United States v. Jaffray
| Decision Date | 27 June 1938 |
| Docket Number | No. 11023.,11023. |
| Citation | 97 F.2d 488 |
| Parties | UNITED STATES v. JAFFRAY et al. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Warren F. Wattles, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., J. Louis Monarch, Sp. Asst. to Atty. Gen., and Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., on the brief), for the United States.
Hayner N. Larson, of Minneapolis, Minn. (J. B. Faegre and Cobb, Hoke, Benson, Krause & Faegre, all of Minneapolis, Minn., on the brief), for appellees.
Before GARDNER, SANBORN, and THOMAS, Circuit Judges.
This is a suit brought by the trustees of the estate of Minnesota and Ontario Paper Company, which is in reorganization under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, to recover from the United States overpayments of income taxes for the years 1922 to 1925 inclusive. The case was tried to the court, without a jury, upon an agreed statement of facts, and from a judgment in favor of the trustees, this appeal is taken.
For the years 1922 to 1925, inclusive, the taxpayer1 made its returns and paid its income taxes to Levi M. Willcuts, Collector of Internal Revenue for the District of Minnesota, who was out of office when this suit was commenced. Timely claims for refund of taxes for each of the four years were filed. As a result of negotiations between the Commissioner and the taxpayer, it was determined that the taxpayer had overpaid its taxes for 1922 by $49,318.77, for 1923 by $29,427.69, for 1924 by $23,904.23, and for 1925 by $7,800.00; and the Commissioner issued certificates of overassessment so indicating.
For the years 1917, 1918, 1919 and 1920 the taxpayer had negligently understated and underpaid its income taxes. The Commissioner of Internal Revenue had determined a large deficiency for each of those years. The taxpayer filed with the Board of Tax Appeals petitions for redeterminations of the alleged deficiencies. On February 25, 1926, the taxpayer and the Commissioner entered into a stipulation for the determination and assessment of the deficiencies for the years 1917 to 1920, inclusive. The last paragraph of the stipulation read as follows:
"It is further stipulated and agreed that the understatement of the amount of the taxable net income as shown by the returns filed by the taxpayer herein for each of the taxable years 1917, 1918, 1919, and 1920 was due to negligence on the part of the taxpayer but without intent to defraud."
On the same day the Commissioner wrote the taxpayer as follows:
"Confirming the agreement made with the Commissioner of Internal Revenue on February 24, 1926, you are advised that the amount of the penalty to be assessed against you as the result of the negligent understatement of your tax liability for the taxable years 1917, 1918, 1919, and 1920 will be compromised by accepting a sum equal to 6 per cent per annum on the deficiencies determined and assessed in accordance with the stipulation this date entered into between the taxpayer and the representative of this office, from the date the deficiencies became due and payable to the date of payment."
On February 26, 1926, a further stipulation was entered into in which it was agreed that the deficiencies should be determined by the Board of Tax Appeals in accordance with the stipulation entered into by the taxpayer and the Commissioner on February 25, 1926. On the same day the Board entered in the proceedings relative to these taxes, an order that the tax liability should be so determined.
On March 6, 1926, there was filed with the Board a stipulation that the amount of the deficiency due from the taxpayer for each of the taxable years 1917, 1918, 1919 and 1920 was as follows:
Tax Penalty
1917, $ 489,533.40 $227,633.03
1918, 351,943.48 139,897.55
1919, 491,360.53 165,834.17
1920, 920,772.85 255,514.46
_____________ ___________
Total, $2,253,610.26 $788,879.21
The Board entered three orders, similar in form, determining the deficiencies for the years 1917 to 1920, inclusive. The order relating to the 1917 tax was as follows:
The stipulation referred to in the Board's orders was the stipulation last mentioned. The "other documentary evidence" referred to by the Board was a computation which was prepared by representatives of the Commissioner and representatives of the taxpayer, and filed with the Board March 6, 1926. This computation was made in accordance with the stipulation of February 25, 1926, settling the tax liability of the taxpayer for the years 1917 to 1920, inclusive. In this computation the amounts which the Board in its orders refers to as "penalty" are designated as "penalty interest on tax deficiencies" and as "interest". The total amount of "interest" as shown by the computation is $788,879.21. The computation was approved in writing by the taxpayer and also by the Treasury Department.
