Botany Worsted Mills v. United States, 31

• Decision Date: 02 January 1929
• Docket Number: No. 31,31
• Citation: 73 L.Ed. 379,49 S.Ct. 129,278 U.S. 282
• Parties: BOTANY WORSTED MILLS v. UNITED STATES. Re
• Court: U.S. Supreme Court

278 U.S. 282

49 S.Ct. 129

73 L.Ed. 379

BOTANY WORSTED MILLS

v UNITED STATES.

No. 31.

Reargued Nov. 20, 1928.

Decided Jan. 2, 1929.

Mr. Nathan A. Smyth, of New York City, for petitioner.

The Attorney General and Mr. W. D. Mitchell, Sol. Gen., of Washington, D. C., for the United States.

[Argument of Counsel from page 283 intentionally omitted] Mr. Justice SANFORD delivered the opinion of the Court.

The Botany Worsted Mills, a New Jersey corporation engaged in the manufacture of woolen and worsted fabrics, made a return of its net income for the taxable year 1917 under the Revenue Act of 1916¹ and the War Revenue Act of 1917. ² By section 12(a) of the Revenue Act it was provided that in ascertaining the net income of a corporation organized in the United States, there should be deducted from its gross income all 'the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties.' Under this provision the Mills deducted amounts aggregating $1,565,739.39 paid as compensation to the members of its board of directors, in addition to salaries of $9,000 each. It paid an income tax computed in accordance with this return. Thereafter, in 1920, the Commissioner of Internal Revenue assessed an additional income tax against it. Of this, $450,994.06 was attributable to his disallowance of $783,656.06 of the deduction claimed as compensation paid to the directors, on the ground that the total amount paid as compensation was unreasonable and the remainder of the deduction as allowed represented fair and reasonable compensation. The Mills after paying the additional tax filed a claim for refund of this $450,994.06. The claim was disallowed; and the Mills thereafter, in September, 1924, by a petition in the Court of Claims sought to recover this sum from the United States, with interest-alleging that the disallowance of part of the compensation paid the directors was illegal.³ After a hearing on the merits the court, upon its findings of fact, dismissed the petition upon the ground that the additional tax was imposed under an agreement of settlement which prevented a recovery. 63 Ct. Cl. 405. And this writ of certiorari was granted.

The first question presented is whether the Mills is precluded from recovering the amount claimed by reason of a settlement.

Section 3229 of the Revised Statutes⁴ provides that: '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 and consent of the said Secretary and the recommendation of the Attorney-General, he may compromise any such case after a suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the Commissioner the opinion of the Solicitor of Internal Revenue, * * * with his reasons therefor, with a statement of the amount of tax assessed, * * * and the amount actually paid in accordance with the terms of the compromise.'⁵

The Government did not claim that there had been a compromise under this statute, but contended in the Court of Claims that, irrespective thereof, an agreement of settlement had been entered into between the Mills and the Commissioner under which the Mills had accepted the partial disallowance as to the compensation paid the directors, and had also received concessions as to other disputed items the benefit of which it still enjoyed, and was therefore estopped from seeking a recovery.

As to this matter the findings of fact show that after the Mills had paid the amount of the tax shown by its original return an investigation of its books disclosed to the Commissioner the necessity of making an additional assessment, to be determined by the settlement of questions relating to the compensation (or, as it was termed, bonus) paid to the directors, depreciation charged off on its books, and reserves charged to expenses. After much correspondence and numerous conferences extending over several months between the attorney and assistant treasurer of the Mills and the chief of the special audit section of the Bureau of Internal Revenue and others of his official associates, a compromise was agreed to as to all the differences, by which the amount to be allowed as reasonable compensation to the directors and as depreciation were agreed upon, and the claim as to reserves was allowed. Thereupon the Mills prepared and filed an amended return based upon the figures agreed upon in the conferences, with documentary evidence which it had agreed to furnish; and the additional assessment was made in accordance with this return.⁶

The court, in sustaining the Government's contention, said: 'With the payment of the tax under the circumstances surrounding this case the agreement, which is mentioned in the record as a 'gentleman's agreement,' became in legal effect an executed contract of settlement;' and that, as the Mills was seeking to recover on account of the particular item which it regarded as unfavorable to its interests, and at the same time hold to the advantage derived from the settlement of other items in dispute involved in the same general settlement, it should not be allowed a recovery.

The Mills contends that the Commissioner had not been given, at the time in question, any authority, either in express terms or by implication, to compromise tax cases except as provided in section 3229; that this statute in granting such authority under specific limitations as to the method to be pursued, negatived his authority to effect a valid and binding agreement in any other way; that as the Government could not have been estopped by the unauthorized transactions of its officials, the Mills likewise could not be estopped thereby; and further, that the findings are insufficient to establish an estoppel.

The Government does not here challenge any of these contentions. In the brief for the United States filed in this Court the Solicitor General states that the question whether such an informal adjustment of taxes as was made in this case is binding on the taxpayer, is submitted for decision in deference to the opinion of the Court of Claims and the importance of the question-but no argument is made in support of the Government's previous contention that the Mills was estopped from questioning the settlement. And, on the contrary, it is stated that-'Before and since the date of the alleged settlement in this case Congress has evidently proceeded on the theory that no adjustment of a tax controversy between representatives of the Bureau of Internal Revenue and a taxpayer is binding unless made with the formalities and with the approval of the officials prescribed by statute. The authority of officers of the United States to compromise claims on behalf of or against the United States is strictly limited. * * * The statutes which authorize conclusive agreements and settlements to be made in particular ways and with the approval of designated officers raise the inference that adjustments or settlements made in other ways are not binding.' And further, that 'No ground for the United States to claim estoppel is disclosed in the findings.'

Independently of these concessions, we are of the opinion that the informal settlement made in this case did not constitute a binding agreement. Section 3229 authorizes the Commissioner of Internal Revenue to compromise tax claims before suit, with the advice and consent of the Secretary of the Treasury, and requires that an opinion of the Solicitor of Internal Revenue setting forth the compromise be filed in the Commissioner's office. Here the attempted settlement was made by subordinate officials in the Bureau of Internal Revenue. And although it may have been ratified by the Commissioner in making the additional assessment based thereon, it does not appear that it was assented to by the Secretary, or that the opinion of the Solicitor was filed in the Commissioner's office.

We think that Congress intended by the statute to prescribe the exclusive method by which tax cases could be compromised, requiring therefor the concurrence of the Commissioner and the Secretary, and prescribing the formality with which, as a matter of public concern, it should be attested in the files of the Commissioner's office and did not intend to intrust the final settlement of such matters to the informal action of subordinate officials in the Bureau. When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode. Raleigh & G. Railroad Co. v. Reid, 13 Wall. 269, 270, 20 L. Ed. 570; Scott v. Ford, 52 Or. 288, 296, 97 P. 99.

It is plain that no compromise is authorized by this statute which is not...