Farrow v. United States

• Citation: 150 F. Supp. 581
• Decision Date: 25 April 1957
• Docket Number: 20876.,No. 20875,20875
• Parties: Robert L. FARROW and Tonia F. Farrow, Plaintiffs, v. UNITED STATES of America, Defendant. William L. FARROW, Individually, and as Executor of the Estate of Eileen H. Farrow, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of California

150 F. Supp. 581

Robert L. FARROW and Tonia F. Farrow, Plaintiffs, v. UNITED STATES of America, Defendant.

William L. FARROW, Individually, and as Executor of the Estate of Eileen H. Farrow, Deceased, Plaintiff, v. UNITED STATES of America, Defendant.

Nos. 20875, 20876.

United States District Court S. D. California, Central Division.

April 25, 1957.

Denio, Hart, Taubman & Simpson, Long Beach, Cal., for plaintiffs.

Laughlin E. Waters, U. S. Atty., Edward R. McHale, Asst. U. S. Atty., Los Angeles, Cal., for the United States.

YANKWICH, Chief Judge.

Robert L. Farrow and Tonia F. Farrow, husband and wife, in one action seek to recover the total sum of $734.14 which it is alleged was erroneously and illegally collected by the defendant from them as a penalty under § 294(d) (2), Internal Revenue Code of 1939, 26 U.S. C.A. § 294(d) (2), for alleged substantial underestimation of estimated taxes, as follows:

(1) For the tax year 1951, for the sum of $71.06, together with interest from March 15, 1952, to and including March 8, 1956;

(2) For the tax year 1952, the sum of $100.72, with interest thereon at the rate of six per cent computed as such from March 15, 1953, to and including March 8, 1956;

(3) For the tax year 1953, the sum of $562.36 with interest thereon at the rate of six per cent per annum from March 15, 1954, to and including March 8, 1956;

(4) For interest at the rate of six per cent per annum from March 8, 1956, on the total sum.

In a companion case William L. Farrow, individually and as executor of the estate of Eileen H. Farrow, deceased, seeks to recover the total sum of $1363.31 which it is alleged was erroneously and illegally collected from plaintiff as a penalty under § 294(d) (2), Internal Revenue Code of 1939, for alleged substantial underestimation of estimated taxes, as follows:

(1) For the tax year 1951, for the sum of $350.71, together with interest from March 15, 1952, to and including March 8, 1956;

(2) For the tax year 1952, the sum of $343.33 with interest thereon at the rate of six per cent computed as such from March 15, 1953, to and including March 8, 1956;

(3) For the tax year 1953, the sum of $669.27 with interest thereon at the rate of six per cent per annum from March 15, 1954, to and including March 8, 1956;

(4) For interest at the rate of six per cent per annum from March 8, 1956, on the total sum.

The facts from which the controversy stems are not in dispute. During the years involved, the plaintiffs filed joint income tax returns on a calendar year basis. They failed to make and file declarations of estimated tax although required so to do, and failed to show to the satisfaction of the Commissioner that such failure, in each instance, was not due to willful neglect. Pursuant to § 294(d) (1) (A) of the Internal Revenue Code of 1939, penalties were assessed against the plaintiffs for such failures to file. The penalties were paid and the propriety of their assessment and payment is not disputed in these actions.

During all the years at issue in the action, the Commissioner of Internal Revenue also assessed against the plaintiffs penalties under § 294(d) (2) of the Internal Revenue Code of 1939, for substantial underestimation of estimated taxes. The Commissioner arrived at his determination of the amounts, in each instance, by using a zero value for the estimated tax. There is no controversy between the parties as to the correctness of the computation of the amount of the penalties so assessed and paid.

The only issue is whether the defendant properly assessed and collected from the plaintiffs the six per cent penalties for substantial underestimation of taxes under § 294(d) (2) of the Internal Revenue Code of 1939 in addition to the ten per cent penalties under § 294(d) (1) (A) of the Internal Revenue Code of 1939.

In assessing the two penalties, the Government acted under the provisions of the Supplement to Regulation 111 and 118, which reads in part as follows:

"(b) Additions for specific failures on the part of the taxpayer with respect to the estimated tax.—

* * * * * *

"(3) Substantial understatement of estimated tax. * * * In the event of a failure to file the required declaration the amount of the estimated tax for the purposes of this provision is zero. * * *" (Supplement to Regulation 111, § 29.294-1(b) (3) (B), in effect for 1951; The corresponding regulation in effect for 1952 and 1953 is Regulation 118, § 39.294-1(b) (3) (i) (a), pp. 1079-1081.)

