United States v. Bank of Commerce & Trust Co.

• Decision Date: 07 May 1940
• Docket Number: No. 60.,60.
• Citation: 32 F. Supp. 942
• Parties: UNITED STATES v. BANK OF COMMERCE & TRUST CO.
• Court: U.S. District Court — Western District of Tennessee

32 F. Supp. 942

UNITED STATES v. BANK OF COMMERCE & TRUST CO.

No. 60.

District Court, W. D. Tennessee, W. D.

May 7, 1940.

C. P. J. Mooney, Asst. U. S. Atty., of Memphis, Tenn., and Stephen Angland, Department of Justice, of Washington, D. C., for plaintiff.

Phil M. Canale and W. G. Boone, both of Memphis, Tenn., for defendant.

MARTIN, District Judge.

The complaint in this cause was filed by the United States of America on November 1, 1939, and was served on the defendant, Bank of Commerce and Trust Company, on the same date. The plaintiff seeks judgment for Eight Thousand, Eight Hundred Twenty-Four Dollars and Sixteen Cents ($8,824.16), plus interest from December 15, 1932, on account of the nonpayment by the defendant of its fourth quarterly installment of income tax for the calendar year 1931.

The defendant denies liability for the payment of the tax, and also pleads the statute of limitations against its collection.

On March 14, 1932, the defendant filed its consolidated income tax return for the year 1931, disclosing a tax liability of Thirty-Five Thousand, Two Hundred Ninety-Six Dollars and Sixty-Three Cents ($35,296.63); whereof, the first quarterly instalment was paid at the time of the return, and two additional quarterly instalments were subsequently paid.

On May 12, 1932, the Commissioner of Internal Revenue signed the assessment list, showing the amount of tax due to be the amount returned by the tax payer, with a credit for the first quarterly payment, leaving a balance due in the amount of Twenty-Six Thousand, Four Hundred Seventy-Two Dollars and Forty-Eight Cents ($26,472.48). The defendant included in its income tax return a discount of One Hundred Eleven Thousand, Four Hundred and Ninety-Three Dollars ($111,493) on bonds issued by the Tennessee Joint Stock Land Bank and the Mississippi Joint Stock Land Bank, representing a repurchase of the bonds at less than par value.

These Joint Stock Land Banks were organized under the Farm Loan Act of 1916, 39 Stat. 360, 12 U.S.C.A. § 641 et seq. On April 3, 1933, the general counsel of the Bureau of Internal Revenue ruled, in the case of Des Moines Joint Stock Land Bank, that the discount on its own bonds purchased during the taxable year constituted exempt income and was, therefore, non-taxable. Following this ruling, the Federal Farm Loan Bureau of the Treasury Department, in a bulletin letter of May 2, 1933, notified all Joint Stock Land Banks "that the discount on your bonds purchased during the taxable year constitutes exempt income and is, therefore, non-taxable."

From examination of the defendant's income tax return for 1930 and 1931, tax deficiencies, protested by the defendant, were proposed by the Commissioner in the respective amounts of Twelve Thousand and Forty-Seven Dollars and Eighteen Cents ($12,047.18) for 1930, and Fourteen Thousand, Seven Hundred Ninety-Three Dollars and Sixty-Nine Cents ($14,793.69) for 1931. No change was made by the Commissioner with respect to the item representing discount on the Joint Stock Land Bank Bonds.

In conformity with customary procedure, a conference followed between representatives of the tax payer and of the Bureau of Internal Revenue, as a result of which the defendant was allowed to deduct a large loss of Two Hundred Nineteen Thousand, Seven Hundred and Thirteen Dollars and Nine Cents ($219,713.09) for 1930, on the Willetts Wood Products Company Bond foreclosure, thereby changing the proposed deficiency for 1930 from Twelve Thousand and Forty-Seven Dollars and Eighteen Cents ($12,047.18) to an over-assessment of Fourteen Thousand, Three Hundred and Eighteen Dollars and Thirty-Nine Cents ($14,318.39), making a total change of tax liability in the amount of Twenty-Six Thousand, Three Hundred Sixty-Five Dollars and Fifty-Seven Cents ($26,365.57). The proposed deficiency, as suggested by the Commissioner, for the year 1931, was sustained in the conference.

On the basis of the result of the conference, reducing the income tax liability of the tax payer for the year 1930, and increasing it for the year 1931, as determined, the defendant, Bank of Commerce & Trust Company, and the Commissioner of Internal Revenue entered into a closing agreement under Section 606 of the Revenue Act of 1928, 26 U.S.C.A.Int.Rev.Code, § 3760, signed by the defendant on March 4, 1933, and by the Commissioner of Internal Revenue on March 17, 1933, and ratified by the Executive Committee of the defendant on March 10, 1933.

