Big Diamond Mills Co. v. United States

• Decision Date: 31 July 1931
• Docket Number: No. 9038.,9038.
• Parties: BIG DIAMOND MILLS CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Eighth Circuit

51 F.2d 721 (1931)

BIG DIAMOND MILLS CO. v. UNITED STATES.

No. 9038.

Circuit Court of Appeals, Eighth Circuit.

July 31, 1931.

Leland W. Scott, of Minneapolis, Minn. (Junell, Oakley, Driscoll & Fletcher, of Minneapolis, Minn., on the brief), for appellant.

Ralph E. Smith, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (Lewis L. Drill, U. S. Atty., of St. Paul, Minn., and M. W. Goldsworthy, Sp. Asst. to U. S. Atty., C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and R. P. Hertzog, Sp. Atty., Bureau of Internal Revenue, all of Washington, D. C., on the brief), for the United States.

Before KENYON and BOOTH, Circuit Judges, and OTIS, District Judge.

BOOTH, Circuit Judge.

This is an appeal from a judgment dismissing on the merits an action brought by the appellant against the United States to recover $3,356.88, with interest from January 28, 1925, representing an amount paid by appellant to the collector of internal revenue as interest on unpaid income and excess profits taxes for the year 1917, which were erroneously assessed against appellant.

The case was tried to the court without a jury (a jury having been duly waived) on an agreed statement of facts, which included the following: March 27, 1918, the appellant company (hereafter called the company) filed its income and excess profits tax return for 1917, disclosing a tax liability of $74,260.02. June 25, 1918, it filed an amended return, disclosing a tax liability of $64,292.74; and on the same date it filed a claim for the abatement of the difference, $9967.28. On June 26, 1918, it paid the tax disclosed on the amended return. On or about January 23, 1923, the company signed a waiver of the statute of limitations. After an examination and audit, the Commissioner, on March 5, 1923, notified the company that the total income and excess profits taxes assessed on the original income and excess profits tax return were due and payable. On May 24, 1923, the Commissioner rejected the claim for abatement, and, on October 26, 1923, the collector of internal revenue made demand for the payment of the balance of $9,967.28, together with interest thereon at the rate of 1 per cent. per month from July 6, 1918, to November 23, 1921 (the date when the Revenue Act of 1921 was passed), amounting to $4,043.39; and interest at the rate of one-half of 1 per cent. per month from November 23, 1921, to May 22, 1923, in the amount of $897.06, making a grand total of $14,907.73. Accompanying this demand was a letter from the collector suggesting that the interest might be made the subject of a compromise offer, inclosing a form for the making of such offer, and stating that the Commissioner had, in similar cases, considered an offer equal to 6 per cent. per annum. The letter is as follows:

"Treasury Department "Internal Revenue Service "St. Paul, Minn., Oct. 26, 1923.

"Big Diamond Flour Mills Co. 922 Exchange Bldg., Minneapolis, Minn.

"In explanation of the enclosed notice and demand for tax, you are advised that this represents the unpaid balance of an additional assessment of Income Tax for the year 1917, and is the result of an audit by the Commissioner of Internal Revenue in connection with a claim for abatement filed by you on 7/3/18. Interest is computed in accordance with section 14 (a) of the Revenue Act of 1916, which remains in force under section 1400 (b) of the Revenue Act of 1918 until that act was superseded by the present law on November 23, 1921.

"However, you are advised that your liability to this interest at 1% per month may at your option be made the subject of an offer in compromise. The Commissioner of Internal Revenue has in similar cases considered an offer equal to interest at the rate of 6% per annum on the balance of tax from the due date to date of payment. The due date in your case was 7/16/18.

"Should you desire to take advantage of your compromise privilege as above explained, you should execute the enclosed Forms 656 and forward the same to this office in duplicate accompanied by a certified check or post office money order in the amount of your offer."

November 1, 1923, the company paid the balance of the taxes demanded; and submitted a compromise offer as to the interest, which, by inadvertence in computation, was too small; and it then submitted an additional compromise offer for the balance, and these compromise offers were accompanied by remittances of the amounts offered to the Commissioner. The total interest thus paid by the company was $3,190. With the letters transmitting this interest was sent Treasury Form 656, which is set out in the margin, together with the first letter of transmittal from the collector to the Commissioner.¹

January 17, 1924, Commander Mill Company filed a claim for refund of $200,000 for the year 1917 for itself and affiliated companies, which included the appellant company. The basis for this claim was the contention that the claimants were entitled to have their excess profits tax liability for the year 1917 determined under the special assessment provisions of section 210 of the Revenue Act of 1917.

