Philadelphia & Reading Corp. v. US

• Decision Date: 31 May 1990
• Docket Number: Civ. A. No. 83-823-CMW.
• Citation: 738 F. Supp. 143
• Court: U.S. District Court — District of Delaware
• Parties: PHILADELPHIA & READING CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

738 F. Supp. 143

PHILADELPHIA & READING CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 83-823-CMW.

United States District Court, D. Delaware.

May 31, 1990.

Edward B. Maxwell, II of Young, Conaway, Stargatt & Taylor, Wilmington, Del. (Frederic L. Hahn, Glen H. Kanwit and David B. Goroff of Hopkins & Sutter, Chicago, Ill., of counsel), for plaintiff.

William C. Carpenter, Jr., U.S. Atty. for Del., and Kent A. Jordon, Asst. U.S. Atty. for Del. (James I.K. Knapp, Acting Asst. Atty. Gen., Edward J. Snyder and Donald J. Gavin, Attys. for Tax Div., Dept. of Justice, Washington, D.C., of counsel), for defendant.

OPINION

CALEB M. WRIGHT, Senior District Judge.

This tax refund suit now comes before this Court after a long and tedious history.¹ Plaintiff Philadelphia & Reading Corporation ("P & R") filed its complaint on November 22, 1983 to obtain a refund from the United States Internal Revenue Service (the "IRS") of approximately $10.1 million of assessed taxes plus interest and penalties.² After discovery had begun, the action was dismissed without prejudice by joint stipulation to provide an opportunity for the parties to resolve the interest and penalty issues.³ P & R and the IRS ultimately reached agreement on these matters, and then jointly moved to reinstate this case on March 7, 1989. The Court granted this motion the same day. P & R later filed an amended complaint on March 28, 1989, seeking a total of $10,529,835.00 in tax refunds exclusive of interest.⁴

Both parties moved for summary judgment in May, 1989. These motions have been fully briefed and argued, and accordingly, they are presently before the Court.

The Court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).

For the reasons which will be explained herein, the Court grants the United States' motion for summary judgment and denies Philadelphia & Reading's motion for summary judgment.

I. FACTS

Judge Marshall made findings of fact in connection with the original injunction case brought in the Northern District of Illinois in 1973. These findings of fact are presented in Judge Marshall's memorandum opinion of August 29, 1980. (Appendix A to Plaintiff's Opening Brief). The Seventh Circuit did not disturb any of Judge Marshall's findings of fact by its opinion in Philadelphia & Reading Corp. v. Beck, 676 F.2d 1159 (7th Cir.1982). The following constitutes the salient facts surrounding this litigation, and derives in a large part from Judge Marshall's memorandum opinion.

In the years 1970-72, the IRS conducted an extensive audit of Philadelphia Reading and its subsidiaries for the periods 1964-68. The principal matter in controversy was the so-called "Extoy loss" of $19 million claimed by a subsidiary of P & R in 1966. The IRS prohibited the gross amount of the loss in 1966, but allowed a part of the loss in 1967. Upon concluding its audit and review of all outstanding tax questions, the IRS declared that P & R owed certain tax deficiencies, but that P & R had also made overpayments.⁵ The final calculation showed that P & R had a net tax deficiency of $4,060,184. The following represents the IRS's actual analysis of P & R's tax liability for the relevant time periods at the termination of the audit:

                Tax Period       Deficiency     Overpayment
                12/31/64                        $  231,991
                12/31/65         $    19,485
                12/31/66         $ 9,336,231
                12/31/67                        $6,237,660
                4/18/68          $ 1,174,119
                                 ___________    __________
                Total:           $10,529,835    $6,469,651
                Net Deficiency:  $ 4,060,184
                

At this point, the Internal Revenue Code would have permitted the IRS to have served immediately upon P & R a ninety-day notice of deficiency pursuant to 26 U.S.C. § 6212. When that ninety-day period expired, the IRS then could have assessed the deficiencies and begun collection procedures with respect to the years 1965, 1966, and 1968. P & R could not have received either a refund of or credit for the overpayments until "the date on which the Secretary or his delegate first authorized the scheduling of an overassessment in respect of any Internal Revenue tax which would be considered as the date of allowance of refund or credit in respect of such tax." 26 U.S.C. § 6407. Furthermore, because both of the overpayments exceeded $100,000, the Secretary at that time could not sanction the scheduling of the overassessment until a report was submitted to the Joint Committee on Internal Revenue Taxation of the United States Congress and the committee had at least thirty days to express any objections. 26 U.S.C. § 6405(a). At any time before the actual scheduling of the overassessment, the IRS reserved the right to disapprove a refund or credit regardless of the Joint Committee's decision.

