Adams v. United States

• Decision Date: 10 September 1974
• Docket Number: Civ. No. 3098.
• Parties: Robert B. ADAMS, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Montana

380 F. Supp. 1033

Robert B. ADAMS, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 3098.

United States District Court, D. Montana, Great Falls Division.

September 10, 1974.

Dorothy A. Hatfield, Great Falls, Mont., for plaintiff.

Roger Olsen, Tax Div., Dept. of Justice, Washington, D.C., for defendant.

OPINION AND ORDER

RUSSELL E. SMITH, Chief Judge.

The pretrial order in this case reads as follows:

"III

"CONTENTION OF THE PARTIES

"1. The plaintiff submits the only issue in this case is:

Whether portions of the salary paid to the plaintiff, in stock were unreasonable so that Adams & Gregoire, Inc., was not entitled to a business deduction for the full amount of the salaries claimed within the meaning of Section 162 of the Internal Revenue Code of 1954.

"2. The defendant submits the issue before this Court, in addition to the one immediately stated by the plaintiff is as follows:

Whether the payment by plaintiff of taxes due and owing from Adams & Gregoire, Inc., personally qualifies him as a proper party to maintain this refund suit of corporate taxes.

"IV

"LAW PROBLEMS

"The defendant respectfully submits that the plaintiff is not the proper party to maintain this tax refund suit within the meaning of Section 7422(a) of Title 26 U.S.C. and Section 1346(a)(1) of Title 28 U.S.C. and hence has no standing to be entitled to recover these corporate taxes."

Adams and Gregoire ("Gregoire" meaning Gregoire and his wife) incorporated Adams & Gregoire, a corporation, and were equal shareholders. In 1960 the corporation paid Adams and J. J. Gregoire equal salaries. Payment was made in cash and stock at par value as compensation for services rendered during the year 1960. Adams & Gregoire, Inc. deducted the full amount of the compensation so paid in computing its 1960 income tax return. Adams and Gregoire individually reported the stock at full par value in their individual tax returns and paid the tax on it. In March 1962 Adams and Gregoire entered into an agreement under which Adams transferred all of his capital stock to Gregoire in exchange for certain property of the corporation and agreed that each would be responsible for his share of the deficiencies assessed against the corporation as a result of an audit then in progress. The Internal Revenue Service (I.R.S.) assessed a deficiency against the corporation for the years 1958, 1959, and 1960, based upon a determination that the corporation could not deduct the value of the stock. At the same time I. R.S. determined that Plaintiff Adams had overstated his individual income for the years in question. Adams elected in writing to have the resulting individual tax credit applied to reduce the corporate tax. In March 1963 Gregoire and Adams determined the share of the corporate taxes for which each was responsible and Adams agreed that he would "hold and save Gregoires harmless from payment of Bob's (Adams') said share of said tax deficit and interest accrued thereon." Adams had not paid his share by June 25, 1963, and at that time the corporation was advised by I.R.S. that in the first part of July the tax would be assigned for collection. The tax had not been paid by October and at that time the I.R.S. was threatening to seize the assets of the corporation. In November 1963 Adams personally paid $5,246.00 to satisfy the deficiency assessed against Adams & Gregoire, Inc. At the time of the payment Adams was neither an officer, director, nor stockholder of Adams & Gregoire. The claim for refund was filed and this action is maintained by Adams to recover for himself and not for the corporation.

The jurisdiction of the court depends upon that portion of 28 U.S.C. § 1346(a)(1) reading:

(a) The district courts shall have original jurisdiction, concurrent with the Court of Claims, of:

(1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected . . . or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws. . . .

The United States, while conceding that Adams did personally pay the tax, contends that he was not a taxpayer within the meaning of 28 U.S.C. § 1346(a) (1). While it is not specifically so stated, the real thrust of the argument is that the only persons entitled to sue under that section are those against whom the tax is assessed.

The rule, however, is as stated in McMahon v. United States, 172 F.Supp. 490, 494 (D.R.I.1959):

. . . The word "taxpayer" should not be deemed to include only a person against whom a tax has been assessed; on the contrary, it should be construed so as to include any person who in fact paid the tax, if such payment was not voluntarily made. In United States v. Updike, 1930, 281 U. S. 489, at page 494, 50 S.Ct. 367, at page 369, 74 L.Ed. 984, the Supreme Court said:

"Indeed, when used to connote payment of a tax, it puts no undue strain upon the word `taxpayer' to bring within its meaning that person whose property, being impressed with a trust to that end, is subjected to the burden. Certainly it would be hard to

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