Sanders v. Commissioner of Internal Revenue

Decision Date30 September 1955
Docket Number5024,5070.,No. 4968-4970,4968-4970
PartiesLeo SANDERS and Jessie H. Sanders, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Leo SANDERS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Jessie H. SANDERS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. T. Coleman ANDREWS, Commissioner of Internal Revenue, Arthur L. Fleming, District Commissioner of Internal Revenue for Oklahoma and Texas, and Earl R. Wiseman, Director of Internal Revenue at Oklahoma City, Oklahoma, Appellants, v. Leo SANDERS and Jessie H. Sanders, Appellees (two cases).
CourtU.S. Court of Appeals — Tenth Circuit


Herman J. Galloway, Washington, D. C. (Dan Moody and John E. Marshall, Washington, D. C., on the brief), for appellant.

Homer R. Miller, Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack, Sp. Asst. to Atty. Gen., on the brief), for Commissioner.

Before BRATTON, HUXMAN and PICKETT, Circuit Judges.

PICKETT, Circuit Judge.

These cases grow out of deficiencies in income taxes, penalties and interest for the years 1943, 1944, 1946 and 1949 assessed against Leo Sanders and his wife, Jessie H. Sanders.1 Jeopardy assessments and liens were then filed. On January 26, 1953, the taxpayers filed a declaratory judgment action in the United States District Court for the Western District of Oklahoma against the Commissioner, the District Commissioner, and the Director of Internal Revenue for the District of Oklahoma in which they sought to quiet title in the taxpayers to certain property, to cancel certain liens, and to enjoin the collection of income taxes for the year 1949 upon the grounds that the taxes had been compromised and settled. On February 3, 1953, the taxpayers sought a redetermination of the income tax deficiency in the United States Tax Court. The principal question in the Tax Court and District Court cases was whether a settlement between the United States and the taxpayers of the amount due under a construction contract included a settlement of the taxpayers' liability for income taxes on the amount paid to them. The Tax Court held that it did not, 21 T.C. 1012, and the District Court, after overruling an objection to its jurisdiction, held that the settlement did include any liability for income taxes on the amount received. Sanders v. Andrews, D.C., 121 F.Supp. 584. The questions presented grew out of the same facts, and the cases were consolidated on appeal. We have concluded that the decision of the Tax Court that the settlement did not include the taxpayers' liability for income taxes is correct. It is therefore unnecessary to consider the jurisdiction of the District Court.

Leo Sanders had been engaged in the general contracting and construction business for many years. He kept his books on the accrual method of accounting. On June 6, 1942, he entered into a contract with the United States under which he agreed to do certain construction work in connection with the Oklahoma Aircraft Assembly Plant at Oklahoma City, Oklahoma. He completed the job early in 1943. During the construction period, considerable changes were made in the plans and specifications, and there were demands that much of the work be accelerated. As a result, the cost of construction was greatly increased and Sanders made claims for additional compensation. It was determined that some of the claims were justified, and Congress appropriated over $1,600,000 to adjust them.

To prevent the running of the statute of limitations, Sanders brought an action in the United States Court of Claims against the United States and sought a judgment for $2,254,420.37. The purpose of the action was to recover an amount alleged to be due on the construction contract. The Department of Justice took charge of the defense of the case. The complaint was not predicated upon a claim for taxes of any character. Representatives of the Department of Justice conferred with the taxpayer, his attorneys and accountants. It was conceded that the United States was indebted to Sanders, and an investigation was made to determine the amount and to verify the cost figures prepared by Sanders' auditor. During this investigation, an examination of Sanders' tax records and returns was made. During the investigation, an attorney for the Department of Justice told Sanders that upon receipt of any settlement money he would have a tax problem and that he should employ a good tax lawyer. On June 29, 1949, after extensive oral negotiations, a settlement was effected under which the United States agreed to pay Sanders $955,101.71, in full settlement of his claims. Sanders' offer to accept this sum stated:

"I hereby offer to accept the sum of $954,100.00, which includes bond premium of $14,100.00, in full settlement of all claims which are included in the above entitled suit and of all claims growing out of Contract W-957-eng-968 and of the construction of the Oklahoma Aircraft Assembly Plant near Oklahoma City, Oklahoma. To this should be added the payment of retained percentage in the amount of $1,001.71, making a total of $955,101.71."

