Disabled American Veterans v. United States

• Decision Date: 20 May 1981
• Citation: 650 F.2d 1178,227 Ct.Cl. 474
• Court: U.S. Claims Court

227 Ct. Cl. 474

650 F.2d 1178

DISABLED AMERICAN VETERANS v. THE UNITED STATES

No. 360-76

UNITED STATES COURT OF CLAIMS

May 20, 1981, Decided

Bart A. Brown, Jr., attorney of record, for plaintiff. Brown & Gardner Co., L.P.A., of counsel.

William C. Rapp, with whom was Acting Assistant Attorney General John F. Murray, for defendant. Theodore D. Peyser and Robert S. Watkins, of counsel.

Skelton, Senior Judge, Kashiwa and Bennett, Judges.

This case is before the court on review of the report of Trial Judge James F. Merow. Because we disagree with that portion of the report dealing with whether a satisfactory refund claim was filed relating to a deduction for the cost of the names list, we reverse the trial judge on that point. We are in agreement with the remainder of the report and, accordingly, we adopt the modified report as an opinion of this court. 1

Regarding the above-discussed variance issue, the trial judge found that the informal oral knowledge gained by the Internal Revenue Service' agents during the audit of plaintiff's (DAV's) returns plus the submission of the pretrial response during the pendency of this case provided "express knowledge" to the Internal Revenue Service of DAV's claim for a deduction for the cost of the names list.

We, however, reject out of hand the notion expressed by the trial judge that the information garnered by the Justice Department's trial attorney from DAV's pretrial submission constituted knowledge chargeable to the Internal Revenue Service for purposes of section 7422(a). Such a position is in fundamental conflict with the clearly established and well-defined procedure found in the Internal Revenue Code and the Treasury Regulations. See, e.g., section 6402; section 7422(a); Treas. Reg. § 301.6402-2.

Furthermore, it is abundantly clear that our cases focus not on whether the "Government" or, as DAV avers, the "defendant" has knowledge of the claim but, specifically, on whether the Internal Revenue Service has such notice. E.g., Union Pacific R.R. v. United States, 182 Ct. Cl. 103, 113, 389 F. 2d 437, 444 (1968); Nat'l Newark & Essex Bank v. United States, 187 Ct. Cl. 609, 615, 410 F. 2d 789, 792 (1969); Standard Lime and Cement Co. v. United States, 165 Ct. Cl. 180, 187, 329 F. 2d 939, 943 (1964).

Filing a petition is not a satisfactory claim for refund, see section 7422(a); Union Pacific, 182 Ct. Cl. at 109, 389 F. 2d at 442; thus, a priori, filing a pretrial submission does not constitute notice to the Service for purposes of section 7422(a). We have said that "[a]vailability of information is not equivalent to notice that a claim is asserted based on that information. That claim must somehow be communicated to the Service." (Emphasis supplied.) Id. at 113, 389 F. 2d at 445. And the burden in that regard rests squarely on DAV. Nat'l Newark & Essex Bank v. United States, 187 Ct. Cl. at 618, 410 F. 2d at 794.

The trial judge also makes much of the fact that DAV did, orally, raise the instant issue with the IRS agents auditing DAV's returns. In addition, the agents agreed to "deny without further investigation the claims for refund as to all issues that had been considered by the Internal Revenue Service during the course of the audit," due to the agents' familiarity with such issues. While DAV did subsequently file a written claim (which was denied by the Service), that claim did not encompass the claim for a deduction for the cost of the names list.

Thus, for there to have been an acceptable claim for refund under section 7422(a) the oral representations made by DAV at the audit must constitute a valid informal claim. We have previously held, however that an oral claim does not meet the statutory requirements. Sicanoff Vegetable Oil Corp. v. United States, 149 Ct. Cl. 278, 286, 181 F. Supp. 265, 269 (1960); Wrightsman Petroleum Co. v. United States, 92 Ct. Cl. 217, 238, 35 F. Supp. 86, 96 (1940), cert. denied, 313 U.S. 578 (1941). Cf. American Radiator & Standard Sanitary Corp. v. United States, 162 Ct. Cl. 106, 113, 318 F. 2d 915 920 (1963); Rosengarten v. United States, 149 Ct. Cl. 287, 294, 181 F. Supp. 275, 279, cert. denied, 364 U. S. 822 (1960).

