Gooch Milling & Elevator Co. v. Commissioner of Int. Rev.

• Decision Date: 29 January 1943
• Docket Number: No. 12372.,12372.
• Citation: 133 F.2d 131
• Court: U.S. Court of Appeals — Eighth Circuit
• Parties: GOOCH MILLING & ELEVATOR CO. v. COMMISSIONER OF INTERNAL REVENUE.

133 F.2d 131 (1943)

GOOCH MILLING & ELEVATOR CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 12372.

Circuit Court of Appeals, Eighth Circuit.

January 29, 1943.

D. M. Kelleher, of Fort Dodge, Iowa (F. W. McReynolds, of Washington, D. C., on the brief), for petitioner.

Arthur A. Armstrong, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Newton K. Fox, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before GARDNER, WOODROUGH, and THOMAS, Circuit Judges.

GARDNER, Circuit Judge.

This case is before us on petition to review a decision of the Board of Tax Appeals determining a deficiency in income and excess profit taxes of petitioner for the fiscal year ended June 30, 1936, in the respective amounts of $4,731.69 and $1,931.73.

Petitioner is a Nebraska corporation operating flour mills. Following the death of its president on June 11, 1938, an audit of the books showed that all inventories as far back as 1928 had been overstated. The reduced inventory for the fiscal year 1936 was first computed by petitioner's accountants and later accepted by the Commissioner as the basis for determining tax deficiencies. Petitioner's income tax return for the fiscal year 1936 reported a net loss, but the Commissioner reduced the opening inventory of July 1, 1935, that being the beginning of petitioner's fiscal year, by $237,104.33, and the deficiency resulted primarily from that adjustment. Based on these corrected inventories the petitioner had overpaid its income taxes for all the fiscal years 1928 to 1934 inclusive in excess of $8,000.00. A revenue agent's report for the fiscal year 1935 showed an overassessment of $7,935.58. The Commissioner, based, on this report, determined a deficiency of $4,731.69 in income taxes, and a deficiency of $1,931.73 on account of excess profit taxes for the fiscal year ended June 30, 1936. The taxpayer then filed its petition with the United States Board of Tax Appeals for a redetermination of the deficiencies. In its original petition to the Board the taxpayer alleged that the Commissioner had determined its liability for income and excess profits for the year ended June 30, 1936, to be $14,951.85; that it had paid $8,288.43 of such tax, leaving a balance of $6,663.42; that there was in fact no deficiency, but that it was entitled to a refund of $8,288.43; that in determining the deficiency of $6,663.42 the Commissioner had erroneously reduced petitioner's inventories at June 30, 1935, in the aggregate amount of $237,104.33, which amount was added to petitioner's income for the year ended June 30, 1936, but was not deducted from its income in determining its tax liability for the year ended June 30, 1935. Thereafter the taxpayer filed a motion with the Board requesting leave to file an amended petition which contained allegations that the Commissioner used an inventory of $123,424.25 on July 1, 1935, in computing its taxable net income for the year ended June 30, 1936; that if the same inventory were used June 30, 1935, in computing the taxable net income for the year ended June 30, 1935, and no other adjustments were made there would be a net loss for the year and an overassessment of $11,038.73.

The amended petition sought alternative relief and asked to have the overassessment for the fiscal year 1935 applied as an offset or recoupment against the deficiencies found for the fiscal year 1936. The motion for leave to amend was taken under advisement pending consideration of the case on its merits. The Board entered findings of fact as follows:

"Petitioner is a Nebraska corporation with its principal office in Omaha. Its income tax returns were filed with the collector of internal revenue at Omaha, Nebraska.

"On its income tax return for the fiscal year 1936 petitioner reported a net loss of $5,533.47. As a result of various adjustments respondent determined that petitioner's net income for 1936 was $93,828.83, upon which he computed a tax liability of $14,951.85 of which $8,288.43 has been paid leaving the deficiencies hereinabove set forth.

"The principal adjustment that respondent made related to petitioner's inventories. Petitioner's balance sheet for the taxable year shows an opening inventory of $361,701.88, and a closing inventory of $345,017.43. The deficiency letter shows that respondent reduced petitioner's opening inventory at July 1, 1935 by the following adjustment, `inventory adjustment, June 30, 1935, $237,104.33.' The deficiency herein results primarily from this adjustment of petitioner's inventory.

