Philadelphia & Reading Corp. v. Beck
| Decision Date | 20 April 1982 |
| Docket Number | 81-1648,Nos. 81-1623,s. 81-1623 |
| Citation | 676 F.2d 1159 |
| Parties | 82-1 USTC P 9334 PHILADELPHIA & READING CORPORATION, Plaintiff-Appellant, v. Roger C. BECK, District Director, Internal Revenue Service, Defendant-Appellee. PHILADELPHIA & READING CORPORATION, Plaintiff-Appellee, v. Roger C. BECK, District Director, Internal Revenue Service, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Glen H. Kanwit, Hopkins & Sutter, Chicago, Ill., for plaintiff-appellant/plaintiff-appellee.
Carleton D. Powell, Tax Div., Dept. of Justice, Dept. of Justice, Tax Division, Washington, D.C., for defendant-appellant/defendant-appellee.
Before CUMMINGS, Chief Judge, SWYGERT, Senior Circuit Judge, and POSNER, Circuit Judge.
Philadelphia & Reading Corporation (taxpayer) sued the District Director of the Internal Revenue Service for the Chicago District (IRS) to enjoin the collection of approximately $14,000,000 1 in federal income taxes on the ground that the prerequisite assessments of a tax deficiency were illegal. The illegality supposedly stemmed from the IRS's failure to give the proper statutory notice of deficiency under Sections 6212(a) and 6213(a) of the Internal Revenue Code (26 U.S.C. §§ 6212(a) and 6213(a)). 2 The complaint asserted that in the absence of a proper statutory notice of deficiency, the making of the assessments with respect to the taxable years 1965 and 1966 and the taxable period ended on April 30, 1968, was prohibited.
In its answer to the complaint, the IRS asserted that it was unnecessary to issue the taxpayer a notice of deficiency for the periods in question prior to assessing the deficiency. According to the IRS, the taxpayer had waived the notice restrictions provided in Section 6213(a). Therefore, the IRS argued, the assessments made on June 22, 1973, became valid and enforceable before the statute of limitations expired, and no injunction should issue.
The district court held that Section 6213(a) "authorizes the issuance of an injunction to restrain collection of an improperly assessed tax but does not mandate it" (App. A 20). Employing equitable principles, Judge Marshall enjoined the IRS from enforcing income tax deficiencies against the taxpayer in any amount in excess of $4,060,184 (plus interest), which was the amount that the parties had agreed would be due after the IRS credited the deficiencies with overpayments in 1964 and 1967 totaling $6,469,651. 47 A.F.T.R.2d 740 (1980). We affirm.
In the fall of 1972, the IRS completed an audit of the taxpayer and its subsidiaries for five taxable periods. Two of the periods resulted in income tax overpayments while the other three resulted in income tax deficiencies as shown on the following table:
Taxable Period
Ended Deficiency Overpayment
----------------- ----------- -----------
December 31, 1964 $ 231,991
December 31, 1965 $ 19,485
December 31, 1966 9,336,231
December 31, 1967 6,237,660
April 18, 1968 1,174,119
----------- -----------
$10,529,835 $6,469,651
Net Deficiency: $ 4,060,184
-----------
At that point, the above audit schedule was agreed to conditionally by the taxpayer's inside tax counsel, who testified that it was the taxpayer's intention to pay the net deficiency plus interest.
On December 13, 1972, the taxpayer executed a qualified Form 870 to carry out the settlement agreement. By that form, the taxpayer waived notice and other restrictions on the assessment and collection of the foregoing deficiencies and agreed to the correctness of the overpayments and net deficiency subject to a condition. The condition upon which the waiver depended provided that the overpayment periods first be executed by an IRS official on a schedule of overassessments pursuant to Section 6407 of the Code. This condition was described as follows:
This document shall be effective as a waiver of restrictions on assessments and collections with respect to the taxable years ending December 31, 1965 and December 31, 1966 and the taxable period ending April 18, 1968 on the date the schedule of overassessments with respect to the taxable years ending December 31, 1964 and December 31, 1967 is signed by an authorized representative of the Internal Revenue Service.
