STANDARD OIL COMPANY (NEW JERSEY) v. McMahon

• Citation: 139 F. Supp. 690
• Parties: STANDARD OIL COMPANY (NEW JERSEY), Plaintiff, v. Denis J. McMAHON, individually and as District Director of Internal Revenue, Lower Manhattan, Defendant.
• Decision Date: 27 February 1956
• Court: U.S. District Court — Southern District of New York

139 F. Supp. 690

STANDARD OIL COMPANY (NEW JERSEY), Plaintiff, v. Denis J. McMAHON, individually and as District Director of Internal Revenue, Lower Manhattan, Defendant.

United States District Court S. D. New York.

February 27, 1956.

Davis, Polk, Wardwell, Sunderland & Kiendl, New York City, for plaintiff, D. Nelson Adams and John N. Stull, New York City, of counsel.

Thomas B. Gilchrist, Jr., Chief U. S. Atty. for the Southern District of New York, New York City, for defendant, Howard A. Heffron, Asst. U. S. Atty., New York City, of counsel.

HERLANDS, District Judge.

Plaintiff-taxpayer commenced this action¹ on March 21, 1955 to enjoin defendant-District Director of Internal Revenue from collecting or attempting to collect from plaintiff any part of two certain assessments of interest on deficiencies in plaintiff's consolidated excess profits tax returns for the calendar years 1943 and 1944.

The decisive question in this case is raised by defendant's motion to dismiss the complaint on the ground that there is "lack of jurisdiction over the subject matter". Rule 12(b) (1) F.R. C.P., 28 U.S.C.A. The answer to that question involves the interpretation and application of section 272(a) (1) of the Internal Revenue Code of 1939, 26 U.S. C.A. § 272(a) (1); now, with changes, Internal Revenue Code of 1954, §§ 6212 (a) and 6213(a).²

Section 272(a) (1) is an express exception³ to the general provision that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." Section 3653(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 3653(a), now Internal Revenue Code of 1954, § 7421(a).

In the exceptional case provided for by section 272(a)(1), the taxpayer may maintain an injunction suit to restrain the collection of an assessment where the assessment is for a tax deficiency and the tax authorities have not complied with the procedure and timetable prescribed by section 272(a) (1).

Section 272(a) (1), so far as relevant, provides:

"If in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this chapter, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within ninety days after such notice is mailed * * * the taxpayer may file a petition with The Tax Court of the United States for a redetermination of the deficiency. No assessment of a deficiency in respect of the tax imposed by this chapter and no distraint or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such ninety-day period, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. Notwithstanding the provisions of section 3653(a) the making of such assessment or the beginning of such proceeding or distraint during the time such prohibition is in force may be enjoined by a proceeding in the proper court. * * *"

The core of this controversy can be excised from its factual and legal complexities by stating defendant's position syllogistically:

1. The procedure and timetable prescribed by section 272(a) (1) apply only to an assessment of a tax deficiency and not to an assessment of interest on a deficiency.

2. This case involves an assessment of interest on a deficiency as distinguished from an assessment of a deficiency.

3. Therefore, since section 272(a) (1) does not apply to this case, plaintiff's action for an injunction — which is mistakenly based on that section — must be dismissed for jurisdictional insufficiency.

Whether the above premises are valid must be determined in the light of the allegations contained in the complaint and as amplified by a "Stipulation of Facts."

I.

The 1943 Tax Return:

On June 29, 1954, defendant mailed to plaintiff a notice that there had been assessed against plaintiff the sum of $6,334,565.70 (subsequently corrected and reduced to $1,682,410.45) representing interest on a deficiency in plaintiff's excess profits tax for the year 1943. Immediate payment was demanded.

At no time has plaintiff agreed to the determination or assessment of any deficiency in its excess profits tax for 1943.

Plaintiff's consolidated excess profits tax return for the calendar year 1943 had been filed on September 15, 1944.⁴ In that tax return, plaintiff claimed an unused excess profits credit carry-over from the year 1941 as an unused excess profits credit adjustment on its 1943 return. As a result, plaintiff's 1943 return showed no excess profits tax due.