The tax deficiency for 1931, in the amount of Fourteen Thousand, Seven Hundred Ninety-Three Dollars and Thirty-Nine Cents ($14,793.39), plus interest, was assessed and paid by the application of the over-assessment for 1930 in the amount of Fourteen Thousand, Three Hundred Eighteen Dollars and Thirty-Nine Cents ($14,318.39), plus interest, plus One Hundred Thirty-Seven Dollars and Eighteen Cents ($137.18) paid in cash on April 17, 1933.

On September 30, 1933, the committee in charge of liquidation of the defendant bank and trust company filed refund claims of Fifteen Hundred Dollars ($1,500) and Thirteen Thousand, Three Hundred Seventy-Nine Dollars and Sixteen Cents ($13,379.16) for the years 1930 and 1931, respectively. Notice of the rejection of these claims was mailed July 30, 1935, and the claims were officially rejected by a letter dated August 13, 1935.

On October 6, 1937, the defendant filed an offer of compromise of One Thousand Dollars ($1,000), in full of the government's claim. This compromise offer was on Treasury Form 656 and contains the following provision:

"The proponent hereby expressly waives:

* * *

"2. The benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitations on assessment and/or collection for the period during which this offer is pending and for one year thereafter."

The Commissioner of Internal Revenue, by letter of March 31, 1938, rejected the compromise offer of the defendant, which has constantly, since September 30, 1933, denied liability for the tax claimed as due by the government; and has asserted its position that its tax for the year 1931 was, in fact, overpaid.

It is apparent that if the income of the defendant for the year 1931, as finally determined, had been reduced by the amount of $111,493, representing discount on Joint Stock Land Bank Bonds, the income tax liability of the defendant would have been Thirteen Thousand, Three Hundred Seventy-Nine Dollars and Sixteen Cents ($13,379.16) less than the amount assessed and now demanded by the government and the defendant would have received a refund of Four Thousand, Five Hundred Fifty-Five Dollars ($4,555).

The record reveals no evidence whatever of any fraud, misrepresentation, or malfeasance by the government or any of its representatives in the procurement of the closing agreement executed between the defendant tax payer and the Commissioner of Internal Revenue in March 1933.

(1) First, the defendant tax payer contends that the action of the Commissioner, in collecting income tax on One Hundred Eleven Thousand, Four Hundred Ninety-Three Dollars ($111,493), representing discounts on the Joint Stock Land Bank Bonds, has resulted in unjust enrichment of the United States to the extent of Four Thousand, Five Hundred Fifty-Five Dollars ($4,555), even after eliminating the Eight Thousand, Eight Hundred Twenty-Four Dollars and Sixteen Cents ($8,824.16) for which the government has brought this suit.

The defendant urges that, under Stewart v. United States, 9 Cir., Aug. 30, 1939, 106 F.2d 405, realized gain from discounts on the land bank bonds is exempt from taxation; and that, upon the principle of Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421, the government is not entitled to retain money wrongfully exacted as taxes.

The argument is that, by the authority both of the Bull case and of Crossett Lumber Co. v. United States, 8 Cir., Feb. 8, 1937, 87 F.2d 930, 109 A.L.R. 1348, an action to recover taxes is in the nature of an action for money had and received, and is governed by equitable principles, even though in form an action at law; from which it follows that the suitor cannot recover unless it be shown that in good conscience he is properly entitled to the money sought from the defendant. United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 54 S.Ct. 443, 78 L.Ed. 859, is also cited by defendant's counsel as authority for their contention.

The government replies that the question whether discounts received from Joint Stock Land Bank bonds are taxable has not been finally answered; that on March 25, 1940, 60 S.Ct. 711, 84 L.Ed. ___, the Supreme Court granted certiorari in Stewart v. United States, supra, relied on by defendant; and that where the tax payer was fully acquainted with all relevant facts when the income tax was paid, tax waivers were not invalid because given in ignorance of the right waived, this having been held with respect to the statute of limitations in Clifton Mfg. Co. v. United States, 4 Cir., 76 F.2d 577.

But the government stands firmly upon the ground that the closing agreement covering the 1931 taxes, executed between the parties to this litigation in March 1933, has forever precluded the right of the defendant tax payer to question the amount of taxes agreed upon in the closing agreement.

If the position of the government upon this proposition of law is correct and this action was seasonably instituted, the government is undoubtedly entitled to recover. The conclusion has been reached that the closing agreement is binding upon the tax payer and cannot be annulled, modified, set aside, or disregarded by this district court. This conclusion follows from the plain language of the statute, the position of the government being well buttressed by the authorities.

The statute of the United States,...