Pursuant to the orders of the Board of Tax Appeals redetermining the deficiencies agreed to, the Commissioner caused the Collector of Internal Revenue for the District of Minnesota to make demand upon the taxpayer for the payment of the total amount found by the Board to be due for the years in question, which aggregated $3,044,810.77. Of this amount, $1,764,076.86 was the total tax deficiency for the years 1918, 1919, and 1920; $788,879.21 was "penalty" for the years 1917 to 1920, inclusive; and $2,321.30 was additional interest added by the Commissioner for the years 1919 and 1920. The taxpayer paid to the Collector, on March 22, 1926, the full amount demanded.
In its return for the year 1926 the taxpayer deducted from gross income $790,355.20 of the "penalty" and interest included in the amount which it paid to the Collector on March 22, 1926. By taking this deduction the taxpayer showed a net loss for 1926, and the carrying forward of this net loss, as authorized by Sections 117(b) and (e) of the Revenue Act of 1928, 45 Stat. 791, 825, 826, 26 U.S.C.A. § 117 note, left a tax liability of only $1,510.43 for 1927, and of $9,327.46 for 1928. The Commissioner, upon an audit of the taxpayer's returns for the years 1926 to 1928, inclusive, concluded that the deduction by the taxpayer of the "penalty" and interest paid in 1926 was improper, and he determined deficiencies as follows: for 1926, $42,884.00; for 1927, $47,445.12; for 1928, $14,270.13.
This was the situation which existed when, on August 31, 1933, the Commissioner notified the taxpayer that its claim for refund of taxes for the years 1922 to 1925, inclusive, were allowed to the extent indicated by the certificates of over-assessment. The certificates stated that the overpayments allowed would not be refunded, but "credited" to taxes claimed to have been underpaid for other years. The principal of the overpayments for the years 1922 to 1925, inclusive, was credited by the Commissioner upon the alleged deficiencies determined by him for the years 1926 to 1928, inclusive. The interest upon such overpayments the Commissioner credited against withholding taxes claimed to have become due from the taxpayer in 1921, but which, it is now conceded, were not collectible.
The taxpayer thereupon commenced this suit to recover the overpayments for the years 1922 to 1925, inclusive, under Section 24(20) of the Judicial Code, § 41(20), Title 28, U.S.C., 28 U.S.C.A. § 41(20), giving to the District Courts jurisdiction of suits against the United States for the recovery of taxes erroneously collected by a Collector who is out of office at the time suit is commenced.
The taxpayer contended that there were no deficiencies in taxes for the years 1926 to 1928, inclusive, and that the crediting by the Commissioner of the overpayments for the years 1922 to 1925, inclusive, against nonexistent deficiencies in taxes for other years constituted a denial of the taxpayer's refund claims.
The Government contended that the Commissioner, in allowing the overpayments and crediting them against alleged deficiencies for other years, had granted the taxpayer's claims for refunds; that the crediting of the overpayments to the claimed deficiencies for the years 1926 to 1928, inclusive, had the effect of paying or overpaying the taxes for those years, and that, since the taxpayer had filed no claims for the refund of taxes for those years, and since it was the action of the Commissioner, and not of the Collector, which caused the crediting of the overpayments to the alleged deficiencies, the court below was without jurisdiction. See Lowe Brothers Co. v. United States, 58 S.Ct. 896, 82 L.Ed. ___. The Government also contended that the deduction made by the taxpayer in 1926 was properly disallowed, and resulted in the deficiencies determined by the Commissioner for the years 1926 to 1928, inclusive.
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