Bartlett v. Delaney

• Decision Date: 23 March 1949
• Docket Number: No. 4334.,4334.
• Citation: 173 F.2d 535
• Parties: BARTLETT et al. v. DELANEY et al.
• Court: U.S. Court of Appeals — First Circuit

173 F.2d 535 (1949)

BARTLETT et al. v. DELANEY et al.

No. 4334.

United States Court of Appeals First Circuit.

March 23, 1949.

Edward C. Thayer, of Boston, Mass. (E. Barton Chapin, of Boston, Mass., on the brief), for appellants.

Sumner M. Redstone, Sp. Asst. to the Atty. Gen. (Theron L. Caudle, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson and Maurice P. Wolk, Sp. Assts. to the Atty. Gen., and William T. McCarthy, U. S. Atty., and W. Arthur Garrity, Jr., Asst U. S. Atty., both of Boston, Mass., on the brief), for appellees.

Before MAGRUDER, Chief Judge, WOODBURY, Circuit judge, and PETERS, District Judge.

MAGRUDER, Chief Judge.

These three cases, which were tried together below and consolidated in this court, raise the same question of law. They would be decided in favor of the taxpayer-appellants if we adhered to our decision in Leach v. Commissioner, 1 Cir., 1931, 50 F. 2d 371. But the government maintains that the authority of this case has been undermined by subsequent decisions, particularly by Security Flour Mills Co. v. Commissioner, 1944, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725.

The taxpayers have been on a cash receipts and disbursements basis, with the calendar year as their accounting period. In 1937 they received certain shares of preferred stock in Bird & Son, Inc., a Massachusetts corporation, pursuant to a recapitalization of the company. In 1942 the Commissioner asserted that these shares constituted taxable dividends to the recipients, and determined deficiencies in their 1937 income taxes accordingly. These deficiency taxes, with interest thereon, were assessed and collected in 1942, the taxpayers having filed their waivers pursuant to § 272(d) of the Internal Revenue Code, 26 U.S.C.A. § 272(d). In their respective income tax returns for 1942, the taxpayers took deductions from gross income for interest paid by them to the government in that year on the aforesaid 1937 deficiencies.

However, litigation instituted by another stockholder of Bird & Son, Inc., similarly situated, resulted in a decision by this court, rendered June 24, 1942, holding that the said issue of preferred stock by Bird & Son, Inc., in 1937 did not constitute a taxable dividend. Bass v. Commissioner, 1 Cir., 129 F.2d 300.

On the basis of the decision in the Bass case, the taxpayers, later in 1942, filed their claims for refund of the amounts of the aforesaid deficiency taxes, and interest thereon, previously paid by them. The Treasury in 1943 refunded the amounts of deficiency tax and interest thereon claimed, together with interest on the amounts refunded. In their income tax returns for the calendar year 1943, the taxpayers reported as interest income not only the item of interest which the government had paid them on the amounts refunded, but also the item of interest which they had paid on the asserted deficiency tax in 1942, which interest had been refunded to them in 1943 along with the principal amount of the deficiency tax.

Up to this point the taxpayers, in the government's view, properly reported the transactions in their returns for 1942 and 1943. That is, (1) the taxpayers having actually paid in 1942 the item of interest on the asserted deficiency tax under compulsion of the Commissioner's deficiency assessment, such item of interest was a proper and unexpungeable deduction from gross income for the year 1942, even though the taxpayers were then contesting the assessments and had filed refund claims in that year to recover the deficiency payments, Chestnut Securities Co. v. United States, 1945, 62 F.Supp. 574, 104 Ct.Cl. 489; and (2) when such interest was refunded in 1943, it represented gross income to the taxpayers in that year, Rothensies v. Electric Storage Battery Co., 1946, 329 U.S. 296, 298, 67 S.Ct. 271, 91 L.Ed. 296; Freihofer Baking Co. v. Commissioner, 3 Cir., 1945, 151 F.2d 383. It is the contention of the government that the foregoing is a logical consequence of the statutory scheme of determining income tax liability on an annual accounting basis, rather than in the light of the ultimate net result of a series of transactions or events over a period of years, growing out of or in some way related to an initial transaction in the taxable year.

Meanwhile, on June 9, 1943, Congress had enacted the Current Tax Payment Act of 1943, 57 Stat. 126, for the purpose of advancing income tax payments so that taxpayers would be placed, as nearly as possible, upon a current basis. Section 6 of that Act, 26 U.S.C.A. § 1622 note, provided that in case the tax for the year 1942, determined without regard to this section, was not greater than the tax for the year 1943 (similarly determined), which was so with these taxpayers, the tax liability for 1942 should be discharged as of September 1, 1943, with amounts theretofore paid on the 1942 tax to be credited as payment for the tax for the year 1943, and the tax for 1943 to be increased by 25 per cent of the computed tax for 1942.