"Following the death of petitioner's president on June 11, 1938, an audit of petitioner's books revealed that all inventories as far back as 1928 were erroneous. The reduced inventory was first computed by petitioner's accountants and was accepted by respondent as the basis for the present deficiencies.

"Based upon corrected inventories the petitioner had overpaid its income taxes for all the years 1928 to 1934, inclusive, in a net sum in excess of $8,000. The revenue agent's report for the fiscal year 1935 shows an overassessment for the fiscal year 1935 in the sum of $7,935.58, which amount is not subject to refund because barred by the statute of limitations." (Italics supplied.)

The Board held that it was unable "for jurisdictional reasons to grant the relief which petitioner desires" and sustained the Commissioner's determination of deficiencies.

Petitioner seeks reversal on the grounds that the Board erred: (1) in refusing to allow the taxpayer to amend its petition; (2) in holding that it was without jurisdiction to apply the doctrine of equitable recoupment; (3) in denying the relief of equitable recoupment. While the Government in these proceedings has and is asserting a deficiency in the payment of income and excess profit taxes for the fiscal year 1936, it appears without dispute that it has collected and still holds in its hands money paid by the taxpayer in excess of the amount justly due for income and excess profit taxes for the fiscal year 1935. This money, though collected by mistake, is wrongfully withheld by the Government. The overpayment was discovered in connection with an investigation of a claimed deficiency in income and excess profit taxes for the fiscal year 1936. The Commissioner determined upon a correction or adjustment of the inventory of June 30, 1935, and then used it as the beginning inventory of the 1936 tax year. This inventory was reduced by $237,104.33 so as to make it $123,424.25. The taxpayer paid some $8,288.43 of the deficiency determined for 1936 but there remained unpaid $6,663.42, the amount here involved. As to this claimed deficiency the taxpayer insists that it was entitled, under the doctrine of equitable recoupment, to offset the overpayment which it had made on the 1935 taxes. The Board in its findings states that "the deficiency herein resulted primarily from this adjustment of petitioner's inventory". In other words, without such readjustment there would be no deficiency. The adjustment of the beginning inventory for the 1936 taxable year automatically changed the 1935 closing inventory and established the error in the basis for computing the 1935 tax. Having collected and retained the taxes on the basis of the uncorrected inventory it is urged that the Government should not, in determining the question of the amount due for the 1936 taxes, insist on this adjustment and that to do so is violative of fundamental principles of abstract justice. Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421; Crossett Lumber Co. v. United States, 8 Cir., 87 F.2d 930, 109 A.L.R. 1348. In the first cited case as in the case at bar, the statute of limitations had run against a claim for overpayment of taxes and the question was whether such claim might not be offset against the Government's claim for taxes due. Addressing itself to the inquiry as to what remedy the taxpayer under such circumstances might have, the Court among other things said 295 U.S. 247, 55 S.Ct. 700, 79 L.Ed. 1421: "In a proceeding for the collection of estate tax, the United States through a palpable mistake took more than it was entitled to. Retention of the money was against morality and conscience. But claim for refund or credit was not presented or action instituted for restitution within the period fixed by the statute of limitations. If nothing further had occurred, congressional action would have been the sole avenue of redress.

"In July, 1925, the government brought a new proceeding arising out of the same transaction involved in the earlier proceeding. This time however, its claim was for income tax. The taxpayer opposed payment in full, by demanding recoupment of the amount mistakenly collected as estate tax and wrongfully retained. Had the government instituted an action at law, the defense would have been good. The United States, we have held, cannot, as against the claim of an innocent party, hold his money which has gone into its treasury by means of the fraud of their agent. United States v. State Nat. Bank, 96 U.S. 30, 24 L.Ed. 647. While here the money was taken through mistake without any element of fraud, the unjust detention is immoral and amounts in law to a fraud on the taxpayer's rights. What was said in the State Bank case applies with equal force to this situation. `An action will lie whenever the defendant has received money which is the property of the plaintiff, and which the defendant is obliged by natural justice and equity to refund. The form of the indebtedness or the mode in which it was incurred is immaterial.' * * * If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained, notwithstanding the statute of limitations had barred an independent suit against the government therefor. This is because...