Collins v. United States

• Decision Date: 14 April 1976
• Docket Number: No. 238-73.,238-73.
• Citation: 532 F.2d 1344
• Parties: Francis COLLINS v. The UNITED STATES.
• Court: U.S. Claims Court

532 F.2d 1344

Francis COLLINS v. The UNITED STATES.

No. 238-73.

United States Court of Claims.

April 14, 1976.

COPYRIGHT MATERIAL OMITTED

Peter B. Sang, Portland, Maine, attorney of record, for plaintiff.

Patricia B. Tucker, Washington, D.C., with whom was Asst. Atty. Gen. Scott P. Crampton, Washington, D.C., for defendant. Theodore D. Peyser, Jr. and Robert S. Watkins, Washington, D.C., of counsel.

Before NICHOLS, KASHIWA, and KUNZIG, Judges.

OPINION

KASHIWA, Judge.^*

This is an action to recover $3,748.85, plus interest, which represents the amount paid by the plaintiff, Francis Collins, to the Internal Revenue Service to satisfy the proposed income and excise tax deficiencies of Summertime Cafe, Inc., for the years 1964 and 1965. For the reasons stated below, we hold for the defendant.

The plaintiff purchased Summertime Cafe, Inc., in December, 1963. Its principal asset was a seasonal liquor license. The corporation operated a nightclub, the Candy Lounge, from April 1 to November 30 during each of the years 1964 and 1965. By an agreement dated August 3, 1965, Mr. Collins sold the stock of the corporation to Harold Loew.

In the spring of 1968, Mr. Collins was contacted by Revenue Agent D. E. Harrington, who was conducting an audit of Summertime Cafe, Inc.'s, federal income tax returns for 1964 and 1965. The main item under consideration was the band expense deduction claimed for each year. In connection with this audit, Mr. Collins made available to Mr. Harrington the receipts signed by the individual band leaders and also copies of his own personal tax returns for 1964 and 1965. After a review of the receipts, Mr. Harrington told Mr. Collins that the deductions claimed for band expenses were doubtful but that, if the deductions were allowed, the question of cabaret taxes would arise.

Mr. Collins received two revenue agent's reports in May, 1969, in which deficiencies were proposed with respect to Summertime Cafe, Inc.'s, and Mr. Collins' personal income taxes for the years 1964 and 1965. The report addressed to Summertime Cafe, Inc., in care of Mr. Collins proposed the disallowance of the claimed band expense deductions of the corporation plus a negligence penalty for the years 1964 and 1965, and other minor adjustments for 1965. The report addressed to Mr. Collins proposed an adjustment for his personal income taxes based on the inclusion of income in the amount of the disallowed band expenses for each year as a constructive dividend to Mr. Collins. An additional item for 1964 was Mr. Collins' receipt of unreported tip income in the amount of $135.

At Mr. Collins' request a conference was scheduled between John MacDonald, District Conferee, and Mr. Collins to consider the proposed tax deficiencies of both Summertime Cafe, Inc., and Mr. Collins. In preparation for this conference, Mr. MacDonald reviewed the case files and researched case law dealing with the substantiation of claimed expenses. At the first conference with Mr. Collins, Mr. MacDonald reviewed the cases with Mr. Collins and noted that a question existed with respect to whether Mr. Collins had sold the stock or the assets of the corporation. Mr. MacDonald explained that Mr. Collins might be liable for the corporate taxes if he had sold the assets of the corporation. Conversely, as Mr. MacDonald explained, if the stock had been sold, the continuing corporation would be liable for the corporate deficiencies, although the purchasers might look to Mr. Collins for reimbursement if the contract contained a warranty clause. In order to resolve these questions, Mr. MacDonald asked Mr. Collins for a copy of the sale document. In response to this explanation, Mr. Collins became visibly agitated and stated that he did not want to go into the sale and that he would pay the taxes.

The remainder of the first conference and the other three conferences between Mr. Collins and Mr. MacDonald concerned the amount of taxes due from the corporation and from Mr. Collins. Mr. MacDonald requested the band receipts and other information pertaining to the band expense deductions in issue. On the basis of the information provided, Mr. MacDonald concluded that the band expense deductions claimed by the corporation were allowable.

As Mr. MacDonald had explained to Mr. Collins at their first conference, if the band expense deductions were allowed, an excise (cabaret) tax¹ would then become due. The amounts of corporate cabaret and income tax deficiencies were computed and the imposition of a 25 per cent penalty for failure to file the required cabaret tax returns was proposed. The allowance of the band expense deductions at the corporate level eliminated the proposed constructive dividend to Mr. Collins. Consequently, the only remaining adjustment was the unreported tip income which resulted in a tax deficiency of under $30.