Ordinarily, a deficiency cannot be assessed nor collection efforts begun until the taxpayer is given a notice of the deficiencies and ninety days to file a petition in the Tax Court. Section 6213(a). The purpose of the above condition was to satisfy the taxpayer's understandable unwillingness to pay the $10,529,835 deficiencies while awaiting approval of the $6,469,651 total overpayments by the Congressional Joint Committee on Internal Revenue Taxation. 3 The taxpayer did not want the three deficiencies assessed until the two overpayments could be offset against them. And if the Joint Committee failed to approve the overpayments, the waiver would be ineffective, allowing the taxpayer to contest the matter in the Tax Court prior to payment of the stated deficiencies.
On June 19, 1973, the taxpayer's case had cleared the Joint Committee, thus permitting the IRS to pay refunds to the taxpayer in excess of $100,000 under Section 6405(a). Both overpayments were actually credited to taxpayer in August 1973, before the expiration of the applicable statute of limitations. The schedules of overpayments with respect to the taxable years 1964 and 1967 were signed by "an authorized representative of the Internal Revenue Service" in August and October 1973, respectively, thus satisfying the express condition in the waiver Form 870. 4
On December 4, 1973, the taxpayer's counsel was given a computer print-out sheet showing that the two overpayments had been credited against the deficiencies and that the IRS was seeking to collect only the $4,060,184 net deficiency. Counsel also learned that the schedule of assessment procedure mentioned in Section 6407 and in the Form 870 had been replaced by computer processing. Nevertheless the taxpayer filed this lawsuit even though the Commissioner was seeking to collect only the agreed net deficiency and the promised schedules of overassessments had both been signed.
When the IRS completed its audit of the taxpayer in the autumn of 1972, a demand could have been made upon the taxpayer to pay the $4,060,184 net deficiency following the 90-day notice prescribed by Section 6213(a) of the Internal Revenue Code. Indeed, the IRS could have demanded payment of the $10,529,835 total deficiency and forced the taxpayer to recoup its overpayments separately. However, as seen, since the two overpayments were in excess of $100,000 the Secretary of the Treasury could not authorize their scheduling until a report was made to the Congressional Joint Committee on Internal Revenue Taxation, with the Joint Committee afforded 30 days within which to express its objections. Prior to the scheduling of overassessments contemplated by Section 6407, the IRS could disapprove a refund or credit regardless of the position taken by the Joint Committee. Thus the taxpayer might have to wait a considerable period of time for the payment or credit of its overassessments, if forthcoming. Consequently, the taxpayer executed the Form 870 conditional waiver of the 90-day notice of deficiency prescribed in Section 6213(a) of the Code and consented to the assessment and collection of the $4,060,184 net deficiency plus interest. However, as seen, the taxpayer made its waiver conditional "on the date the schedule of overassessments with respect to the taxable years ending December 31, 1964 and December 31, 1967 is signed by an authorized representative of the Internal Revenue Service."
While the matter was under consideration by the Joint Committee, the Chicago district office of the IRS sent at least some of the relevant control documents to the IRS Kansas City Service Center with instructions to process the case. Under procedures at the Service Center, when the control documents indicate deficiencies of over $50,000, the deficiencies are automatically assessed unless the Service Center has been instructed not to make an assessment. Accordingly, in early 1973, the Service Center issued a $14,000,000 assessment to taxpayer even though no 90-day notice had been sent to taxpayer as required under Section 6213(a) of the Code and the condition of taxpayer's waiver of notice had not been met since its overpayments had not yet been scheduled. This caused the taxpayer's tax counsel to telephone an employee of the Service Center requesting her to abate the assessments. She promptly complied.
On June 22, 1973, the same employee of the Service Center who had sent the taxpayer the improper assessments again sent similar assessments because she thought the statute of limitations was expiring on June 30, 1973. When the Service Center issued the $14,000,000 tax bills in June 1973, it had not been informed that the taxpayer had already consented to extend the statute to September 30, 1973.
On June 26, 1973, the taxpayer was advised that on June 19, 1973, the Joint Committee approved the IRS determination of the taxpayer's overpayments for 1964 and 1967, thus enabling the Treasury Secretary's delegate to authorize the scheduling of the overassessments under Section 6407 of the Internal Revenue Code.
After receiving the $14,000,000 tax bills, the taxpayer's inside tax counsel notified the Kansas City Service Center that the assessments were premature since the condition of the Form 870 waiver had not yet been met. At the same time he advised the Kansas City office that the taxpayer had consented to an extension of the statute of limitations until September 30, 1973. This resulted in the staying of the collection of the bills until after the taxpayer's account was credited...
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