Priess v. United States

• Decision Date: 10 December 1941
• Docket Number: No. 192.,192.
• Citation: 42 F. Supp. 89
• Parties: PRIESS v. UNITED STATES.
• Court: U.S. District Court — District of Washington

42 F. Supp. 89

PRIESS v. UNITED STATES.

No. 192.

District Court, E. D. Washington, N. D.

December 10, 1941.

Tustin & Chandler, of Spokane, Wash., for plaintiff.

Lyle Keith, U. S. Dist. Atty., of Spokane, Wash., for defendant.

SCHWELLENBACH, District Judge.

In this action plaintiff asks judgment for the amount of interest paid by him under protest on the deficiency assessments levied against him on his income taxes for the years 1936-1939 inclusive. The facts are not in dispute. In plaintiff's returns during each of these years he reported as income on his single premium life insurance annuities, with death benefit contract 3% of the consideration paid for the annuity part of the insurance policies. These returns were made in conformity with the interpretation placed upon the Statute by the Internal Revenue Bureau (General Counsel Memorandum 6395). Thereafter, on January 8, 1940, defendant, through its Internal Revenue Bureau, adopted a new interpretation of Section 22(b) (2) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev. Code § 22(b) (2) (General Counsel Memorandum 21716). Under this interpretation it was held that such single premium life insurance annuities, with death benefit contracts, were not annuity contracts but contracts for the payment of the interest or earnings on a certain fund. Under the new interpretation, plaintiff's income for tax purposes during each of the years mentioned was substantially increased. Thereafter, a deficiency assessment was imposed, 26 U.S.C.A. Int.Rev.Code, § 271. Included in such deficiency as a part of the tax was interest at the rate of 6% per annum from the date prescribed for the payment of the tax to the date the deficiency was assessed. 26 U.S.C.A. Int.Rev.Code, § 292. Plaintiff paid the principal of the deficiency without objection but he paid the interest portion of the deficiency under protest and this action is to compel the refunding of such interest.

It is conceded that, in making his returns and in paying his taxes during the period mentioned, plaintiff complied fully with the requirements of the defendant and the defendant's interpretation of the Statute. Plaintiff's theory in this case is that, as to him, the collection of interest constituted a penalty. He makes this contention on the basis that he neither borrows nor lends money. He has retired from business. All of his funds are invested. He spends his income for personal living expenses, traveling expenses and donations to charity. He, therefore, argues that the retention of the money which he should have paid during each of the involved years was of no value to him and that, therefore, he should not be penalized by being compelled to pay for the use of it since he was without fault.

To this contention, defendant answers that this Court has no authority to render judgment on recovery of either taxes or interest collected in pursuance of an Act of Congress enacted in pursuance of its constitutional authority. Jackson Furniture Company v. McLaughlin, 9 Cir., 85 F.2d 606; United States v. Globe Indemnity Company, 2 Cir., 94 F.2d 576.

To my mind, this is a complete answer. The Statute is plain and unambiguous. It reads: "Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency, shall be paid upon notice and demand from the collector, and shall be collected as a part of the tax, at the rate of 6 per centum per annum from the date prescribed for the payment of the tax * * *." 26 U.S.C.A. Int.Rev.Code § 292.

Clearly, in the light of the Statute and the ruling of the Circuit Court of Appeals of the Ninth Circuit, Jackson Furniture Company v. McLaughlin, supra, it does not lie within my power to undo the action of the Commissioner in which he was following the plain, simple mandate of the Statute.

However, plaintiff makes a forceful and an appealing argument on the basis that he is being penalized when he was in fact innocent of wrongdoing. So forcible and so appealing is plaintiff's argument that I feel constrained to examine closely the question as to whether this is a penalty.

It is evident that the Congress, in providing interest on deficiency assessments, did not consider such interest to be a penalty. This is shown by the fact that, in two separate sections of the Act apart from the interest on deficiency section, the Congress provided for penalties. In 26 U.S.C.A. Int.Rev.Code § 291, there is provided the penalty for failure to file a return. In 26 U.S.C.A. Int.Rev.Code § 293, there are provided penalties for deficiencies due to negligence or intentional disregard of rules and regulations and for deficiencies due to fraud with intent to evade the tax. The legislative intent to distinguish between penalty and interest is clear.

Plaintiff, in his...