Treasury regulations will be sustained unless they are unreasonable and plainly inconsistent with the purposes of the Act. They are given effect as contemporaneous constructions by the Agency which the Congress has charged with the enforcement of the Act. And they gather added strength if the Congress, after their promulgation, did not see fit to disapprove them in a subsequent Act, but reenacted the section to which they related in its former wording. Helvering v. R. J. Reynolds Tobacco Co., 1939, 306 U.S. 110, 114-116, 59 S.Ct. 423, 83 L.Ed. 536; Bryant v. C. I. R., 9 Cir., 1940, 111 F.2d 9, 11-12; Citizens' Nat. Trust & Savings Bank of Los Angeles v. United States, 9 Cir., 1943, 135 F.2d 527, 529; Gray Line Company v. Granquist, 9 Cir., 1956, 237 F.2d 390, 394 and cases cited in Note 4.

"This bespeaks congressional approval." Corn Products Refining Co. v. Commissioner, 1955, 350 U.S. 46, 53, 76 S.Ct. 20, 25, 100 L.Ed. 29. And see, Helvering v. Winmill, 1938, 305 U.S. 79, 83, 59 S.Ct. 45, 83 L.Ed. 52.

The courts which have considered the matter are in disagreement as to the validity of the Regulation here under consideration. Neither the Regulation nor its application in case of failure to file an estimate was successfully challenged until 1954 when a District Court in Georgia held it invalid as imposing a double penalty. United States v. Ridley, D.C.Ga., 1954, 127 F.Supp. 3. Since then other district courts have adopted the same view. See Owen v. United States, D.C.Neb., 1955, 134 F.Supp. 31, 39; Powell v. Granquist, D.C.Or., 1956, 146 F.Supp. 308; Stenzel v. United States, D.C.N.D.Cal.1957, 150 F.Supp. 364.

The view expressed in these cases is that it is illogical to say that a person who does not file an estimate underestimates his tax. See Jones v. Wood, D.C. Ariz.1956, 151 F.Supp. 678. But we have long learned to apply to all legislation, including taxation, Mr. Justice Holmes' famous apothegm,

"The life of law has not been logic; it has been experience." Holmes, Common Law 1 (1881).

And the cases which have studied with care the legislative history of the sections relating to the filing of estimates have reached the conclusion that the Regulation is not only consistent with the intent of the Congress but that its very language was taken from Congressional Reports. See Fuller v. Commissioner, 1953, 20 T.C. 308, 316; Hartley v. Commissioner, 1954, 23 T.C. 353, 360; Peterson v. United States, D.C.Tex., 1956, 141 F.Supp. 382, 384-385. The Tax Court in one of the cases cited summed up its conclusion in this manner:

"The regulation is couched in the same language used by Congress in its Conference Report on legislation covering this subject and follows the procedure therein prescribed. It therefore appears that the regulation actually reflects, rather than distorts, the will of Congress, and we uphold its validity." Fuller v. Commissioner, supra, 20 T.C. at page 312.

I concur in this view.

To see the situation in proper perspective, we must bear in mind that with the enactment of the Current Tax Payment Act of 1943, 26 U.S.C.A. § 1621 et seq., a new policy of collecting income taxes was put into effect,—withholding of tax at source. It was assumed that the Government, in this manner, would be assured of collecting taxes from persons who might either escape taxation altogether or, through improvidence, might not be in a position to pay them when they became due.

By the new method, the Government was assured that persons deriving their chief income from wages or salaries or stated remuneration would have their taxes deducted periodically by the employer, including the governmental agencies themselves, and thus pay their tax in a more or less painless manner.

A popular columnist not very friendly to the income tax system has very recently stated correctly the object of the withholding provisions:

"All earnings are reported at least twice, once by the payer and another time by the recipient and to prevent the citizen from spending his earnings as he goes along. * *

"The psychological effect of the withholding tax is that many who pay taxes do not automatically realize how much they pay. They regard as their wages the net amount that they take home." George E. Sokolsky, "The Burden of Our Taxes", Los Angeles Herald Express, April 20, 1957, Editorial page.

However, there are many persons with taxable incomes derived from sources other than wages or salaries. To put them on a basis of equality with others, § 58 of the Internal Revenue Code of 1939 was enacted providing for the filing of declarations of estimated tax...