About a week after their last conference, Mr. Collins informed Mr. MacDonald that he had retained legal counsel to assist him with respect to the proposed deficiencies. On August 26, 1969, Mr. Collins executed a power of attorney form authorizing Peter Sang to represent him before the Internal Revenue Service. Thereafter, Mr. Collins' attorney handled all substantive matters concerning the proposed deficiencies.

Mr. Collins' attorney and Mr. MacDonald had one conversation relating to the proposed penalties for failure to file the required cabaret tax returns. After the conversation an affidavit explaining the failure to file the required returns and reaffirming Mr. Collins' willingness to pay the corporate deficiencies was submitted. The affidavit was signed by both Mr. Collins and his attorney. Based on the information contained in the affidavit, Mr. MacDonald recommended that penalties for the failure to file cabaret tax returns not be imposed.

On or about September 12, 1969, Mr. Collins paid the proposed income and cabaret tax deficiencies of Summertime Cafe, Inc., for 1964 and 1965 in the total amount of $3,748.85. In the present action Mr. Collins seeks the recovery of these amounts plus interest.

This is an action for the recovery of amounts paid by the plaintiff to satisfy the proposed tax deficiencies of Summertime Cafe, Inc. This case involves the further consideration of the right of the Internal Revenue Service to accept and retain amounts offered by a third party to satisfy the tax liabilities of a separate entity. Initially, we note that the plaintiff has not argued that Summertime Cafe, Inc., did not owe the income or excise taxes paid or that the taxes were excessive in amount. The plaintiff's position appears to be that the Internal Revenue Service has no right to retain the amounts he tendered to satisfy the proposed corporate deficiencies.

The principal issue is whether the plaintiff was a volunteer in paying the taxes of Summertime Cafe, Inc.

Plaintiff states that jurisdiction is conferred upon the court by 28 U.S.C., Section 1491, citing Fidelity & Casualty Co. v. United States, 490 F.2d 960, 203 Ct.Cl. 486 (1974). The Fidelity case, like this case, involved an action for the recovery of amounts tendered by the plaintiff to satisfy the tax liabilities of another party. In that case the court assumed jurisdiction to determine whether the circumstances surrounding the acceptance of the payment in issue created a contract implied in fact even though the plaintiff was not a taxpayer entitled to maintain an action for the overpayment of taxes.²

It is the defendant's position that the circumstances surrounding payment in this case do not support any finding of a contract implied in fact. We assume jurisdiction to consider this question. Cf. J. C. Pitman & Sons, Inc. v. United States, 317 F.2d 366, 161 Ct.Cl. 701 (1963); Ralston Steel Corp., Assignee v. United States, 340 F.2d 663, 169 Ct.Cl. 119, cert. denied, 381 U.S. 950, 85 S.Ct. 1803, 14 L.Ed.2d 723 (1965).

In order to consider this question, we first have to examine the voluntariness of plaintiff's payment. In cases involving the payment of tax liabilities by a third party, it is fundamental that the plaintiff cannot recover if the payment in issue was voluntary and the plaintiff bears the burden of proving some element which would remove him from the category of volunteer. In Fidelity & Casualty Co. v. United States, supra, we held:

Even viewed in a light most favorable to plaintiff, the actions of IRS in the circumstances surrounding payment of the taxes by plaintiff cannot be considered so overpowering as to have inhibited plaintiff from the unfettered exercise of its reasoned judgment. * * * 203 Ct.Cl. at 497, 490 F.2d at 966.

* * * * * *

There are no circumstances in this case whereby a contract implied in fact can be established based on the dealings between IRS and the plaintiff. Plaintiff has failed to carry its burden in this regard, and it must be placed in the fatal category of a volunteer. * * * 203 Ct.Cl. at 498, 490 F.2d at 967.

See J. C. Pitman & Sons, Inc. v. United States, supra; Combined Industries, Inc. v. United States, 15 F.Supp. 349, 83 Ct.Cl. 613 (1936); Central Aguirre Sugar Co. v. United States, 2 F.Supp. 538, 77 Ct.Cl. 17 (1933).

Plaintiff's main contention appears to be that the deficiencies proposed against Summertime Cafe, Inc., were paid as the result of duress applied by the Internal Revenue Service. We have considered the question of duress in a wide variety of situations and in Fruhauf Southwest Garment Co. v. United States, 111 F.Supp. 945, 951, 126 Ct.Cl. 51, 62 (1953), summarized its conclusions as follows:

* * * three elements are common to all situations where duress has been found to exist. These are: (1) that one side involuntarily accepted the terms of another; (2) that circumstances permitted no other alternative; and (3) that said circumstances were the result of coercive acts of the opposite party. * *

Even if the plaintiff's version of the disputed facts is accepted, we find that none of these elements can be...