United States v. John Barth Co.

• Decision Date: 12 September 1928
• Docket Number: No. 3885.,3885.
• Citation: 27 F.2d 782
• Parties: UNITED STATES v. JOHN BARTH CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

27 F.2d 782 (1928)

UNITED STATES v. JOHN BARTH CO. et al.

No. 3885.

Circuit Court of Appeals, Seventh Circuit.

June 7, 1928.

On Petition for Rehearing, September 12, 1928.

Mabel Walker Willebrandt, Asst. Atty. Gen., for the United States.

Louis Quarles, of Milwaukee, Wis., and S. Sidney Stein, of Chicago, Ill., for defendant in error.

Before ALSCHULER, EVANS, and PAGE, Circuit Judges.

EVAN A. EVANS, Circuit Judge.

Plaintiff brought this action to recover $29,442.42, together with interest thereon at 1 per cent. per month from June, 1919. Liability was traced to an agreement executed by defendants whereby they agreed "to pay any part of the tax found by the Commissioner to be due plaintiff from John Barth Company as income and profits tax." Defendants demurred to the complaint on the ground that the cause of action was barred by the statute of limitations, because more than five years elapsed between the date of the tax return and the determination by the Commissioner. The demurrer was sustained, and judgment for defendants followed.

The complaint alleges that the John Barth Company, hereinafter called the taxpayer, made its 1918 income tax return to the government, and was assessed thereon a tax aggregating $126,182.81, a part of which the taxpayer promptly paid; that thereafter the taxpayer filed a claim in abatement with respect to the unpaid portion of the tax. It gave a bond, pursuant to section 214a, U. S. Act 1918 (Comp. St. § 6336 1/8g a), executed by defendant, United States Fidelity & Guaranty Company.

This action is upon the bond.

Recited in the bond are the filing of the taxpayer's income tax return, its subsequent filing of a claim in abatement based upon an asserted loss, the execution of the bond pursuant to sections 214 (a) and 234 (a) of the Revenue Act of 1918 (Comp. St. §§ 6336 1/8 g a, 6336 1/8pp a), in order that payment of the tax be deferred until the claim in abatement be decided.

The obligation reads: "Now, therefore, the condition of the foregoing obligation is such that if the principal shall, on notice and demand by the collector, duly pay any part of such tax found by the commissioner to be due, with interest, at the rate of 12 % per annum * * * then this obligation is to be void but otherwise to remain in full force and effect."

On March 25, 1926, the Commissioner of Internal Revenue, passed upon the claim in abatement and determined that there was due from the taxpayer for income and profits tax for the year in question, the sum of $29,842.42. Demand for payment was made on the taxpayer and the surety company. Payment was refused. This action was thereupon commenced.

Pertinent sections of the statutes are set forth in the margin.¹

Plaintiff seeks to distinguish between an action to recover a tax and one based upon a surety agreement wherein the signers agreed to pay a sum represented by the tax. It admits its action to collect the tax as such has been barred by the statute of limitations. Its reliance is therefore, solely upon the written obligation of defendants to pay the amount ultimately fixed by the Commissioner.

In short, its position is that the taxpayer had the alternative of paying the amount assessed against it or of giving a bond to secure plaintiff while its abatement claim was pending before the Commissioner. Having elected to give the bond, an additional cause of action accrued to the government. Stated differently, the government, upon its receipt and acceptance of the bond, became possessed of two remedies. It could enforce the collection of the tax in the manner provided by law when the amount thereof was determined, or it could sue upon the bond. Having two separate and distinct causes of action, each was subject to the application of its appropriate statute of limitations.

Defendants do not dispute the creation of an additional cause of action which arose upon the execution of the surety agreement. They contend, however, that the statute, sections 250 (d), Act of 1918, and 250 (d), Act of 1921, not only places a time limit on plaintiff's remedy but section 1106 (a), Act of 1926, extinguishes the liability itself.

It further insists that the agreement (the basis of the second cause of action accruing to the government) must be the sole measure of liability of those who executed it. In the instant case this agreement was merely to pay a tax, and when the tax was extinguished (not merely barred) all liability thereunder was terminated.

The courts that have passed upon this question are not in accord. Some District Courts have held (decisions not reported) that the obligation of the taxpayer and the surety arising out of the execution of the agreement was to pay a sum of money which the Commissioner should ultimately find due as a tax. Other courts hold that, the obligation, being one to pay a tax, is as fully met by the extinguishment of the tax as by its payment by the taxpayer.

In general, it may be said that statutes of limitation bar only the remedy. But the different statutory enactments on the subject of time limitations upon the determination and assessment of income taxes culminating in the Act of 1926, indicate an intent not merely to bar the remedy but to extinguish entirely all liability for the tax, where its determination and assessment is not made within five years after filing the return.

Congress evidently sought to cure, so far as possible, the evil of long delay in determining the amount of the tax with its consequent embarrassment to taxpayers and the huge penalties upon taxes determined after much delay.

Our conclusion respecting this doubtful question is that the liability under the agreement must be strictly measured by its words. Inasmuch as the parties agreed to pay "any part of such tax found by the Commissioner to be due" there was no obligation to pay what had been extinguished prior to the commencement of this action.

This distinction may at first seem to be a refined one, but it is predicated upon the rule that the surety is justified in construing his contract strictly.

That the parties might have agreed to pay a sum of money rather than a tax cannot be questioned. Likewis...