Eachern v. Rose, 6

• Decision Date: 08 November 1937
• Docket Number: No. 6,6
• Citation: 302 U.S. 56,82 L.Ed. 46,58 S.Ct. 84
• Parties: McEACHERN v. ROSE, Former Collector of Internal Revenue
• Court: U.S. Supreme Court

302 U.S. 56

58 S.Ct. 84

82 L.Ed. 46

McEACHERN

v ROSE, Former Collector of Internal Revenue.

No. 6.

Argued Oct. 14, 15, 1937.

Decided Nov. 8, 1937.

Mr. William A. Sutherland, of Atlanta, Ga., for petitioner.

Mr. Homer S. Cummings, Atty. Gen., and Mr. Guy Patten, of Washington, D.C., for respondent.

Mr. Justice STONE delivered the opinion of the Court.

This petition for certiorari raises the question whether overpayments of income taxes for the calendar years 1929, 1930, and 1931 are so related to a tax on income which should have been but was not assessed against the taxpayer for the year 1928, as to preclude recovery of the overpayments, although collection of the 1928 tax is barred by the statute of limitations.

In 1924, petitioner's decedent sold 500 shares of the corporate stock of an insurance company for the sum of $300,000, at a net profit of $295,000 over 1918 cost. Ten per cent. of the purchase price was paid at the time of sale and the balance was to be paid in installments, aggregating annually 10 per cent. of the purchase price, in each of the nine succeeding years. As permitted by the applicable statutes (section 202, Revenue Act of 1924, c. 234, 43 Stat. 255; sections 202, 212, Revenue Act of 1926, c. 27, 44 Stat. 11, 23; section 44, Revenue Act of 1928, c. 852, 45 Stat. 805, 26 U.S.C.A. § 44 and note), decedent elected to return the profit for income taxation on the installment basis. After his death in 1928, petitioner, as his administrator, filed income tax returns in behalf of his estate for the calendar years 1928 to 1931, inclusive, showing in each year a sale of 50 shares of the stock of the insurance company at a net profit of $29,500. These returns were erroneous in point of fact and of law, as the petitioner sold no shares of the stock in any of those years, and since, by reason of the provisions of section 44(d) of the 1928 act,¹ the capital gain included in the value of the unpaid installments at the time of decedent's death was income taxable to decedent for the year 1928, and not in subsequent years.

By the provisions of section 44(d), as construed by Treasury Regulations 74, Art. 355, the transmission of an installment obligation at the death of the payee capitalizes the unpaid installments of the contract and results in taxable gain to the estate of the decedent, measured by the difference between the fair market value of the obligation at the time of his death and its unrecovered cost. By section 113 of the 1928 act (26 U.S.C.A. § 113 note), the basis for computing the annual profit upon the installments paid after the decedent's death is the fair market value of the contract at the time of his death. The unpaid tax for 1928, computed as required by section 44(d), exceeds the sum of the overpayments made in 1929, 1930, and 1931.

On the trial in the district court, the collector contended that petitioner was estopped to deny that the sales of stock occurred and profit accrued as reported in his returns for the years in which refunds were claimed; and that, in any case, upon equitable principles, the petitioner was not entitled to recover the overpayments for those years, since they were less in amount than the tax which should have been assessed against him for 1928. See Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265. The trial court overruled these contentions, and gave judgment for petitioner. The Circuit Court of Appeals for the Fifth Circuit reversed, holding that petitioner was not in equity and good conscience entitled to recover the overpayments which, because of his failure to pay the 1928 tax, had resulted in no unjust enrichment of the government. 86 F.(2d) 231. We granted certiorari, 300 U.S. 652, 57 S.Ct. 752, 81 L.Ed. 863, because of the importance of the question in administration of the revenue laws.

The collector does not press here the contention that petitioner is estopped to challenge the correctness of his returns for the years of overpayment. The failure of the government to assess the appropriate tax in 1928 is not shown to be attributable to the erroneous statements made in the returns for the later years, and it is not necessary for petitioner to show understatement of the income taxable in 1928 in order to show the correct amount of the different income derived from the installment contract in the years of overpayment. For, under section 113, the overpayments are established by showing that in each year the amount of income from the sale of the stock as reported exceeded the difference between the installments collected and so much of the value of the installment contract at the death as is allocable to the taxable year. But respondent insists, as the court below held, that petitioner is not equitably entitled to recover overpayments of taxes upon the profits derived from the contract in certain years because the overpayments are exceeded by a tax which he should have paid on the profits realized in an earlier year.

We may assume that, in the circumstances, equitable principles would preclude recovery in the absence of any statutory provision requiring a different result. But Congress has set limits to the extent to which courts might otherwise go in curtailing a recovery of overpay- ments of taxes because of the taxpayer's failure to pay other taxes which might have been but were not assessed against him. Section 607 of the 1928 act (26 U.S.C.A. § 1670(a)(2) declares that any payment of a tax after expiration of the period of limitation shall be considered an overpayment, and directs that it be 'credited or refunded to the taxpayer if claim therefor is filed within the period of limitation for filing such claim;' and section 609(a) of the 1928 act (26 U.S.C.A. § 1675(a) provides that 'any credit against a liability in respect of any taxable year shall be void if any payment in respect of such liability would be considered an overpayment under section 607 (1670(a)(2)).' These provisions preclude the government from taking any benefit from the taxpayer's overpayment by crediting it against an unpaid tax whose collection has been barred by limitation.

It is plain that these provisions forbid credit of the overpayments of taxes for 1930 and 1931, which were made after collection of the 1928 tax was barred. If petitioner had then paid the 1928 tax, there would have been an overpayment of the tax, refund of which is made mandatory by section 607. Credits against the tax of overpayments of taxes assessed for other years, if made at that time, could not stand on any different footing under the provisions of section 609 (26 U.S.C.A. § 1675). The right of the government to credit the overpayments upon the earlier unpaid tax could arise only when the overpayments occurred; but since at that time collection of the 1928 tax was barred by limitation, and payment of it would be an overpayment, credit against it of the 1930 and 1931 overpayments was forbidden by section 609.

Different considerations apply to the 1929 overpayment. When it was made, collection of the 1928 tax was not barred and the Commissioner was not then prevented...