Flora v. United States

• Decision Date: 24 July 1956
• Docket Number: Civ. No. 3916.
• Citation: 142 F. Supp. 602
• Parties: Walter W. FLORA, Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Wyoming

142 F. Supp. 602

Walter W. FLORA, Plaintiff, v. The UNITED STATES of America, Defendant.

Civ. No. 3916.

United States District Court D. Wyoming.

July 24, 1956.

A. G. McClintock, Cheyenne, Wyo., for plaintiff.

John F. Raper, U. S. Atty., of Cheyenne, Wyo., and Thomas H. Foye, Atty., U. S. Dept. of Justice, Tax Division, Washington, D. C., for defendant.

KERR, District Judge.

The primary question here is whether losses sustained by taxpayer in 1950, resulting from trading in commodities and commodity futures, were capital losses within the meaning of the term defined by Section 117(a) (1) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 117(a) (1).

The taxpayer by this action seeks to recover payments made by him upon his 1950 income tax which he claims to have been illegally assessed.

Flora, the taxpayer, is a partner in the Flora Engineering Company. In its partnership return of income for 1950 it claimed as ordinary loss the amount of $85,216.10 growing out of transactions in commodities and commodity futures during that year. The loss so claimed was disallowed by the Bureau, thereby resulting in an additional income to taxpayer in the amount of $42,608.05. On March 27, 1953, a deficiency assessment was made against the taxpayer in the amount of $27,251.13. Taxpayer paid the sum of $5,058.54 on said deficiency assessment and this action has for its purpose the recovery of said sum so paid.

The government filed a motion to dismiss this action and as a basis therefor alleged that this Court was without jurisdiction to hear and determine the matter as the complaint showed conclusively on its face that the taxpayer has not paid the full amount of the tax deficiency assessed against him.

Historically, it has been the established policy of our tax system for the taxpayer to pay first and litigate afterwards. This is the method of corrective justice consistently followed by the lower courts since the decision of Cheatham v. United States, 92 U.S. 85, 23 L.Ed. 561. Recently, however, in the case of Bushmiaer v. United States, 8 Cir., 230 F.2d 146, at page 149, the Court held: "There is no provision in the revenue act specifically requiring the taxpayer to pay the full amount of the additional assessment unless that may be inferred from the provision requiring the taxpayer as a condition precedent to his right to maintain a civil action in the District Court to file a claim for refund." The court in reversing the decision of the trial court allowed suit to be maintained where the taxpayer paid the sum of $5,000 on an assessment of $137,987.28.

The Bushmiaer case is in direct conflict with Suhr v. United States, 3 Cir., 18 F.2d 81, at page 83, where the court stated:

"None of the various tax acts provide for recourse to the courts by a taxpayer until he has failed to get relief from the proper administrative body or has paid all the taxes assessed against him. The payment of a part does not confer jurisdiction upon the courts. Blair v. United States ex rel. Birkenstock, supra 271 U.S. 348, 46 S.Ct. 506, 70 L.Ed. 983."

It is important to note that in the Cheatham case the court said, 92 U.S. at page 88:

"So also, in the internal-revenue department, the statute which we have copied allows appeals from the assessor to the commissioner of internal revenue; and, if dissatisfied with his decision, on paying the tax the party can sue the collector; and, if the money was wrongfully exacted, the courts will give him relief by a judgment, which the United States pledges herself to pay.

"It will be readily conceded, from what we have here stated, that the government has the right to prescribe the conditions on which it will subject itself to the judgment of the courts in the collection of its revenues."

And again, 92 U.S. at page 89:

* * * "It is essential to the honor and orderly conduct of the government that its taxes should be promptly paid, and drawbacks speedily adjusted; and the rule prescribed in this class of cases is neither arbitrary nor unreasonable. * * * He can, if the decision is delayed beyond twelve months, rest his case on that decision; or he can pay the amount claimed, and commence his suit at any time within that period."

It will be noted that the Court refers to paying "the tax" as a prerequisite to suit for recovery. It contemplates a payment of the entire tax assessed and not a token payment for the purpose of obtaining a judicial determination of the unpaid balance prior to the payment of the same.

This principle has been consistently approved by the Supreme Court in the following cases: Kings County Savings Institution v. Blair, 116 U.S. 200, 6 S.Ct. 353, 29 L.Ed. 657; Dodge v. Osborn, 240 U.S. 118, 36 S.Ct. 275, 60 L.Ed. 557; Graham v. Du Pont, 262 U.S. 234, 43 S.Ct. 567, 67 L.Ed. 965; Phillips v. Commissioner, 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289; United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 54 S.Ct. 443, 78 L.Ed. 859; Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248.

In 1924 Congress recognized the hardships imposed on taxpayers in being required to pay the tax assessed as a condition precedent to bringing a suit for recovery of the same and established the Board of Tax Appeals (now the United States Tax Court). The Board of Tax Appeals was set up as a place where the validity of an income tax assessment could be litigated prior to the payment of the deficiency assessment. It is important to quote the precise language of the House Committee on Ways and Means when it created the Board of Tax Appeals:

"(H. Rep. No. 179, 68th Cong., 1st Sess., pp. 7-8 (1939-1 Cum.Bull. (Part 2) 241, 246-247)):

"The committee recommends the establishment of a Board of Tax Appeals to which a taxpayer may appeal prior to the payment of an additional assessment of income, excess-profits, war-profits, or estate taxes. Although a taxpayer may, after payment of his tax, bring suit for the recovery thereof and thus secure a judicial determination of the questions involved, he can not, in view of section 3224 of the Revised Statutes, which prohibits suits to enjoin the collection of taxes, secure such a determination prior to the payment of the tax. The right of appeal after payment of the tax is an incomplete remedy, and does little to remove the hardship occasioned by an incorrect assessment. The payment of a large additional tax on income received several years previous and which may have, since its receipt, been either wiped out by subsequent losses, invested in non-liquid assets, or spent, sometimes forces taxpayers into bankruptcy, and often causes great financial hardship and sacrifice. These results are not remedied by permitting the taxpayer to sue for the recovery of the tax after this payment. He is entitled to an appeal and to a determination of his liability for the tax prior to its payment."

I have carefully considered the decisions respecting the rights of the taxpayer and it is my reasoned judgment that since the complaint shows on its face that the plaintiff has not paid the entire tax assessment he should not maintain the instant suit. However, since the Third and Eighth Circuits are in conflict on the subject and this Circuit has not had occasion to pass on the matter I deem it advisable to pass upon the merits of the case as the record consists only of a stipulation of facts and a few pages of testimony.

The facts are not in serious dispute, if in dispute at all. The Flora Engineering Company is a family partnership and was formed to engage in the business of engineering and farming; in 1950 the taxpayer acquired seats on both the Chicago Board of Trade and the New...