Standard Oil Company v. McMahon

• Decision Date: 26 April 1957
• Docket Number: No. 60,Docket 24135.,60
• Citation: 244 F.2d 11
• Parties: STANDARD OIL COMPANY (New Jersey), Plaintiff-Appellant, v. Denis J. McMAHON, Individually and as District Director of Internal Revenue, Lower Manhattan, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

244 F.2d 11 (1957)

STANDARD OIL COMPANY (New Jersey), Plaintiff-Appellant, v. Denis J. McMAHON, Individually and as District Director of Internal Revenue, Lower Manhattan, Defendant-Appellee.

No. 60, Docket 24135.

United States Court of Appeals Second Circuit.

Argued January 17, 1957.

Decided April 26, 1957.

Davis, Polk, Wardwell, Sunderland & Kiendl, New York City (D. Nelson Adams, New York City, of counsel), for plaintiff-appellant.

Thomas B. Gilchrist, Jr., Chief Asst. U. S. Atty., for the Southern Dist. of New York, New York City (Howard A. Heffron and Miriam R. Goldman, Asst. U. S. Attys., New York City, of counsel), for defendant-appellee.

Before MEDINA and HINCKS, Circuit Judges, and LEIBELL, District Judge.

MEDINA, Circuit Judge.

This action was brought to enjoin the collection of an assessment of interest in respect of alleged "deficiencies"¹ in appellant's excess profits taxes for the years 1943 and 1944. The District Court ruled that it was without jurisdiction to grant the relief sought and dismissed the complaint. 139 F.Supp. 690. This appeal followed.

In its excess profits tax returns for the years 1943 and 1944 appellant claimed unused excess profits tax credit carryovers from the years 1941 and 1942, as a result of which it paid less in taxes than would otherwise have been due. Upon final audit of these returns some years later, the Commissioner disallowed a portion of these carryovers, thus determining "deficiencies" to that extent for the years in question. The Government does not seek to collect those asserted "deficiencies," inasmuch as they were abated, if they ever existed, by the application of an excess profits tax credit carryback in 1945.² The Government does, however, claim interest on the alleged "deficiencies" for the period during which it says there were such "deficiencies." Appellant, since it maintains that there never was any "deficiency," has resisted the claim for interest.

In 1954, the statutes of limitations having been extended by appropriate stipulations, the Government assessed the interest claimed. No notice of deficiency had been mailed. Appellant thereupon commenced this action to restrain collection of the assessment on the ground that Section 272(a) (1) of the Internal Revenue Code of 1939 prohibited such an assessment without a prior notice of deficiency. The sole issue before us is whether the procedure set forth in Section 272 is applicable.

That section 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. * * *" 26 U.S.C.A. § 272(a) (1).

Section 272 had its origin in Section 274 of the Revenue Act of 1924, 43 Stat. 297. Before that time taxpayers were not permitted to litigate the correctness of the Commissioner's determination of tax until they had paid the amount claimed. In that year, the Congress established the Board of Tax Appeals (known since 1942 as the Tax Court) "to provide taxpayers an opportunity to secure an independent review * * * in advance of their paying the tax found by the Commissioner to be due. Before the Act of 1924 the taxpayer could only contest the Commissioner's determination of the amount of the tax after its payment. The Board's duty under the Act of 1924 was to hear, consider, and decide whether deficiencies reported by the Commissioner were right." Old Colony Trust Co. v. Commissioner of Internal Revenue, 279 U.S. 716, 721, 49 S.Ct. 499, 501, 73 L.Ed. 918.

The Tax Court's jurisdiction under Section 272 is on its face limited to situations in which "the Commissioner determines there is a deficiency," and the Tax Court has power only to redetermine such a "deficiency." Thus, it has no jurisdiction of questions which relate solely to the assessment of interest. Commissioner of Internal Revenue v. Kilpatrick's Estate, 6 Cir., 140 F. 2d 887; United States v. Globe Indemnity Co., 2 Cir., 94 F.2d 576; Standard Portland Cement Co. v. Commissioner of Internal Revenue, 3 Cir., 80 F.2d 585; Crolich v. United States, D.C., 144 F. Supp. 109; Guaranty Trust Co. of New York v. United States, D.C., 95 F.Supp. 776; Estate of Sloane, 3 T.C.M. 555, 570. Similarly, if prior payment has extinguished the "deficiency," there is no jurisdiction in the Tax Court even though this be contrary to the intention of the parties. Bendheim v. Commissioner of Internal Revenue, 2 Cir., 214 F.2d 26; McConkey v. Commissioner of Internal Revenue, 4 Cir., 199 F.2d 892; Superheater Co. v. Commissioner of Internal Revenue, 2 Cir., 125 F.2d 514; Walsh, 21 T.C. 1063; Anderson, 11 T.C. 841. The statutory procedure urged by appellant is applicable, of course, only where the Tax Court has jurisdiction, since the deficiency notice procedure was designed only to allow such a determination prior to payment.

