Hastings & Co. v. Smith

• Decision Date: 23 June 1954
• Docket Number: Civ. No. 13215,14238.
• Citation: 122 F. Supp. 604
• Parties: HASTINGS & CO., Inc. v. SMITH. UNITED STATES v. HASTINGS & CO., Inc.
• Court: U.S. District Court — Eastern District of Pennsylvania

122 F. Supp. 604

HASTINGS & CO., Inc. v. SMITH.

UNITED STATES v. HASTINGS & CO., Inc.

Civ. Nos. 13215, 14238.

United States District Court, E. D. Pennsylvania.

June 23, 1954.

Leon I. Mesirov, Mesirov & Leonards, Philadelphia, Pa., for Hastings & Co., Inc.

H. Brian Holland, Asst. Atty. Gen., Andrew D. Sharpe, John E. Garvey, Ruppert Bingham, Sp. Assts. to the Atty. Gen., W. Wilson White, U. S. Atty., Philadelphia, Pa., for Francis R. Smith and United States of America.

CLARY, Judge.

Hastings & Company, Inc., hereinafter called "Hastings", in Civil Action No. 13215 is attempting to restrain the Collector of Internal Revenue from collecting interest on tax deficiencies (later extinguished by net operating loss carry-backs) for which the Government has made claim under an assessment which Hastings asserts was improperly made and illegal. Civil Action No. 14238 is an action by the Government to collect the same interest.

The facts fully set out in the Government's affidavit may be summarized very briefly as follows: For its fiscal year ending March 31, 1948, Hastings filed its tax return showing a small tax due, which it paid. For the year ending March 31, 1949, it filed a return showing approximately $13,000 income tax due and of this reported tax liability paid the first quarterly installment. At the end of the first quarter of the then ensuing tax year it filed an application for an extension of time in order to stay further payment under the corporate net loss carry-back provisions of the Internal Revenue Code, 26 U.S.C. § 122, and on June 15, 1950, timely filed its application for benefit under those provisions together with claims for refunds of the taxes it had paid in 1948 and 1949. Pursuant to the carry-back provisions, the Commissioner of Internal Revenue, hereinafter called "Commissioner", granted the claims for refunds, which were in due course paid to Hastings, and caused an audit of the returns to be made for the years 1948, 1949 and 1950. The audit completely revamped the tax liability of Hastings for the years 1948 and 1949. The Agent's revision showed a substantially increased tax liability for both the years 1948 and 1949 and an extremely large operating deficit for the year 1950, in fact, larger than was then claimed by Hastings. The carry-back loss of 1950 completely extinguished the tax liability for 1948 and extinguished nearly all of the tax liability for 1949. The Agent's figures, submitted to Hastings, for the years 1948 and 1950, were approved by it through its president in an Agreement dated May 7, 1951, and set out below.¹

Hastings also executed a "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax", Treasury Form 870, for the year 1949, agreeing to an unextinguished tax deficiency of $3,721.71. The waiver in usual form, included the words "together with interest thereon as provided by law". On or about June 26, 1951, the Commissioner adopted the report of the Internal Revenue Agent as his own determination, and on August 3, 1951, assessed against the plaintiff the deficiency in income tax for the year 1949 agreed to by Hastings together with interest thereon for the period June 15, 1949 to June 15, 1951, the thirtieth day after filing the waiver of restrictions against such assessment. The Commissioner also assessed against the taxpayer interest on the extinguished deficiency in tax, found in the 1948 return, for the period from June 15, 1948 to June 15, 1950, the date of Hastings application for benefits under the carry-back provisions; also interest on the extinguished tax liability, found for 1949, for the period from June 15, 1949 to June 15, 1950. On August 8, 1951, the Commissioner, by letter, notified Hastings of his action and of the facts of the assessment on the tax rolls of the Internal Revenue Bureau. Hastings paid the unextinguished tax deficiency found by the Commissioner for 1949 and made the subject of the Waiver Form 870 together with the interest thereon. It, however, disclaimed any liability for the further interest assessed by the Commissioner, and these two actions resulted. Each side has moved for summary judgment in its favor and since the facts are undisputed, the actions may be disposed of on the legal questions involved.