Subsequently, the company received a letter dated January 19, 1925, reading as follows:

"Jan. 19, 1925. "Big Diamond Mills Company, Minneapolis Minnesota.

"Sirs: You are advised that under date of January 3, 1925, the Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, has accepted the amount of $3190.00, tendered as an offer in compromise of liability to the interest which accrued on a rejected claim for abatement of a portion of the tax assessed on your return of the annual income for the year 1917."

In a letter from the office of the Commissioner dated January 28, 1925, the company was advised that an overassessment of $9,902.24 had been made for 1917, and on June 22, 1925, this amount was refunded, together with $813.33 interest, covering a period from November 1, 1923, to March 14, 1925. The amounts so refunded did not include the amount of interest here in controversy. On June 27, 1925, the company filed a claim for a refund of the interest which had been paid under the compromise offer. May 5, 1927, this claim was rejected in a letter which read as follows:

"Reference is made to the conference held with your representative in the office of the General Counsel in support of the brief submitted by you to the Income Tax Unit relative to the refund of offers in compromise accepted in settlement of the liabilities incurred to interest accrued on the rejected portions of claims for abatement for the year 1917 tendered by the Commander Mill Company, Big Diamond Mills Company and the Empire Milling Company, Minneapolis, Minnesota.

"Due consideration has been given to the arguments presented and the cases cited by you. In accordance with the decision made by the office of the General Counsel, you are advised that there is no authority in law by which an amount tendered in compromise of interest can be refunded where, subsequent to the formal acceptance of the offer, the tax upon which interest accrued is refunded to the taxpayer."

Following the rejection of the claim for refund of the interest, the present suit was commenced.

The action is for money had and received; in form, an action at law, but governed by equitable principles; and it is the contention of appellant that it is entitled in equity, justice, and good conscience to the money involved and in appellee's possession.

It is conceded that the money involved is interest based upon a tax which was paid by appellant and which was afterward refunded by appellee as having never been due from appellant, but as having been wrongfully collected by reason of an erroneous assessment.

It would seem that under these facts, and in the absence of countervailing circumstances, if the tax itself was refunded, the interest based upon the tax should also be refunded as a matter of justice and equity; but the appellee contends that there is a conclusive countervailing circumstance, to wit, the making of the compromise agreement.

The trial court held that the compromise of the interest was valid and binding upon the parties, and could not be disturbed.

The main question involved in this appeal is whether, in view of the compromise agreement, the appellant company can recover the amount paid as interest under said compromise agreement.

A compromise is a contract, and, like other contracts, it requires, among other things, parties capable of making, and authorized to make, the contract, a subject-matter, and a consideration. 12 C. J. 316 et seq.; 5 R. C. L. p. 876 et seq.; Hunt on Accord & Satisfaction Compromise, p. 167; Board of Health of State of La. v. Teutonia, etc., Co., 137 La. 422, 68 So. 748, Ann. Cas. 1916B, 1251; 5 R. C. L. p. 881, § 6; Elliott on Contracts, § 235; 25 L. R. A. (N. S.) 275, note; Skinner v. Cromwell (C. C. A.) 40 F.(2d) 241, 245; City Street Improvement Co. v. Pearson, 181 Cal. 640, 185 P. 962, 20 A. L. R. 1317.

Compromises are favored in the law (12 C. J. p. 336, § 32; 5 R. C. L. p. 878, § 3; 25 L. R. A. N. S. 287, note; Daly v. Busk, etc., Ry. Co., 129 F. 513, 521 C. C. A. 8); but, nevertheless, the contract is subject to construction at the hands of the court as to its meaning and validity and consideration, in view of the language used, and in view of the circumstances surrounding the making of the contract. See 12 C. J. pp. 335, 367.

In the case at bar, the validity, the construction, and the consideration of the contract of compromise are each the subject of controversy.

The statute relevant to the situation is section 158, title 26, USCA, which is section 3229, Rev. St., and reads as follows:

"§ 158. Compromises. The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, may compromise any civil or criminal case arising under the internal-revenue laws instead of commencing suit thereon; and, with the advice...