Motor Fuel Carriers, Inc. v. United States

• Decision Date: 23 January 1970
• Docket Number: No. 43-68.,43-68.
• Citation: 420 F.2d 702
• Parties: MOTOR FUEL CARRIERS, INC. v. The UNITED STATES.
• Court: U.S. Claims Court

420 F.2d 702 (1970)

MOTOR FUEL CARRIERS, INC. v. The UNITED STATES.

No. 43-68.

United States Court of Claims.

January 23, 1970.

William R. Frazier, Jacksonville, Fla., attorney of record, for plaintiff.

Frances M. Foltz, Washington, D. C., with whom was Asst. Atty. Gen., Johnnie M. Walters, for defendant. Philip R. Miller, Washington, D. C., of counsel.

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

OPINION

DAVIS, Judge.

We have to decide, on undisputed facts submitted by joint stipulation, a narrow but prickly issue emerging from the accumulated earnings tax imposed by § 531 of the Internal Revenue Code of 1954.¹ Taxpayer, a Florida corporation, was assessed income tax deficiencies for 1958-1962, including accumulated earnings taxes. Within ten days of notice and demand by the Government, the company paid the entire amount of the tax alleged to be due, with interest from the return due date of the years in question. It then sued to recover the amount thus paid under § 531. Motor Fuel Carriers, Inc. v. United States, 202 F.Supp. 497 (N.D.Fla.1962), remanded 322 F.2d 576 (C.A.5 1963), on remand 244 F.Supp. 380 (N.D.Fla.1965). Judgment for the Government for the entire amount was finally rendered in the spring of 1965. Thereafter, plaintiff made claim with the District Director of Internal Revenue for return of the interest paid on the accumulated earnings tax, $34,381.09. The theory was that this tax is a penalty or additional tax, interest upon which must be assessed under § 6601(f) (3),² prescribing that interest on assessable penalties or additions to the tax begins ten days after notice and demand. Upon failure of the District Director to allow the claim,³ plaintiff filed suit for refund in this court.

The case presents two related questions: (1) Is the accumulated earnings tax an "assessable penalty, additional amount, or addition to the tax" within § 6601(f) (3); and (2) if the interest on the § 531 tax is not covered by § 6601(f) (3), what, for the purposes of § 6601(a), is the "last date prescribed for payment"? Since we find for the taxpayer on alternative grounds, we discuss both of these issues in the matrix of the accumulated earnings tax.

The accumulated earnings tax: The history of the accumulated earnings tax reflects a congressional purpose to minimize revenue losses caused by nondistribution of gains and profits by corporations attempting to shield their shareholders from the individual income tax. See United States v. Donruss Co., 393 U.S. 297, 303, 307, 89 S.Ct. 501, 21 L.Ed.2d 495 (1969); Helvering v. National Grocery Co., 304 U.S. 282, 58 S. Ct. 932, 82 L.Ed. 1346 (1938); Williams Investment Co. v. United States, 3 F. Supp. 225, 239, 77 Ct.Cl. 396, 426 (1933) (concurring opinion); Casey v. Comm'r, 267 F.2d 26, 32 (C.A.2 1959) (Hand, J., concurring opinion); Estate of Goodall v. Comm'r, 391 F.2d 775, 796 (C.A.8), cert. denied, Sub. Nom. Good-All Electric Mfg. Co. v. Comm'r, 393 U.S. 829, 89 S.Ct. 96, 21 L.Ed.2d 100 (1968). To achieve that goal Congress discourages undesirable withholding by treating, to a certain extent, that as done which ought to be done. See Pomeroy, The Statutory Pattern, 17 W.Res.L.Rev. 704, 705 (1966). See also B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, 209-238 (2nd ed. 1966). In 1913, at the start of the modern federal income tax, shareholders were required to include in their returns their distributive share of the yearly corporate earnings, whether distributed or not, of those businesses "however created or organized, formed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed * * *" Rev.Act of 1913, ch. 16, 38 Stat. 166. Later, fearing possible constitutional objections stemming from Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920), Congress relieved stockholders of personal liability under the accumulated earnings tax, and placed the levy directly upon the offending corporation, at a rate of 25% of the undistributed earnings for the year in question. This format of taxing the corporation exists today, though fairly substantial revisions have been made. Compare Rev.Act of 1921, ch. 136, § 220, 42 Stat. 247, with Int.Rev.Code of 1954, 26 U.S.C. §§ 531-537 (1964).

