Domtar Newsprint Sales Limited v. United States

• Decision Date: 11 December 1970
• Docket Number: No. 48-69.,48-69.
• Citation: 435 F.2d 563,193 Ct. Cl. 505
• Parties: DOMTAR NEWSPRINT SALES LIMITED v. The UNITED STATES.
• Court: U.S. Claims Court

193 Ct. Cl. 505, 435 F.2d 563 (1970)

DOMTAR NEWSPRINT SALES LIMITED v. The UNITED STATES.

No. 48-69.

United States Court of Claims.

December 11, 1970.

Richard J. Hiegel, New York City, for plaintiff; George G. Tyler, New York City, attorney of record.

Frances M. Foltz, Washington, D. C., with whom was Asst. Atty. Gen. Johnnie M. Walters, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

ON PLAINTIFF'S MOTION AND DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT

COWEN, Chief Judge:

Plaintiff, a Canadian corporation not engaged in trade or business within the United States, brought this action to recover an alleged overpayment of Federal income taxes and interest penalties for the year 1960, plus statutory interest.

The facts are stipulated and show that this controversy arose by reason of a property distribution from The Wright Company, Inc. of all the issued and outstanding stock of The Alberni Paper Company, Inc. to plaintiff in January of 1960. Wright, a Delaware corporation engaged in business within the United States, is wholly owned by plaintiff and, in turn, Wright owned all of the stock of Alberni, a New York corporation also engaged in business within the United States. The fair market value of the Alberni stock on the date of distribution was $450,000, but its adjusted basis in the hands of Wright immediately before the distribution was $25,000.

Wright withheld and paid to the Internal Revenue Service $1,250 as Federal income tax due from plaintiff on the distribution for the 1960 tax year. The $1,250 was computed by applying the 5 percent tax rate provided for in the Income Tax Convention then in force between the United States and Canada against the adjusted basis of the stock in the hands of Wright — $25,000.

After March 15, 1961, the Internal Revenue Service determined that Wright should have withheld and paid income taxes at the rate of 5 percent on $450,000, the fair market value of the stock. On May 28, 1965, plaintiff paid the deficiency in the amount of $26,660.89 of which $5,410.89 was interest. On May 3, 1968, plaintiff filed with the proper office a return on Form 1120-F (entitled "United States Income Tax Return of Foreign Corporation — 1960"). The return showed that plaintiff had overpaid the tax in the amount of $21,250. Plaintiff then filed a claim on May 14, 1968, for refund of the taxes and interest paid in 1965. Since the claim was neither granted nor denied within 6 months, this suit was filed.

The case is before the court on the parties' cross motions for summary judgment, which present two questions for decision — (1) whether plaintiff's action is barred by the statute of limitations because of the failure to file a claim for refund within the time specified by Section 6511 of the Internal Revenue Code of 1954, and (2) whether plaintiff was subject to the tax on the fair market value of the property received by it as a dividend in kind, or only on the lesser of the fair market value or the adjusted basis of the property. For the reasons stated, we resolve both issues in favor of the plaintiff.

I The Statute of Limitations Issue

The controlling statute is Section 6511 of the Internal Revenue Code of 1954.¹

As stated above, plaintiff paid the deficiency in issue on May 28, 1965, but did not file a return for the year 1960 until May 3, 1968. The claim for refund was filed on May 14, 1968, less than 3 years from the time the return was filed, and the amount of the refund claimed did not exceed the tax paid within the 3-year period preceding the filing of the claim for refund.

Relying on the last clause of the first sentence of section 6511(a), defendant contends that the statute of limitations bars plaintiff's refund claim, because it was not filed within 2 years of the payment of the deficiency. Defendant also argues that plaintiff never made a return, because the form filed did not fulfill the function of a return which is to provide the Government with the operative facts bearing on plaintiff's tax liability. Thus, the defendant maintains that, since the tax liability had been previously determined and satisfied, the filing of the return was a useless act — a mere attempt to extend the statute of limitations on refunds.

Plaintiff answers that it filed a return, which it was required to file under the circumstances, and that the plain language of section 6511(a) allows a taxpayer 3 years in which to claim a refund after the return is filed. Plaintiff also points out that defendant's position is contrary to the published rulings of the Internal Revenue Service.