Two points should be made very clear in limine. First, it is settled that the Government is entitled to interest if the asserted "deficiencies" did exist for a period of time. Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346. The only dispute in the case at bar relates to the proper procedure to be used. Second, the Government does not seek to prevent appellant from litigating the existence of the asserted "deficiencies." If the interest is collected under the challenged procedure, appellant will be free to litigate that issue in a suit for refund.

Appellant contends that, despite the fact that the Code couches the Tax Court's jurisdiction in terms of a present "deficiency," the Code as a whole indicates that the Congress meant the Tax Court to have jurisdiction whenever there is a "live" dispute concerning a "deficiency," past or present, so long as the taxpayer has not waived recourse to that tribunal. Appellant relies on two propositions, which it says are implicit in the Code: (1) that a taxpayer normally need not pay disputed sums without the opportunity to secure a prior adjudication, and (2) that a taxpayer is entitled to a determination by the Tax Court, irrespective of its right to litigate the issues in controversy in some other federal court, unless it has waived the right. These propositions, while distinct, are necessarily closely interrelated, as the only forum normally available for litigation prior to payment is the Tax Court.

The Government contends that appellant's claims have been rejected by cases holding that the deficiency notice procedure set forth in Section 272 is inapplicable where the Government is seeking to collect interest on abated "deficiencies," citing United States v. Koppers Co., 348 U.S. 254, 75 S.Ct. 268, 99 L.Ed. 302; Hastings & Co. v. Smith, 3 Cir., 224 F.2d 875; Rodgers v. United States, 123 Ct.Cl. 779, 108 F.Supp. 727; Cumberland Portland Cement Co. v. United States, D.C., 101 F.Supp. 577, affirmed per curiam 6 Cir., 202 F.2d 152. These cases are not dispositive of this appeal, however, for in each of them the taxpayer admitted the existence of the former "deficiency" but denied liability for interest on other grounds. Under these circumstances there would have been no point in insisting upon a deficiency notice, since, as noted above, the Tax Court has no jurisdiction of questions relating solely to interest. But these cases are not totally inapplicable. In each of them the court approved a procedure whereby a taxpayer may be required to pay a disputed sum of interest without an opportunity to secure a prior determination. Thus, these cases are at odds with the first of appellant's two propositions. Furthermore, Subtitle B of the Code, 26 U.S.C.A. § 1250 et seq. imposes a host of taxes collectible without an opportunity for prior adjudication. We must conclude, therefore, that the Congress did not intend taxpayers to have a right to a prior adjudication in any and all circumstances. The Congress saw fit to limit this right to cases in which the Commissioner is asserting a present "deficiency" in respect of certain taxes and we are not at liberty to override that legislative determination.

The second of appellant's propositions is that a taxpayer who has not waived recourse to that tribunal is entitled as of right to secure a Tax Court determination of his contentions relating to the existence of a "deficiency." It points out that, even where a jeopardy assessment has been made, specific provision is made to preserve to the taxpayer an opportunity to secure a Tax Court adjudication although there is no present "deficiency." Section 273(b). Appellant finds the provision of Section 271(b) "a further indication of Congressional intent to permit taxpayers to avail themselves of the jurisdiction of the Tax Court in all cases except where they waive their rights by voluntary payment in advance." This section eliminates from consideration in determining "deficiencies," required payments of estimated tax.

But appellant overlooks the provisions of Section 274, which specifically provide for assessment of "deficiencies" without recourse to the Tax Court following an adjudication of bankruptcy or the appointment of a receiver. Thus, even in this instance of involuntary payment, the Congress has denied the taxpayer access to the Tax Court. In addition, it is undisputed that a mistaken overpayment in one respect will prevent the taxpayer from litigating other questions in...