McGraw-Hill, Inc. v. United States

• Decision Date: 18 June 1980
• Docket Number: No. 58-75.,58-75.
• Parties: McGRAW-HILL, INC. v. The UNITED STATES
• Court: U.S. Claims Court

623 F.2d 700

McGRAW-HILL, INC. v. The UNITED STATES

No. 58-75.

United States Court of Claims.

June 18, 1980.

Charles A. Schwartz, New York City, attorney of record, for plaintiff.

James S. Maxwell, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant; Theodore D. Peyser, Jr., Washington, D.C., of counsel.

Before FRIEDMAN, Chief Judge, and BENNETT and SMITH, Judges.

OPINION

PER CURIAM:

This case comes before the court on defendant's exceptions to the recommended decision of Trial Judge Robert J. Yock, filed August 13, 1979, pursuant to Rule 134(h), having been submitted to the court on the briefs and oral argument of counsel. Upon consideration thereof, since the court agrees with the trial judge's recommended decision, as hereinafter set forth,^* it hereby affirms and adopts the decision as the basis for its judgment in this case and, accordingly, plaintiff is entitled to recover with judgment entered for plaintiff as set forth in the following Conclusion of Law.

OPINION OF TRIAL JUDGE

YOCK, Trial Judge:

This is an action to recover taxes paid by plaintiff, McGraw-Hill, Inc. for calendar years 1964 and 1965. Plaintiff agreed to the assessment and collection of these taxes and also waived to some extent its right to claim a refund. The issues in this case are: (1) whether plaintiff paid its own liability for withholding taxes attributable to certain indirect moving expense reimbursements made to its employees 1964 and 1965 so as to be able to claim a refund when the law subsequently changed, or whether plaintiff voluntarily paid the income tax liability of its employees attributable to such reimbursements so that as a volunteer it would not be able to claim a refund; and (2) whether plaintiff is estopped from claiming a refund by virtue of the administrative settlement to which it previously agreed.

Defendant no longer argues that the indirect moving expense reimbursements paid by plaintiff to its employees are "wages" properly subject to withholding under section 3401 et seq. of the Internal Revenue Code of 1954 (hereinafter the "Code"). Previous decisions of the Court of Claims firmly establish that such reimbursements are not "wages" or remuneration for services performed by an employee for his employer within the meaning of section 3401 of the Code even though it is income to the employees under section 61 of the Code. Allstate Insurance Co. v. United States, 530 F.2d 378, 209 Ct.Cl. 1 (1976); Humble Oil & Refining Co. v. United States, 442 F.2d 1362, 194 Ct.Cl. 920 (1971); Humble Pipe Line Co. v. United States, 442 F.2d 1353, 194 Ct.Cl. 944 (1971). The principle of these decisions, i. e., that "wages" is a less inclusive term than "income," has been recently affirmed by employment tax decisions involving other types of reimbursements (meal allowances) by an employer. Central Illinois Public Service Co. v. United States, 435 U.S. 21, 98 S.Ct. 917, 55 L.Ed.2d 82 (1978); Hotel Conquistador, Inc. v. United States, 597 F.2d 1348, 220 Ct.Cl. ___ (1979). Therefore, defendant relies solely on the nature of the payments made by plaintiff (withholding tax or income tax) and the administrative settlement under which they were paid (creating an estoppel) as grounds for denying any recovery to plaintiff.

This court holds for the plaintiff.

I. Facts

During the course of a corporate income tax audit of the plaintiff, Internal Revenue Service agents discovered that in 1964 and 1965 plaintiff had reimbursed some of its employees for direct and indirect moving expenses incurred in transfers at company request. Only the indirect moving expenses are at issue in this case. "Indirect" moving expenses are all moving expenses other than the expenses incurred by an employee in moving himself, his immediate family, household goods and personal effects in transferring from one work location to another. Rev.Rul. 54-429, 1954-2 C.B. 53. None of the reimbursements made by plaintiff had been reported on W-2 forms as compensation paid to employees, and no federal income tax had been withheld by plaintiff with respect to the reimbursements. The normal procedure in such cases would have been for the Internal Revenue Service (hereinafter "the IRS") to assert a withholding tax deficiency against the employer and to examine the employees' individual income tax returns to determine whether the reimbursements had been treated as income. If the employee had not so treated the income, the IRS might then assess a deficiency against the employees' individual income tax account.¹