Assuming for the purpose of this discussion that a bona fide return was filed by plaintiff, we hold that section 6511 (a) allowed 3 years from the date the original but late return was filed to claim the refund.

The language of section 6511(a) supports our interpretation. Here, the tax was imposed by the Internal Revenue Code, section 881. Second, although defendant initially suggested that no return was required of plaintiff, it later admitted one was required. We think this is correct in light of Treas.Reg. 1.6012-2(g) (1) requiring that a return be filed if the withholding is insufficient to cover the taxes due, or if the taxpayer desires to claim a refund. Whether or not plaintiff is right on the merits, it is plain that the regulation required a return to be filed. Third, this was the one and only return of plaintiff. Thus, the cases dealing with amended returns are inapposite.

Moreover, we agree that defendant's position is inconsistent with two published rulings. The first of these is Mim. 4814, XXXX-XX-XXXX. The ruling was an interpretation of section 322(b) (1) and (2) of the Revenue Act of 1934, as amended, which contains substantially the same provisions as section 6511(a) and 6511(b) (2) (A).²

After referring to the report of the Senate Committee on Finance, which accompanied the revenue bill of 1934, the ruling stated:

The policy written by the Congress into section 322 of the Revenue Act of 1934 and the corresponding provisions of the Revenue Acts of 1936 and 1938 may be stated to be that the 3-year period of limitation from the date of the filing of the return upon the allowance of credits or refunds, or the filing of claims therefor, is applicable in any case in which a return is filed by the taxpayer, whether required or not, or whether timely or delinquent; but the amount allowable is limited to the tax paid within the three years immediately preceding the filing of the claim, or, if no claim was filed, then during the three years immediately preceding the allowance of the credit or refund. * * * Mim. 4814, 1938-2 C.B. 96, 97.

The second is Rev.Rul. 57-354, 1957-2 C.B. 913. The ruling dealt with section 322(b) of the 1939 Code, which is substantially equivalent to section 6511(a), as amended in 1958. It covers the question as to whether an untimely return filed after the 2-year period had expired entitled the taxpayer to the benefit of the 3-year period when his return discloses no tax liability. The ruling states:³

In the instant case, delinquent returns were filed by the taxpayer for the purpose of recovering taxes withheld and paid as estimated taxes for the years 1951, 1952 and 1953. These amounts are presumed to have been paid on March 15 of each of their following years. The returns, which disclosed no tax liability, were filed by the taxpayer in October 1955 for the year 1951 and December 1955 for the years 1952 and 1953.

Section 322(b) (1) of the 1939 Code, relating to the limitation on allowance of refunds and credits, provides as follows:

(1) Period of limitation. — Unless a claim for credit or refund is filed by the taxpayer within three years from the time the return was filed by the taxpayer or within two years from the time the tax was paid, no credit or refund shall be allowed or made after the expiration of whichever, of such periods expires the later. If no return is filed by the taxpayer, then no credit or refund shall be allowed or made after two years from the time the tax was paid, unless before the expiration of such period a claim therefor is filed by the taxpayer.

Section 322(b) (2) of the 1939 Code relates to the limit on the amount of credit or refund and provides that, if a return was filed by the taxpayer and the claim was filed within three years from the time the return was filed, the amount of credit or refund shall not exceed the portion of the tax paid during the three years immediately preceding the filing of the claim.

Under section 322(e) of the 1939 Code, prepayments of tax made through the withholding of tax at the source, or payments of estimated tax, prior to the due date of the tax are considered as having been paid on the last day prescribed by law for the payment of the tax by the taxpayer, which was March 15 if he filed his return on the basis of a calendar year.

The status of a claim for refund must in the final analysis be determined in the light of the facts as they exist at the time it is filed. Thus, if no return was filed prior to the filing of a claim for refund, the two-year period of limitation is applicable in determining the timeliness of the claim. However, if a return was filed prior to the filing of a claim for refund, the three-year period of limitation governs.

Based on the facts in the instant case, a refund of any overpayment of tax for the year 1951 is barred since the return, which also constitutes a claim, was not filed within three years from the presumptive date of payment, March 15, 1952. The returns for the years 1952 and 1953 were filed within three years of the presumptive dates of payment and therefore such returns, pursuant to the taxpayer\'s election to have them treated as claims, were filed within the statutory period applicable with respect to both the time in which a claim must be made and the limit

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