The United States, through the Attorney General's office, accepted this offer in a letter which stated in part:

"Please be advised that the acceptance of your offer to compromise and the filing with the Court of Claims of your Motion to Dismiss the petition, which has been furnished this Department to be held in escrow pending receipt by you of the amount mentioned above, covers all claims arising out of the contract whether or not they are set forth in the petition."

On June 30, 1949, Sanders and an officer in the Army Engineer Corps, acting for the United States, signed a supplemental agreement which modified the original contract in accordance with the compromise settlement agreed upon between the parties and which stated:

"Upon payment of the above amount agreed to as a compromise settlement, and retained percentage in the amount of $1,001.71, all matters between the Contractor and the Government arising by reason of or in connection with Contract No. W-957-eng-968 will have been settled, and, the contractor hereby releases the Government from any and all claims now filed or to be filed in the future, arising from or in connection with Contract No. W-957-eng-968, as amended."

Upon receipt of the settlement money, Sanders dismissed his action with prejudice.

On September 15, 1950, Leo Sanders filed a tentative income tax return for 1949 which did not include the amount received under the settlement. Thereafter, an agent of the Bureau of Internal Revenue insisted, without success, upon the filing of a completed return. In 1952, the Commissioner determined that the amount Sanders received from the settlement was income, and assessed a deficiency with penalties and interest. Jeopardy assessments, distraint and tax liens were filed against the property of Sanders. On September 12, 1952, Sanders and his wife filed a joint return for 1949 in which the amount received in the settlement was reported as a capital gain. A capital gain tax of $247,694.44 was paid. Sanders testified that this return was made at the suggestion of the Director of Internal Revenue for Oklahoma, who stated that he believed that the property would be released upon such payment. At the time the liens were filed, the Commissioner requested proper officials of the United States to withhold from Sanders the payment of $49,279.23, which was admittedly due on another contract, and apply the amount on the taxes owing.

We think that there is a total lack of evidence to show that the settlement of the contractual claims which Sanders was asserting against the United States included a settlement of the income taxes which would be due on the amount received under the settlement. When the settlement was made, no taxes were due. No mention of income tax liability was made in any of the written documents. The evidence relied upon to sustain the position of the taxpayers was the testimony of Sanders and his assistant. They relate to observations which appear at most to be the expression of opinion by an attorney for the Department of Justice to the effect that there would be no income taxes due.2 The taxpayer discussed the matter with the Deputy Attorney General and made no mention to him that his tax liability was also to be settled. The taxpayers' auditor was present when the final settlement was agreed upon, and he was not told that the settlement would include a release of liability for income taxes. All of the investigations and the negotiations between the parties were carried on to determine the amount due Sanders for services in performing the contract. The complaint in the litigation which was settled by the agreement asked only for a judgment in the sum due for services performed under the contract. When that amount was agreed upon and paid, it was income the same as though the sum had been specified in the contract. There is clearly no basis for holding that the oral statement of an attorney for the Department of Justice was sufficient to constitute a contract to relieve the taxpayers of payment of income taxes on the amount received.

Sanders testified that he would not have accepted the settlement had he known that the amount received thereunder was to be taxable. Even if this were true, there is no evidence that any one representing the United States agreed that the important item of income tax was to be settled. Neither Sanders nor his attorney and accountants claimed that the taxes were included in the settlement until long after its execution. In the 1952 return and in a letter written in October, 1952, Sanders' tax attorney referred only to the question of whether the income could be considered as a capital gain.

Furthermore, there was no tax dispute and even if the settlement was intended to include tax liability, it did not...

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