Daugette v. Patterson, 16485.

• Decision Date: 10 March 1958
• Docket Number: No. 16485.,16485.
• Parties: F. R. DAUGETTE, and F. R. Daugette and Mary E. Daugette, Appellants, v. George D. PATTERSON, District Director of Internal Revenue, for District of Alabama, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

250 F.2d 753 (1957)

F. R. DAUGETTE, and F. R. Daugette and Mary E. Daugette, Appellants, v. George D. PATTERSON, District Director of Internal Revenue, for District of Alabama, Appellee.

No. 16485.

United States Court of Appeals Fifth Circuit.

December 26, 1957.

Certiorari Denied March 10, 1958.

William S. Pritchard, Winston B. McCall, Birmingham, Ala., Pritchard, McCall & Jones, Birmingham, Ala., of counsel, for appellant.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Atty., Sheldon I. Fink, Washington, D. C., W. L. Longshore, U. S. Atty., Birmingham, Ala., Robert N. Anderson, Attorney, Department of Justice, Washington, D. C., Malcolm L. Tanner, Asst. U. S. Atty., Birmingham, Ala., for appellee.

Before RIVES, JONES and BROWN, Circuit Judges.

Certiorari Denied March 10, 1958. See 78 S.Ct. 561.

JONES, Circuit Judge.

In an action for a Federal income tax refund brought by the appellant taxpayers against the District Director of Internal Revenue, the district court directed a verdict for the Government. F. R. Daugette was engaged in the construction and building business. Out of this business arose the transactions which give rise to this controversy. His wife, Mary E. Daugette, was a plaintiff in the district court and is an appellant here only because she and her husband filed joint tax returns for the years involved.

In 1947 Daugette and others organized Larkway Gardens Corporation for the purpose of acquiring land and having apartment buildings erected on it under the National Housing Act as amended 12 U.S.C.A. § 1701 et seq. Its charter provided for the issuance of common stock of five classes designated as "A", "B", "C", "D" and "E". 97,285 shares of the Class E stock of the par value of one dollar per share were authorized and it was provided the amount of capital with which the corporation should commence business was $146,185. The charter provided that Daugette should receive all the Class E stock. The subscriptions to the stock of Larkway Gardens, forming an exhibit to its corporate charter, recited that all subscriptions were "to be paid in cash, or real property, or services, rendered or to be rendered." Daugette agreed to construct the apartment units for Larkway Gardens. He entered into two contracts. One of these was a lumpsum contract on an F.H.A. printed form. By it Daugette agreed to do the work for $1,445,413, and in addition thereto as a fee the 97,285 shares of Class E stock of the par value of a dollar a share. On the basis of construction costs of $1,445,413, a builder's fee of $97,285, and an architect's fee of $37,302, aggregating $1,580,000, an F.H.A. insured mortgage in the latter amount was given by the First National Bank of Birmingham. The total amount of the loan as finally made was $1,595,000. At or about the same time as the making of the construction contract on the F.H.A. form, the other construction agreement was executed. By it Daugette agreed with Larkway Gardens to do the work at cost plus a fixed fee of $34,000. The agreement recited that any difference between the F. H.A. loan and the cost, builder's fee and expense should be paid to the stockholders of Larkway Gardens. There was introduced in evidence an undated letter of Daugette to Larkway Gardens saying that he would "surrender, transfer and assign" the Class E stock to the corporation on demand. In October of 1948, the year after the stock was issued to Daugette, the certificate was surrendered "for cancellation and reissuance". The Class E stock was reissued to the holders of the Class A stock pro rata. There was testimony that the Class E stock was to be surrendered for the benefit of the Class A stock when the project had been completed and the $34,000 had been paid. The president of Larkway Gardens testified that the Class E common stock "was issued according to the set-up of F.H.A. to complete the equity in the corporation in the name of Daugette". The president of Larkway Gardens was unable to recall that F.H.A. was informed of the agreement to sell or surrender the stock to the company for a dollar.