In 1966, as a result of an inquiry from an employer, the IRS developed a special program (hereinafter called "the program") setting certain conditions under which the IRS would accept payment by an employer of the income tax liability of its employees attributable to indirect moving expense reimbursements. Under the program, the amount paid by the employer would be computed by approximating the income tax liability of the employees receiving reimbursements. The computation would be "grossed up" to give effect to constructive compensation derived from the employer's payment of the employee's tax liability. Interest would be due to the extent that interest would be payable by the employees if they were held individually liable for the tax.² The IRS would refrain from asserting any tax liability against employees for the reimbursements.³ The employer would provide the IRS with a statement waiving its right to claim a refund unless there was a change in IRS position. Withholding tax examination reports, procedures, and forms would be used with respect to the payments received under the program.

Plaintiff's accountant (Mr. Philip Weissman, who was deceased at the time of trial) handled all negotiations with the IRS agents during the course of the audit. Mr. Weissman was apprised of the program by IRS agents, and he drafted a settlement letter proposal containing several elements of the program but lacking any specified amount of money to be assessed and any waiver of plaintiff's right to claim a refund. Separate settlement proposal letters for 1964 and 1965 were signed by plaintiff's vice president in charge of taxes, Mr. John L. Cady, and were sent to the IRS in 1968. Soon after the first proposal was made in February of 1968, Mr. Weissman and an IRS agent (Mr. Bernard Kaufman) began to negotiate the amount to be paid by plaintiff, but they could not reach an agreement. They apparently could never agree on what formula would be appropriate to use. Virtually no progress on this aspect of the plaintiff's audit was made for approximately 1 year.

In February of 1969, a new IRS agent (Mr. Adolph Zuckerman) was assigned. He made a computation of the rate of tax to be applied to the amount of indirect moving expense reimbursements by finding the average income tax rate applicable to the employees receiving reimbursements. Mr. Zuckerman's rate was lower than the first agent's rate because Mr. Zuckerman included a greater number of lowerpaid employees in his sample. Mr. Weissman was shown the calculations by Mr. Zuckerman and he agreed to the amount proposed. Upon the recommendation of the accountant, Mr. Cady, plaintiff's vice president for taxes, executed on March 17, 1969 for 1964 and on September 24, 1969 for 1965, withholding tax forms agreeing to the assessment and collection of the amount proposed by the IRS agent. Mr. Cady also sent the IRS a letter⁴ with respect to each year in issue (1964 and 1965) which stated:

In accordance with your request, we wish to advise you that no claim for refund will be filed covering this payment, unless it should be determined by subsequent court decision or Internal Revenue Ruling that such tax was illegally collected.

The IRS agreed to the plaintiff's proposals as submitted by the plaintiff.

Plaintiff paid the taxes to which it had agreed and the interest thereon on March 9, 1970 for both years in question. After decisions were entered in Humble Oil & Refining Co., supra, and Humble Pipe Line Co., supra, on May 14, 1971, holding that no withholding tax was payable with respect to indirect moving expense reimbursements to employees, plaintiff filed a timely claim for refund, which is the basis for the present action.

II. Discussion

A. Nature of tax paid.

It is firmly established in this court that a volunteer, paying the taxes of another, has no valid claim for a refund. Fidelity & Casualty Co. v. United States, 490 F.2d 960, 203 Ct.Cl. 486 (1974); J. C. Pitman & Sons, Inc. v. United States, 317 F.2d 366, 161 Ct.Cl. 701 (1963). The plaintiffs, in the above cases had clearly paid the taxes of another, and therefore, fell into that fatal category of being volunteers. However, in the present case, the parties cannot agree whether the amount paid by plaintiff represents a voluntary payment of its employees' income tax liability or a payment of plaintiff's own withholding tax liability. The defendant argues forcefully for the former position and the plaintiff argues just as strenuously for the latter position.

It is apparent that the tax paid by plaintiff was calculated by reference to the potential income tax liability of its employees because the rate applied to the amount of indirect moving expense reimbursements was significantly higher than the 14 percent rate for withholding tax applicable to the years in question.⁵ Plaintiff paid a tax of 28 percent on the amount of reimbursements in 1964 and 22 percent in 1965. Plaintiff's accountant was shown the computations by which the IRS agent arrived at these percentages, and a letter from the accountant to Mr. Cady indicates that the tax rate agreed on was calculated from tax rates of various employees sampled.

In view of the above, it must be found that the plaintiff's accountant understood how the IRS agent calculated the amount of tax to be paid. The accountant's understanding of the program seems to be incomplete in...