Jewel Shop, Inc. v. United States

• Decision Date: 12 November 1965
• Docket Number: No. 274-61.,274-61.
• Parties: The JEWEL SHOP, INC. v. The UNITED STATES.
• Court: U.S. Claims Court

173 Ct. Cl. 466, 352 F.2d 526 (1965)

The JEWEL SHOP, INC. v. The UNITED STATES.

No. 274-61.

United States Court of Claims.

November 12, 1965.

Jacquin D. Bierman, New York City, attorney of record, for plaintiff. Chase & Bierman, New York City, of counsel.

Sheldon P. Migdal, Washington, D. C., with whom was Acting Asst. Atty. Gen. Richard M. Roberts, for defendant. C. Moxley Featherston, Lyle M. Turner, and Philip R. Miller, Washington, D. C., of counsel.

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

LARAMORE, Judge.

This case comes to us on stipulated facts which plaintiff claims make out a good cause of action for the recovery of interest allegedly due on income tax overpayments. On June 18, 1951, the Commissioner of Internal Revenue made a jeopardy assessment against The Jewel Shop, Inc., a South Carolina corporation, of additional income and excess profits taxes including fraud and delinquency penalties and interest for the taxable years 1944 through 1950. Plaintiff paid only part of the alleged deficiencies. On July 13, 1956, the Commissioner assessed plaintiff for deficiencies in retailer's excise taxes covering the years 1942 through 1947. Plaintiff petitioned the Tax Court for a redetermination of the income and excess profits tax deficiencies, and on April 1, 1957 that court entered an order determining that there were both deficiencies and overpayments. Because total overpayments exceeded deficiencies, the District Director first credited the overpayments against the unpaid income and excess profits tax deficiencies. He then credited the overpayments against the unpaid deficiencies in the retailer's excise taxes. He refunded plaintiff the balance.

The District Director computed the interest component of deficiencies and overpayments in the following manner. In crediting the overpayments against the unpaid deficiencies in income and excess profits taxes (those determined by the Tax Court), he charged delinquency interest¹ on the deficiency from June 19, 1951 (notice and demand for payment date) to May 29, 1957 (date Commissioner signed and scheduled the overpayments). However, he only allowed interest on the overpayment from the date of overpayment to June 18, 1951. As to the deficiencies in the retailer's excise taxes, the District Director charged interest on the deficiency from July 16, 1956² (notice and demand for payment date) to May 29, 1957. He allowed interest on the overpayment from the date of overpayment to July 13, 1956.

Reference to the facts illustrates the District Director's method of computation. For fiscal 1944, the Tax Court determined that plaintiff overpaid its income tax by $3.04, its declared value excess profits tax by $3,570.05, and its excess profits tax by $22,948.97 — a total overpayment of $26,522.06. The District Director applied $5,146.11 of the 1944 excess profits tax overpayment against the $10,798.70 excess profits tax deficiency determined for fiscal 1946. Because the overpayment credit did not come into being until May 29, 1957, delinquency interest of $1,833.95 ran on the 1946 deficiency from assessment until 1957. By contrast, the District Director allowed no interest on the same $5,146.11 for the same period (June 19, 1951 to May 29, 1957). He allowed interest only from the overpayment date to the jeopardy assessment date. In other words, defendant has charged about $1,800 for monies which plaintiff should have paid when assessed in 1951, but defendant has not paid interest on the overpayment (from 1951 to 1957) which was in existence for this same period and which was used to satisfy the deficiency. Plaintiff claims interest on all the overpayments for the period from assessment (1951 as to income and excess profits tax deficiencies and 1956 as to retailer's excise tax deficiencies) to May 29, 1957. The parties agree that the applicable statutory provisions are in the Internal Revenue Code of 1939.