The taxpayer, F. R. Daugette, entered into another such deal with a corporation of the name of South Park, Inc. This corporation's books listed a liability of $25,000 for 250 shares of its Class B $100 par stock and showed this stock as being issued to Daugette in 1949. A certificate for this stock was completed but remained in the stock book.

The Internal Revenue Agent who examined Daugette's Federal income tax returns for 1947, 1948 and 1949 proposed substantial deficiencies of tax and negligence penalties. By far the greater part of the proposed deficiencies resulted from the inclusion as income of the Larkway Gardens Class E stock in 1947, and the South Park Class B stock in 1949, at the par value of these shares. Following the issuance of the so-called "thirty-day letter" conferences were had by Daugette and his attorney and accountant with representatives of the Internal Revenue Services. The contentions of Daugette and those of the Commissioner were stated and discussed. Proposals and counter-proposals were made. A settlement was reached. Under the terms of the settlement the Larkway Class E stock was valued at twenty cents per share instead of a dollar per share as proposed, the South Park Class B stock was to be valued at $10 per share rather than $100 per share as proposed, the negligence penalties were to be eliminated, and some other issues were conceded by Daugette to the Commissioner. For each of the disputed years Daugette filed an "Offer of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment" on Treasury Form 870-AD. By these instruments Daugette offered to accept as correct assessments in the amount there set forth which were the same as had been determined by the settlement. In these forms it was provided:

"This offer is subject to acceptance by or on behalf of the Commissioner of Internal Revenue. It shall take effect as a waiver of restrictions on the date it is accepted. Unless and until it is accepted, it shall have no force or effect.

"If this proposal is accepted by or on behalf of the Commissioner, the case shall not be reopened nor shall any claim for refund be filed or prosecuted for the year(s) above stated (other than for the amounts of the overassessments shown above), in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations; and the taxpayer also agrees: (1) To make payment of the above deficiency, together with interest, as provided by law, promptly upon receipt of notice and demand from the District Director of Internal Revenue, and not to file an offer in compromise respecting such liability; and (2) upon request of the Commissioner to execute at any time a final closing agreement as to the tax liability, on the foregoing basis, for said year(s) under the provisions of section 3760 of the Internal Revenue Code. 1939 26 U.S.C.A. § 3760"

At the bottom of these forms is a note which reads:

"Note. — The execution and filing of this offer will expedite the adjustment of your tax liability. It is not, however, a final closing agreement under section 3760 of the Internal Revenue Code nor does it extend the statutory period of limitation for refund, assessment, or collection of the tax."

The offers were accepted for the Commissioner by the Associate Chief of the Appellate Division of the Internal Revenue Service at Birmingham. The assessments were made in the amounts specified in the offers and payment was made by Daugette. By waivers previously executed the period of limitations for the assessment of the tax had been extended to June 30, 1955. On September 12, 1955, Daugette filed claims for refunds asserting that the Larkway Gardens Class E stock was not additional compensation and had no value and that the South Park Class B stock had no value and was never issued to him. Suits for refund were commenced in March of 1956. The Director asserted that the Commissioner had relied to his detriment upon the offers and that Daugette was estopped to assert the claims which he attempted to put forward. The court directed a verdict for the defendant Director sustaining his defense of estoppel, and from an adverse judgment Daugette has appealed.

Before us the appellants urge that equitable estoppel was not a defense which the Government could assert; that if such defense could have been raised it should have been submitted to the jury; that the Revenue Agent had been guilty of malfeasance in procuring the execution of the offers and the right to reopen on the ground of malfeasance should have been submitted to the jury; and that the undisputed evidence required a finding that the stocks had no value and hence a verdict for Daugette should have been directed.

The appellants lean heavily upon Botany Worsted Mills v. United States, 278 U.S. 282, 49 S.Ct. 129, 131, 73 L.Ed. 379, and from the opinion there they quote the following:

"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 the particular mode, it includes the negative of any other mode."

In the Botany Worsted Mills case we also find this language:

"And, without determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel, it suffices to say that here the findings disclosed no adequate ground for any claim of estoppel by the United States."

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