Defendant asserts that a substantial portion of the 1941 carry-over credit which plaintiff utilized on its 1943 return was improper and should be eliminated. On the other hand, plaintiff claims that the 1941 carry-over was proper; and it is plaintiff's position that there is an unresolved controversy between plaintiff and defendant with respect to the propriety of the 1941 carry-over and whether there ever was a deficiency in plaintiff's excess profits tax for 1943.

Defendant further contends that the elimination of the improper 1941 carry-over credit would result in a deficiency in plaintiff's excess profits tax for the year 1943, in the absence of other circumstances; that there were such other circumstances subsequently occurring that prevented a deficiency in 1943, namely, that plaintiff was entitled to the benefit of an unused excess profits credit carryback from the year 1945;⁵ and that, therefore, the deficiency in respect of plaintiff's excess profits tax for 1943 abated and was eliminated as and when the 1945 carry-back was applied to the 1943 tax.

II.

The 1944 Tax Return:

On November 24, 1954, defendant mailed to plaintiff a notice that there had been assessed against plaintiff the sum of $209,332.48 (subsequently corrected and reduced to $172,394.18), representing interest on plaintiff's excess profits tax for 1944. Immediate payment was demanded.

At no time has plaintiff agreed to the determination or assessment of any deficiency in its excess profits tax for 1944.

Plaintiff's consolidated excess profits tax return for the calendar year 1944 had been filed on September 14, 1945.⁶ In that tax return, plaintiff claimed an unused excess profits credit carry-over from the year 1942 as an unused excess profits credit adjustment on its 1944 return. After giving effect to this 1942 carry-over, plaintiff's 1944 return showed an excess profits tax in the amount of $947,510.41 to be due and owing, which amount was paid by plaintiff when due.

Defendant asserts that the 1942 carry-over credit which plaintiff utilized on its 1944 return was improper and should be eliminated. This is disputed by plaintiff.

Defendant further contends that the elimination of the improper 1942 carry-over credit would result in a deficiency in plaintiff's excess profits tax for the year 1944, in the absence of other circumstances; that there were such other circumstances subsequently occurring which prevented the deficiency in 1944, namely, that plaintiff was entitled to the benefit of an unused excess profits credit carry-back from the year 1945;⁷ and that, therefore, the deficiency in respect of plaintiff's excess profits tax for 1944 abated and was eliminated as and when the 1945 carry-back was applied to the 1944 tax.

III.

The Gist of Plaintiff's Argument:

Plaintiff argues that it has been improperly foreclosed from exercising the right to petition the Tax Court for a re-determination of the alleged 1943 and 1944 deficiencies, because defendant did not mail the usual 90-day letter, the statutory notice of deficiency, and because defendant did not thereafter assess such 1943 and 1944 deficiencies.

This argument entails the contention that, by virtue of the provisions contained in section 292(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 292(a), interest on a deficiency must be assessed at the same time that the deficiency itself is assessed, and that in the absence of an assessment of the deficiency, there can be no independent or separate assessment of interest on such deficiency. Section 292(a) provides that "interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency, * * * and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax * * * to the date the deficiency is assessed, * * *." This language means, according to plaintiff, that interest may not be lawfully assessed unless defendant first has determined that there is a deficiency and the amount of the deficiency; and that interest may not be collected, at the statutory six per cent rate to the date the deficiency is assessed, unless defendant shall have first assessed the deficiency. Applying this line of reasoning to the facts herein, plaintiff points out that defendant did not assess a deficiency in respect of plaintiff's excess profits tax for either 1943 or 1944; that no notice of deficiency in respect of the alleged 1943 and 1944 deficiencies was ever sent to plaintiff; and that, therefore, the assessments of interest on such deficiencies are invalid and not enforceable by payment.

IV.

The Gist of Defendant's Argument:

In point of fact, defendant argues, the 1941 and 1942 carry-overs improperly reduced plaintiff's excess profits tax for 1943 and 1944. In the course of his audit examination, defendant determined (without assessment) that there were tax deficiencies for the years 1943 and 1944, and that plaintiff was entitled to certain carry-backs for the year 1945. When defendant applied the 1945 carry-backs to the 1943 and 1944 deficiencies, the 1943 and 1944 deficiencies were cleaned up and eliminated as of December 31, 1945, the date when plaintiff became entitled to the 1945 carry-backs. However, the 1943 and 1944 deficiencies, as determined by defendant, were a...