The practical situation that this complex statutory scheme created was that the IRS could have demanded payment of the deficiencies after the ninety-day period while P & R might have had to wait much longer for the credit of its overassessment. The IRS agent involved suggested that P & R execute a waiver form (Form 870) which would have barred the IRS from assessing and collecting any deficiencies until after P & R had received a notice of deficiency and P & R had the chance to challenge the deficiency in Tax Court. Refusal to execute the waiver would have resulted in the IRS's issuing a notice of deficiency. Philadelphia Reading would have then faced the alternatives of (1) immediately litigating the deficiency in the Tax Court, or (2) permitting the time for filing of a petition in Tax Court to lapse, so that the IRS could lawfully assess the tax deficiencies.

P & R decided not to execute a standard waiver form of restrictions on assessments and collection, Form 870. Instead, P & R executed an alternative waiver form, the qualified Form 870. The IRS specifically created this qualified form to address cases involving multi-year audits with deficiencies and overpayments. Basically, execution of this form allows a taxpayer to waive restrictions on assessment and collection for deficiency years subject to the condition precedent that the overpayment years have first been scheduled as overassessment pursuant to section 6407 of the Internal Revenue Code.⁶

P & R signed the qualified Form 870 on December 13, 1972, and it contained the following language:

This document shall be effective as a waiver of restrictions on assessment and collection with respect to the taxable years ending December 31, 1965 and December 31, 1966 and the taxable period ending April 18, 1968 on the date the schedule of overassessments with respect to the taxable years ending December 31, 1964 and December 31, 1967 is signed by an authorized representative of the Internal Revenue Service.⁷

The qualified Form 870 included a number of features which were designed to allow time for the Joint Committee's approval of the overassessment, and upon approval and credit of the overpayments, P & R would pay the net deficiency of about $4 million.⁸ The record indicates that at no point in this whole process did P & R ever intend to challenge the merits of the IRS' position in the Tax Court.⁹

After the Chicago office of the IRS received the qualified Form 870, a report on the audit was prepared for the Joint Committee. In January, 1973, P & R's files were forwarded to the National Office of the IRS for transmittal to the Joint Committee. As this process was occurring, IRS control documents were sent from the Chicago office of the IRS to the Kansas City Service Center with directions to process the case.¹⁰

In February of 1973, Ida Ballard, an employee at the Kansas City Service Center, began assessment procedures for the deficiencies for the years 1966 and 1968. Ms. Ballard was unaware of any instructions directing that assessments not be made.¹¹ P & R's internal tax counsel, Gerald Nordstrom, immediately contacted the Kansas City Service Center after receiving a bill for these deficiencies. Nordstrom explained the situation to Ballard, and soon thereafter the IRS abated these assessments. Nordstrom received notices of abatement from the IRS.

The communications problems between the Chicago office of the IRS and the Kansas City Service Center continued into May of 1973, when the case was still under review by the Joint Committee. P & R had earlier consented to an extension of the statute of limitations to June 30, 1973. The Chicago office, which had responsibility to monitor the statute of limitations, obtained a further extension from P & R to September 30, 1973. Unfortunately, the Chicago office did not relay this information to the Kansas City Service Center, leaving Ms. Ballard to believe that the statute of limitations on the assessments would run on June 30, 1973.¹² Accordingly, on June 22, 1973, Ballard initiated assessment for all of P & R's deficiency years (1965, 1966, and the tax period ending April 16, 1968).

P & R received the bills for these second assessments on June 25, 1973. Nordstrom again contacted Ballard and discussed the situation with her. He explained that the assessments were premature because the conditions of the qualified Form 870 had not yet been met, and in addition, P & R had consented to an extension of the statute of limitations to September 30, 1973.¹³ Unbeknownst to either at the time, the P & R overpayments cleared the Joint Committee on June 19, 1973. The Kansas City Service Center did not learn of the Joint Committee's action until June 26, 1973. Nordstrom received word of the Joint Committee's approval by letter from the Chicago District Director of the IRS dated June 26, 1973.

The IRS never abated the June 22, 1973 assessments even though they occurred before the Kansas City Service Center had scheduled the overpayments. The actual time sequence for scheduling of the overpayments was the following: (1) The schedules for the overassessment for the 1967 tax year ($6,237,660) were signed and credited to P &...