For an act to constitute a valid informal refund claim, that act must be clear and explicit and "we must be satisfied that [the act] contains the means by which theCommissioner will be apprised that a certain tax is being contested without resort to extraneous factors." (Emphasis supplied.) Rosengarten v. United States, 149 Ct. Cl. at 294, 181 F. Supp. at 279. As a general rule, an act sufficient to constitute a valid informal claim must take the form of a definite instrument. Id. The need for a written claim has been stated to be because

It is common knowledge that the personnel in governmental departments is constantly changing. Many times several different employees work on a single case. Some of them have before them only such information as is contained in the files. For this reason, and because of the shortness of the memory of man, and for many other reasons, only a written claim is sufficient to meet the requirements of the statute and the need it intended to fill. [Wrightsman Petroleum Co. v. United States, 92 Ct. Cl. at 238, 35 F. Supp. at 96.]

Moreover, the fact the agents agreed to promptly deny the subsequently filed claim does not mean the Service waived or did not intend the customary notice function of the claim for refund to be utilized. At best it is a statement that those agents would not change their positions on the issues raised. An appellate conference was also available to DAV, and the reasons for requiring a claim also apply to the appellate level. 2 Therefore, we do not view the agents' statement at the audit level as negating any further purpose for filing a refund claim. Instead, we view these facts as demonstrating a waiver by DAV of any IRS appellate level consideration plus a waiver of DAV's claim for a deduction for the cost of the names list by its failure to make a timely claim therefor.

The trial judge's report, as modified, follows:

FOOTNOTES.

1 The findings of fact are in the possession of the parties and are not reprinted here. These findings are adopted with the exception of finding number 44. Finding 44 is modified by deleting everything after the first sentence and now states: "The receipts plaintiff obtained from the rental of its donor list constituted UBTI."

2 The purpose of filing a refund claim includes both a notice function and an administrative function. Administratively, a claim for refund allows an opportunity for errors to be determined and corrected and also for limiting the scope of any ensuing litigation. See Union Pacific, 182 Ct. Cl. at 109, 389 F. 2d at 442.

OPINION OF TRIAL JUDGE *

MEROW, Trial Judge: In this case, Disabled American Veterans (DAV) seeks to recover a total of $ 4,267,140.47, plus interest as provided by law, representing the amount of income tax and assessed interest which it paid on May 3, 1976 for the calendar years 1970, 1971, 1972 and 1973. DAV is an organization which has, at all relevant times, been granted an exemption from taxation under section 501(c)(4) of the Internal Revenue Code (code). 1 Accordingly, the sums paid by DAV were assessed by the Internal Revenue Service (IRS) on the basis of its audit and determination that, in each year in question, DAV received unrelated business taxable income (UBTI) as defined in sections 511-13 of the code and implementing Treasury Regulations. DAV asserts that it received no UBTI during the years in question. 2 The central issues in this case are whether amounts received by DAV from a semi-annual Special Solicitations program utilizing premium items and amounts received from the rental of names on its mailing list constituted UBTI.

Faced with examples 3 of tax exempt organizations acquiring and operating, on a tax-free basis, businesses unrelated to the purposes for which the organizations were exempt, in 1950 Congress enacted the unrelated business income provisions which have been carried over substantially unchanged as sections 511-13 of the present code. These provisions subject certain unrelated business income of exempt organizations to the ordinary corporate income tax, thereby placing such operations of tax exempt organizations on a par with their taxpaying competitors. The legislative history of sections 511-13 demonstrates that Congress perceived the tax-free operation of an unrelated trade or business by an exempt organization to provide an unfair advantage over competitors. The primary purpose for subjecting unrelated business income to taxation was to remove this unfair competitive edge. 4

Under section 511 of the code, only the UBTI of an exempt organization, such as plaintiff, is subject to federal income taxes. Section 512(a) of the code provides that UBTI is the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less allowable deductions.Section 513 defines an unrelated trade or business as:

* * * any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 * * *. 5

Accordingly, sections 511-13 impose a tax where an exempt organization obtains income from a trade or business regularly carried on by it, which is not substantially related to the purpose for which the organization is exempt from taxation (aside from a need for income or funds). However, not all unrelated business income is taxable in that Congress, in section 512(b)(1)-(3) of the code, excluded from the scope of these provisions income received from dividends, interest, royalties and real property rents. These comprise the conventional type...