I am faced with directly contrary contentions. First, the Government insists that it is entitled to collect the interest on the agreed tax deficiencies even though the tax liability itself was extinguished by carry-backs of losses sustained in a succeeding year. This contention is, of course, vigorously opposed by Hastings. On the second point, I am confronted with the contention of Hastings that it is entitled to enjoin as uncollectible even if owed the collection of the interest on extinguished tax liability because it was not assessed strictly in accordance with the procedure prescribed by Section 272(a)(1) of the Internal Revenue Code²; further, that interest could not be assessed unless the deficiency itself was actually assessed. The answer of the Government to this contention is that it is not necessary to assess the extinguished tax liability and that interest thereon can be assessed and collected without following the procedural requirements of Section 272(a) (1).

On the first question, in support of their respective positions on the merits, both the Government and Hastings cite as authority the case of Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346. In that case there was involved a New Jersey corporation which had filed its return on December 15, 1941 for the tax period January 1, 1941 to September 30, 1941. On January 12, 1942, the Commissioner of Internal Revenue assessed the tax which respondent Seeley timely paid. Respondent was adjudged a bankrupt thereafter and a receiver was appointed on July 7, 1943. On August 2, 1943, the Commissioner, using the accelerated procedure applicable in bankruptcy cases, 26 U.S.C.A. § 274(a), assessed deficiencies in taxes with interest from the date of the tax to the assessment date. On March 3, 1944, respondent filed its return for the fiscal year from October 1, 1942 to September 30, 1943, showing a net operating loss for that year. This loss when carried back, in accordance with the carry-back provisions of the Internal Revenue Code, was sufficient to abate completely the tax liability for 1941. Respondent then filed claims for a refund of that part of the 1941 tax which had already been paid and for the abatement of the assessed deficiency and interest. The Commissioner abated the deficiency, but refused to refund all the tax which had been paid, retaining an amount equal to the interest which had been assessed on the deficiency. The taxpayer then sued the Collector for the interest. The District Court, 76 F.Supp. 937, dismissed the case, the Court of Appeals reversed, 3 Cir., 172 F.2d 77, and the Supreme Court, 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346, in its opinion, reversed and reinstated the judgment of the district court. Mr. Chief Justice Vinson, in his decision in this case, sets out in detail the statutory scheme which presented the problem and the intent of Congress under the statutory scheme that interest be paid.³

The Government in its brief and at argument strongly contends that this decision controls the instant case. The Government adopts the reasoning of the Manning case and argues that the equitable considerations of that case are present here and therefore should govern. However, Hastings, just as strongly argues that because it had made application for the benefits of the carry-back provisions prior to audit and determination of the tax deficiency that fact completely distinguishes the Manning case. Hastings points out that this aspect was expressly reserved from the decision of the Manning case and further argues that this reservation intended an opposite result, when and if a case involving that point should be presented to the Supreme Court. In support thereof Hastings cites two cases wherein refunds were granted taxpayers of interest paid on tax deficiencies. Henry River Mills Co. v. U. S., 96 F.Supp. 477, 119 Ct.Cl. 350; Premium Oil Refining Co. of Texas v. U. S., D.C., 107 F.Supp. 837, U. S. v. Premium Oil Refining Co., 5 Cir., 209 F.2d 692. I do not consider these cases as controlling the instant situation, Koppers Co. v. U. S., Ct.Cl., 117 F.Supp. 181; Kuder Citrus Pulp Co. v. U. S., D.C., 117 F.Supp. 395. Both cited cases involve adjustments under the excess profits tax provision of the Internal Revenue Code, 26 U.S.C.A. § 722. Such adjustments are made on the basis of conditions existing at the time of the payment of the tax and result in a determination of no tax having been due the United States at the time of the filing of the return. On the other hand, in the case of the application of the carry-back provisions, the tax extinguished by its application in nowise affects the tax liability of the taxpayer at the time the original tax was due and payable and it so remains until the occurrence of the subsequent events (an operating loss in a succeeding taxable year).

There are no legal or equitable principles here involved which would warrant a different result in this case based solely upon the fact that prior to the determination of a deficiency tax liability by the Commissioner, the taxpayer had made application for the benefits of the carry-back provisions and claims for refund. The taxes involved had been due the United States and the United States should have had the use of the tax money from the due date. It did not have it because of the faulty return of the taxpayer and I see no legal, equitable, or moral justification in relieving the taxpayer of liability for interest under such circumstances. It is far from certain that merely because the Supreme Court refused to pass upon a question of law not before it, the Court would arrive at any different conclusion under the present facts than...