Bear Valley Mutual Water Company v. Riddell, 72-1800.

• Decision Date: 20 March 1974
• Docket Number: No. 72-1800.,72-1800.
• Citation: 493 F.2d 948
• Parties: BEAR VALLEY MUTUAL WATER COMPANY, Plaintiff-Appellee, v. R. A. RIDDELL, District Director of Internal Revenue, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

493 F.2d 948 (1974)

BEAR VALLEY MUTUAL WATER COMPANY, Plaintiff-Appellee, v. R. A. RIDDELL, District Director of Internal Revenue, Defendant-Appellant.

No. 72-1800.

United States Court of Appeals, Ninth Circuit.

March 20, 1974.

Ann E. Belanger, Atty. (argued), Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, U. S. Dept. of Justice, Washington, D. C., for defendant-appellant.

Michael B. Arkin (argued), Thomas H. McPeters, of Surr & Hellyer, San Bernardino, Cal., for plaintiff-appellee.

Before KOELSCH, BROWNING and KILKENNY, Circuit Judges.

KOELSCH, Circuit Judge:

The government appeals from the granting of taxpayer's motion to amend judgment, Fed.R.Civ.P. 60(b)(6), the effect of which was to increase the amount of taxes which the government must refund beyond the amount already refunded pursuant to the original judgment.¹

The background of the present dispute is as follows:

Taxpayer is a nonprofit "mutual" irrigation company which distributes water free to its shareholders, covering the costs of capturing and distributing the water by other business operations, and by periodic "shareholder assessments." The government assessed deficiencies against taxpayer for the fiscal years ending October 31 of 1958, 1959, and 1960, and collected approximately $31,000 in corporate income taxes allegedly due. Taxpayer filed claims for refund which were denied, and suit was brought to recover the overpayments.

The suit resulted in only a partial victory for the taxpayer. The district court rejected the government's contention that the taxpayer realized income in distributing water to the shareholders, and agreed with the taxpayer that its expenses were properly deductible. However, the court held that shareholder assessments, which the taxpayer had characterized as nontaxable contributions to capital, were in part payments for the water distributed and therefore income to the taxpayer.

The district court adopted a formula for determining the proportion of the assessments includable in taxpayer's income, redetermined taxpayer's income in each of the disputed years, calculated the tax due, and entered judgment in taxpayer's favor for the amounts overpaid. As a result of the court's computations, the taxpayer was entitled to a refund of the entire amount paid for 1959, but to only a partial refund for 1958 and 1960, as the court's calculations revealed net taxable income in those years.

The judgment was entered April 22, 1968, and was affirmed on June 9, 1970. Thereafter the taxpayer accepted the ordered refund and signed a satisfaction of judgment for the disputed years. However, on June 15, 1971, the taxpayer moved to amend the judgment to order refund of the taxes for 1958 and 1960 not refunded under the original judgment. The district court granted the motion and the government brought this appeal. We reverse.

The basis for the additional relief sought by taxpayer was the existence of net operating losses in 1953 and 1955 which because the years prior to 1953 were loss years, could be carried over to eliminate the remaining tax liability for 1958 and 1960. 26 U.S.C. § 172. The government opposed the amendment of judgment on the ground that taxpayer was precluded from recovery by its failure to assert the right to loss carryovers in its claim for refund or in the suit in district court.

As we agree with the government's position, we do not reach the issue, which the parties have argued extensively, of whether Rule 60(b)(6) was used appropriately to amend the judgment in this case. The failure of the taxpayer to raise the issue of loss carryovers in his claim for refund precluded refund on that basis in the district court — we are certain that the district court could not grant relief to the taxpayer by amendment of the judgment which it could not appropriately grant in the original judgment.

"No suit can be maintained against the sovereign for illegally collected taxes unless it is strictly within the terms of the statute under which the sovereign has consented to be sued." 10 Mertens, Law of Federal Income Taxation, § 58A.02, at 6. 28 U.S.C. § 1346 grants the district courts original jurisdiction to entertain suits for refund of illegally collected taxes. However, 26 U.S.C. § 7422(a) provides:

"(a) No Suit Prior to Filing Claim for Refund. — No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . until a claim for refund or credit has been duly filed with the Secretary or his delegate, according to the provisions of law in that regard, and the regulations of the Secretary or his delegate established in pursuance thereof."

The applicable Treasury Regulation, 26 C.F.R. § 301.6402-2(b) provides:

"(b) Grounds set forth in claim. (1) No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof . . . ."

The long-established interpretation of these provisions is that the filing of a claim with the Internal Revenue Service is a jurisdictional prerequisite to a suit for refund,² and, in the absence of a waiver by the government, the taxpayer cannot recover in its suit for refund on a different ground than that set forth in the claim for refund.³ Taxpayer's claim for refund failed to include a right to a loss carryover from 1953 and 1955 to 1958 and 1960 among the grounds for contesting the tax liability, nor did it recite the facts necessary to support such a claim as required by § 301.6402-2(b). This failure is fatal to any subsequent recovery on that ground.

Taxpayer attempts to avoid the consequence of its noncompliance with § 7422(a) and § 301.6402-2(b) by contending that the issues raised by the claim for refund⁴ pertained to its entire tax history and of necessity had to be decided before taxpayer could know whether loss years existed in 1953 and 1955 which were available for carryover.

We are not persuaded. Taxpayer was aware when it filed claims for refund that under its theory of the law it had net operating losses in the years prior to 1955. The completion of the audit conducted throughout the litigation by the government some three years after judgment did not, as the taxpayer argues, "establish" the losses; the audit simply confirmed what the taxpayer thought to be the case from the outset. The fact that the losses were placed in some doubt because the district court did not accept taxpayer's position on shareholder assessments does not relieve taxpayer of the responsibility of advancing all issues bearing on its tax liability for the disputed years in its claim for refund. Had taxpayer done so, the Service would have considered the loss carryovers in administratively reviewing the claim, as contemplated by § 7422(a), and might on that basis have granted refunds. If not, and the issue was litigated in the suit, the original judgment could have been held open until an audit, using the district court's formula, determined whether taxpayer had losses in 1953 and 1955 and the amounts available for carryover. Taxpayer's failure to follow the prescribed procedure, rather than an inevitable consequence of the nature of the issues and the government's audit procedure,⁵ was simply a costly oversight. See Young v. United States, 203 F.2d 686 (8th Cir. 1953); Barry-Wehmiller Machine Co. v. Commissioner, 20 T.C. 705 (1953).

Finally, taxpayer contends that the government has waived its right to rely on the variance.⁶ We find no waiver in this case. The Court has made clear that in order to establish that the Service has waived compliance with the regulation's requirement—that all grounds for refund be set out in the claim for refund—

"The showing should be unmistakable that the Commissioner has in fact seen fit to dispense with his formal requirements and to examine the merits of the claim. It is not enough that in some roundabout way the facts supporting the claim may have reached him. The Commissioner\'s attention should have been focused on the merits of the particular dispute. The evidence should be clear that the Commissioner understood the specific claim that was made even though there was a departure from form in its submission." Angelus Milling Co. v. Commissioner, 325 U.S. 293, 297-298, 65 S.Ct. 1162, 1165, 89 L.Ed. 1619 (1945).

Far from having the clear showing required by Angelus Milling, supra, we find no indication in the record, nor has the taxpayer pointed any out to us, that the Service focused attention on the merits of taxpayer's claim of loss carryovers until after taxpayer's motion to amend judgment.⁷ The Service then asserted the variance as a ground for denying the refund, thereby insisting on its right to compliance with the regulation. There is no evidence that the Service considered loss carryovers in originally denying the claim for...