After filing their returns for the year 1943, it occurred to the taxpayers, or to their counsel, that in view of the provisions of the Current Tax Payment Act it would be advantageous to minimize their taxable income for 1943 by eliminating from gross income the interest refund received by them in that year, and at the same time correspondingly to increase their computed taxable income for 1942 — the year of forgiveness — by eliminating the deduction theretofore taken for interest paid in that year on the asserted tax deficiency.

Accordingly the taxpayers, in September, 1944, filed their claims for refund of the respective amounts of overpayment computed by them to have resulted from the inclusion in gross income, in their returns for 1943, of the interest payments which had been refunded to them in 1943. In making such computation, each of the taxpayers adjusted the 1942 component of his 1943 income tax liability by eliminating the amount which had been deducted in his original return for 1942 for interest paid in that year. The Commissioner having failed to forward the statutory notice of disallowance of the claims within six months, § 3772(a) (2), Int.Rev.Code, 26 U. S.C.A. § 3772(a) (2), the taxpayers commenced the present suits for refund. The District Court entered judgments for the defendants, and the taxpayers appealed.

In Leach v. Commissioner, 1 Cir., 1931, 50 F.2d 371, a cash-basis taxpayer had taken a deduction in her income tax return for the year 1922 on account of payment in that year of a deficiency in estate taxes, and interest thereon. In 1928 the greater part of such deficiency tax, with the proportionate part of the interest that had been paid thereon, was refunded, together with interest on the amount of refund. Thereafter the Commissioner determined a deficiency in the taxpayer's income tax for 1922, asserting that the deduction which the taxpayer had taken for that year should be reduced by the amount of the 1928 refund. The Board of Tax Appeals upheld the Commissioner, 16 B.T.A. 781, and upon petition for review this court affirmed the decision of the Board.

We think Leach v. Commissioner, supra, supports the tax accounting theory urged by the taxpayers in the case at bar, and we shall not undertake to distinguish the Leach case on the ground that there it was the Commissioner, not the taxpayer, who was seeking to relate back a tax refund for the purpose of expunging a deduction which the taxpayer had taken in an earlier year. Cf. Ross v. Commissioner, 1 Cir., 1948, 169 F.2d 483, 492.

For a time, the Board of Tax Appeals expressed its adherence to the rule of Leach v. Commissioner, supra. The cases were elaborately reviewed in The E. B. Elliott Co. v. Commissioner, 1941, 45 B.T.A. 82, at page 91, and the majority opinion concluded: "We think it is clear that, despite some apparent departures from it, the rule to be drawn from our decisions is that all refunds of paid taxes are to be adjusted to the years in which the taxes were paid and deductions claimed, as the best method to reflect income; the only proper departure from the rule of adjustment of the refund in the years of payment is where the statute of limitations or some other consideration has made it impossible. In such cases it is obviously inequitable to allow the taxpayer the unjust enrichment which would result and the refund must then be treated as income in the year of receipt."

To the same effect was the decision in The Louisa Co. v. Commissioner, 1941, 45 B.T.A. 1056, which involved a taxpayer who reported on a cash basis. The rule applied in the Leach case was also accepted by the Court of Claims in Bohemian Breweries, Inc. v. United States, 1939, 27 F. Supp. 588, 89 Ct.Cl. 57. See also Hoboken Land & Improvement Co. v. Commissioner, 3 Cir., 1943, 138 F.2d 104.

This rule, that a tax refund received in a later year must be related back to eliminate a corresponding deduction which had been taken in an earlier year whenever the tax liability for the earlier year is still open for adjustment, was developed and applied by the lower courts without benefit of the blessing of an authoritative decision of the Supreme Court on the point. We must now examine Dixie Pine Products Co. v. Commissioner, 1944, 320 U.S. 516, 64 S. Ct. 364, 88 L.Ed. 420, and Security Flour Mills Co. v. Commissioner, 1944, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725.

In the Dixie Pine case, a taxpayer on the accrual basis accrued certain state excise taxes assessed against it in 1937, and took a deduction for them in that year, although it did not pay such taxes and was in fact then contesting its liability therefor in the state courts. In 1938 it was finally adjudged by a decree in the state court that the excise taxes assessed against it were not legally due. In its federal income tax return for 1938, the taxpayer by way of compensating entry included in gross income the amount of such excise taxes for which deduction had been taken in the earlier year....