It is clear that plaintiff would be entitled to interest on the overpayments for the period from assessment to May 29, 1957, if there were no deficiencies against which to credit the overpayments. Internal Revenue Code of 1939, § 3771(a), (b) (2). For tax refunds, the statute provides that six percent interest runs from the date of overpayment "to a date preceding the date of the refund check by not more than thirty days." Internal Revenue Code of 1939, § 3771 (b) (2). Plaintiff's problem comes about because defendant credited the overpayments against the income and excess profits tax deficiencies and the retailer's excise tax deficiencies determined by the Tax Court and the Service respectively. Where the credit procedure is used, section 3771(b) (1) applies and that provides for somewhat different treatment from section 3771(b) (2), the refund provision paraphrased above. Section 3771(b) (1) states:

Such interest shall be allowed and paid as follows: * * * In the case of a credit, from the date of the overpayment to the due date of the amount against which the credit is taken, but if the amount against which the credit is taken is an additional assessment * * * then to the date of the assessment of that amount. Emphasis added.

Defendant applied this provision on the theory that the jeopardy assessment on June 18, 1951, and the assessment of retailer's excise taxes on July 13, 1956 were "additional assessments" which stopped the running of interest on overpayments used as credits. While we think this treatment is anomalous and inequitable, we find no escape from the statutory mandate and are accordingly constrained to hold for defendant.

Because the statutory scheme for crediting overpayments against income and excess profits taxes differs somewhat from the procedure for crediting overpayments against retailer's excise taxes, we shall discuss the credit procedures separately. Looking first to the District Director's procedure in crediting overpayments against unpaid income and excess profits tax deficiencies determined by the Tax Court, we note that this was required by the statute. Internal Revenue Code of 1939, §§ 322(a) (1), (d), 603, 729(a). Section 322(a) (1) is not discretionary as shown by the following language:

Where there has been an overpayment of any tax imposed by this chapter, the amount of such overpayment shall be credited against any income, war-profits, or excess-profits tax or installment thereof then due from the taxpayer, and any balance shall be refunded immediately to the taxpayer. Emphasis added.

Plaintiff argues that where an overpayment is determined by the Tax Court, the rule is different. The argument is that section 322(d) qualifies section 322 (a) (1), and gives the Commissioner discretion to credit or refund. We do not agree with plaintiff's reading of the statute. Section 322(d) simply states that when the decision of the Tax Court has become final the amount of overpayment "shall * * * be credited or refunded to the taxpayer." This is not language of discretion, however. The statute reads this way to cover what will probably be the most common case; that is, where there is no outstanding deficiency and the Tax Court finds there is an overpayment for the one year under consideration, there "shall be" a refund. However, where the Tax Court has a few years in issue and determines both deficiencies and overpayments, or where it determines an overpayment and there exist outstanding assessable deficiencies, there "shall be" a credit because the mandatory language of section 322(a) (1) applies. In any event, we conclude that even if the District Director had discretion to refund and not to credit, his actions would not constitute an "arbitrary and capricious" abuse of discretion. This point is developed more fully in the discussion of the credit against the retailer's excise taxes.

Once it is determined that the crediting procedure has been properly used, section 3771(b) (1) automatically applies, assuming that a jeopardy assessment is an "additional assessment." This is not the first time that application of this provision has worked an inequitable result. This court has had this same provision before it on six recent occasions and has decided to read the statute literally. E. I. duPont deNemours & Co. v. United States, 147 F.Supp. 486, 137 Ct.Cl. 191 (1957); Ash Grove Lime & Portland Cement Co. v. United States, 132 F.Supp. 213, 132 Ct.Cl. 7 (1955); Matson Navigation Co. v. United States, 130 F.Supp. 357, 131 Ct.Cl. 199 (1955); Abney Mills v. United States, 130 F. Supp. 353, 131 Ct.Cl. 159 (1955); Dewey Portland Cement Co. v. United States, 128 F.Supp. 385, 131 Ct.Cl. 41 (1955); Virginia Elec. & Power Co. v. United States, 126 F.Supp. 178, 130 Ct.Cl. 189 (1954). Other courts read the statute similarly. Felixson v. United States, unofficially reported, 6 Am.Fed.Tax R.2d 6109 (S.D.Calif.1960); Pan American World Airways, Inc. v. United States, 119 F.Supp. 144 (S.D.N.Y.1953); Max Factor & Co. v. United States, unofficially reported, 43 Am.Fed.Tax R. 1188 (S.D.Calif.1951).

In the six cases before this court, the government took an inconsistent position to the one it now assumes. The fact pattern was quite simple. In response to the Commissioner's...