as are involved in this case, the Board exercises...