United States v. Hamilton, 6401

• Decision Date: 13 June 1938
• Docket Number: 6402.,No. 6401,6401
• Parties: UNITED STATES v. HAMILTON et al. (two cases).
• Court: U.S. Court of Appeals — Seventh Circuit

117 ALR 446, 96 F.2d 878 (1938)

UNITED STATES v. HAMILTON et al. (two cases).

Nos. 6401, 6402.

Circuit Court of Appeals, Seventh Circuit.

April 25, 1938.

Rehearing Denied June 13, 1938.

J. Roy Browning and H. L. Howard, both of Chicago, Ill., for appellants.

James W. Morris, Asst. Atty. Gen., and Sewall Key, Louise Foster, and Helen R. Carloss, Sp. Assts. to Atty. Gen., for the United States.

Michael L. Igoe, of Chicago, Ill., for appellee.

Before SPARKS and TREANOR, Circuit Judges, and LINDLEY, District Judge.

TREANOR, Circuit Judge.

These appeals are taken from the judgment of the District Court rendered in a suit on a bond which had been given to secure the payment of a deficiency income tax assessment. The defendants, taxpayer and surety, seek a reversal of the judgment in Cause No. 6401, and the plaintiff, United States, seeks a modification of the judgment in its cross-appeal, Cause No. 6402.

This is a suit on a bond to recover from Bess W. Hamilton, as principal, and the Fidelity & Casualty Company of New York, as surety, the amount of $4,164.16 with interest thereon at 6 per cent. per annum from June 8, 1931, to June 8, 1932, and interest thereon at 12 per cent. per annum from June 8, 1932, until paid.

The defendant Bess W. Hamilton was notified by letter from the Commissioner of Internal Revenue, under date of February 25, 1931, of a proposed deficiency of income tax for the year 1928. Subsequently the deficiency was assessed in the amount of $3,680.81 as tax, and interest in the amount of $483.35. Mrs. Hamilton signed an application for an extension of time for payment of this deficiency in accordance with the provisions of section 272(j) of the Revenue Act of 1928, 26 U. S.C.A. § 272 and note.¹

Pursuant to this application for extension of time, which was filed with the Collector of Internal Revenue at Chicago, Mrs. Hamilton, as principal, and the Fidelity & Casualty Company of New York, as surety, executed and delivered a bond to the United States in accordance with the provisions of section 272(j), supra, with the following conditions:

"Now, Therefore, the condition of the foregoing obligation is such that if the principal shall on or before the 8th day of June, 1932, pay the deficiency in tax plus penalty and interest properly applicable thereto, in accordance with the terms of the extension as herein stated, and shall otherwise well and truly perform and observe all the provisions of law and the regulations;

"Then this obligation is to be null and void, but otherwise to remain in full force, virtue, and effect.

"The terms of the extension are as follows:

"Payment to be made of the sum of $4164.16 on or before June 8, 1932, plus interest at the rate of six per cent per annum from June 8, 1931."

The Commissioner of Internal Revenue advised the Collector of Internal Revenue at Chicago, by letter, that the surety bond had been approved and that application for extension had been granted under the following conditions:

"Payment to be made of the sum of $4,164.16 on or before June 8, 1932, plus interest at the rate of six per cent per annum from June 8, 1931.

"Upon default of the payment of the above-mentioned tax, interest will be charged at the rate of twelve per cent per annum from the due date as extended until paid."

On May 27, 1932, Mrs. Hamilton paid the Collector of Internal Revenue at Chicago the sum of $200 on account of her tax liability for the year 1928.

In a letter dated December 14, 1932, the Collector of Internal Revenue at Chicago notified the Fidelity & Casualty Company of New York of the refusal of Bess W. Hamilton to pay the amount due and owing and demanded payment thereof from the Fidelity & Casualty Company of New York. But no part of the amount due was paid by either of the defendants or by anyone in their behalf prior to the commencement of this suit.

The trial court made a special finding of facts, stated conclusions of law thereon, and rendered judgment for the United States.

Defendants insist that the bond in suit was not executed as a statutory bond; and they further insist that even if it is a statutory bond, the trial court was in error in permitting recovery of an amount which, defendants claim, was in excess of the obligation of the bond and in violation of its express terms.

The authority to extend the time for the payment of the income tax deficiency is purely statutory and the bond in suit was required and given under the authority of the same sections of the statute which authorize the extension and impose the obligations connected therewith. And we agree with the District Court's conclusion that as a matter of law, the bond in suit was a statutory bond and that the pertinent provisions of the statute constitute a part of the contract of the bond.² And we agree with the related conclusion that the defense, that the statute of limitations had run against the assessments, is not available since this is a suit on the statutory bond, the breach of which affords the United States a "cause of action separate and distinct from an action to collect taxes which it already had."³ And it follows from the foregoing that the amount of the original deficiency tax and the sums of interest properly added thereto are material only to the measure of liability under the bond.

The only source of authority to the Commissioner to grant an extension of time for the payment of a deficiency is section 272(j) of the Revenue Act of 1928; and that section and section 296, 26 U.S.C. A. § 296 and note,^3a expressly state the conditions upon which such an extension may be granted. There is a maximum time limit and if the Commissioner requires a bond the liability thereon is "conditioned upon the payment of the deficiency in accordance with the terms of the extension." And section 296 provides that interest at 6 per cent. on the amount of the deficiency, for which time of payment is extended, shall be collected as a part of the deficiency tax; and, also, that if such deficiency is not paid in accordance with the terms of the extension, "there shall be collected, as a part of the tax, interest on such unpaid amount at the rate of 1 per centum a month for the period from the time fixed by the terms of the extension for its payment until it is paid, and no other interest shall be collected on such unpaid amount for such period."

It cannot be questioned that the taxpayer who secured the extension for payment of her deficiency became obligated to pay 6 per cent. interest, as a part of the deficiency tax, for the period of the extension; and that she was obligated further to pay interest at the rate of 1 per cent. a month,...