From the early history of the accumulated earnings tax, four factors are to be particularly noted: (1) In both the 1913 and the 1921 Acts, the tax imposed was part of an "additional tax" or "in addition to" the normal income tax (38 Stat. at 166; 42 Stat. at 247); (2) mere accumulation of gains and profits was not to be viewed as indicative of the forbidden intent to avoid individual taxes, unless the Commissioner certified that in his opinion the accumulation was unreasonable for the needs of the business (38 Stat. at 167; 42 Stat. at 248); (3) the tax imposed was to be "levied, collected, and paid for each taxable year" (Rev. Act of 1921, ch. 136, § 220, 42 Stat. 247; Rev.Act of 1913, ch. 16, 38 Stat. 166); and (4) it was to be "computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as the normal income tax. * * *" (Rev.Act of 1921, ch. 136, § 220, 42 Stat. 247; cf. Rev.Act of 1913, ch. 16, 38 Stat. 166).

In 1934, the phrase "in addition to" was deleted from the tax-imposing provision, Rev.Act of 1934, ch. 277, § 102, 48 Stat. 702, and "surtax" substituted. The prohibition on regarding the accumulation as a violation of the proscribed purpose, without certification by the Commissioner, was eliminated in 1924, Rev.Act of 1924, ch. 234, § 220, 43 Stat. 277. The Revenue Code of 1939, with minor changes, simply adopted the 1934 provisions. Int.Rev.Code of 1939, 26 U. S.C. § 102 (1952). The 1954 Code, with alterations we believe significant for this case, substantially incorporated the requirements of the 1939 Code. Int. Rev.Code of 1954, 26 U.S.C. §§ 531-537 (1964). In 1954, however, Congress reinstated the phrase "in addition to" in describing the nature of the tax. 26 U. S.C. § 531. It also added a section carefully allocating the burden of proof in § 531 cases tried before the Tax Court, so as to place that burden largely on the Internal Revenue Service. 26 U.S.C. § 534.⁴

Even though the statute has not, since 1924, explicitly required the Commissioner of Internal Revenue to make a determination that the accumulation is unreasonable, and therefore that the tax is imposable, the actual practice is, and has been, that the tax is not "self-assessing" but is levied only after and by determination of the Revenue Service. There is no provision in, or part of, Treasury Form 1120 (the return form) for reporting the amount subject to this tax; nor are there any schedules or instructions for reporting the item. It is left wholly to the Government's initiative. See Mertens, Law of Federal Income Taxation, Vol. 7, § 39.57 (Rev. ed. 1967).⁵

This procedure has not come about by happenstance, the Treasury's neglect, or the irresponsibility of corporate taxpayers. It is inherent in the nature of the tax — and was formerly recognized specifically by Congress — that a taxpayer can hardly determine for itself, with any accuracy, if the tax is due, and if so to what extent. The general standard of liability (§ 532) is the elusive one that the corporation has been, during the taxable year, "formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed." The difficulty of applying this criterion is increased by the further declarations that "the fact that the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders" (§ 533), and (with respect to non-holding or non-investment company taxpayers) that account is to be taken of that part of earnings and profits "retained for the reasonable needs of the business," including "the reasonably anticipated needs of the business" (§§ 535(c), 537). These are complex and difficult evaluations, invoking very large elements of judgment and discretion, and with great room for difference of opinion.

Section 6601(f) (3): Section 6601(f) (3) (supra, note 2), headed "Interest on penalties, additional amounts, or additions to the tax", allows interest "in respect of any assessable penalty, additional amount, or addition to the tax" only if that sum is not paid within 10 days of notice and demand. Literally read, this section covers the accumulated earnings tax. That impost may or may not be a "penalty" within this section's coverage,⁶ but it can easily be characterized as an "additional amount" or an "addition to the tax." As we have seen, that was how Congress expressly described it, in terms, until 1934 and, again, in the 1954 Code (see fn. 1, supra). In ordinary English, moreover, that is just what this tax appears to be — an addition to the regular income tax.

Even for tax legislation, the literal or on-the-face reading may turn out to be inapt, and the Government urges that that is so here. The burden of the argument is that the history and context of § 6601(f) (3) demonstrate that, for this provision, the only "additional amounts or additions to the tax" can be those so named and included in chapter 68 of the 1954 Code, §§ 6651-6683 ("Additions to the Tax, Additional Amounts, and Assessable Penalties").⁷ It is true that, in the 1939 Code, one of the provisions then dealing with interest (§ 294(b), on delinquency interest) referred in terms to "additional amounts" or an "addition" which were related expressly to some of the items now...