Field
Service Advice 200130043, June 25, 2001
CCH
IRS
Letter Rulings Report No. 1274, 08-01-01
IRS
REF
: Symbol: CC:PA:CBS:Br2
Uniform Issue List Information:
UIL
No. 7122.03-00
Compromises
-
Breach
[Code Sec.
7122 ]
INTERNAL
REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE
ADVICE
MEMORANDUM
FOR ASSOCIATE
AREA
COUNSEL (
SBSE
),
AREA
4,
DETROIT
,
MICHIGAN
FROM:
Lawrence H. Schattner, Chief, Branch 2
(Collection, Bankruptcy & Summonses)
SUBJECT:
Default of Offer-in-Compromise
This
Chief Counsel Advice responds to your memorandum
dated May 8, 2001. In accordance with I.R.C. §6110(k)(3)
, this Chief Counsel Advice should not be
cited as precedent.
ISSUES
Whether
the Internal Revenue Service
("Service") may unilaterally default a
joint offer in compromise when Taxpayer-Husband
breached his obligations under a separate but
related offer in compromise on the basis of an
oral agreement tying the two offers together.
CONCLUSIONS
No.
Treasury Regulations specifically require that
offers in compromise be reduced to writing and
thus cannot be altered by an oral agreement.
FACTS
A
joint offer in compromise was accepted by the
Service to resolve Taxpayers' outstanding income
tax liabilities. The notice of acceptance
stated, "our acceptance is subject to the
terms and conditions on the enclosed form 656,
Offer in Compromise." Taxpayers fulfilled
their obligations under the offer in compromise
by paying the total due plus interest.
The
Service also accepted Taxpayer-Husband's
individual offer in compromise to resolve his
outstanding employment tax liabilities. The
notice of acceptance contained the same language
as above. Taxpayer-Husband never made any
payments under his offer in compromise and the
Service defaulted both compromise agreements.
According
to your memo, it was the practice of the local
offer in compromise group to inform taxpayers
orally that individual and joint agreements were
tied together. Your memo does not state if
Taxpayers in this case were specifically told
that default of one offer would result in
default of the other and whether Taxpayers
agreed. Your memo also states that current
practice is to make agreements tying the two
offers together in writing.
LAW
AND
ANALYSIS
The Nature of an Offer in Compromise
An
offer in compromise is a statutory creation.
I.R.C. section
7122(a) states:
The
Secretary may compromise any civil or criminal
case arising under the internal revenue laws
prior to reference to the Department of Justice
for prosecution or defense; and the Attorney
General or his delegate may compromise any such
case after reference to the Department of
Justice for prosecution or defense.
I.R.C.
§7122(a)
. Thus, any offer in compromise is to be
strictly construed according to the statutory
requirements. Botany Worsted Mills v. United
States, 278 U.S. 282 (1929) [1
USTC ¶348 ]; Klien v. Commissioner,
899 F.2d 1149 (11th Cir. 1990) [90-1
USTC ¶50,251 ]; Bowling v. United States,
510 F.2d 112 (5th Cir. 1975) [75-1
USTC ¶9333 ];
It
has also been said that an offer in compromise
is a contract and is subject to the general
rules governing contracts. United States v.
Feinberg, 372 F.2d 352 (3rd Cir. 1967) [67-1
USTC ¶9176 ]; United States v. Lane,
303 F.2d 1 (5th Cir. 1962) [62-1
USTC ¶9467 ]; Kurio v. United States,
429 F.Supp. 42 (S.D. Tex. 1970) [71-1
USTC ¶9112 ]. However, the rules of
contracts cannot abrogate the statutory
requirements governing offers in compromise. Bowling,
510 F.2d at 113 [75-1
USTC ¶9333 ].
Requirement of a Writing
Temporary
Treasury Regulation section
301.7122
-1T(c)(1) requires that all offers in compromise
be submitted in writing on forms prescribed by
the Service.1 In accordance with this
regulation the Service now requires that all
offers must be submitted on Form 656.
IRM
5.8.1.4(1)
In
Boulez v. Commissioner, 810 F.2d 209
(D.C. Cir. 1987) [87-1
USTC ¶9177 ] a taxpayer challenged the
Treasury regulation's writing requirement,
arguing that he had a binding oral compromise
agreement. Pierre Boulez ran afoul of
U.S.
tax law by failing to include certain income on
his tax returns.
Id.
at 210. After extensive negotiations, Boulez
reached an oral compromise agreement with the
Service.
Id.
In an unrelated audit, the Service discovered
more tax deficiencies and issued a notice of
deficiency.
Id.
at 211. Boulez argued that the oral agreement
settled all of his tax liabilities, including
these newly discovered deficiencies, and was
binding on the Service.
Id.
The court of appeals disagreed and found that
Treasury Regulation section
301.7122-1(d) (1960) required an offer in
compromise to be set out in writing and that
this requirement was "entirely reasonable,
and a wholly permissible interpretation of Section
7122 ." Boulez, 810 F.2d at 214
[87-1
USTC ¶9177 ]. In addition the court stated
that the writing requirement could not simply be
overlooked as it is "a fundamental tenet of
formalizing agreements."
Id.
at 216. Thus, because the agreement did not
conform to statutory requirements it was not
binding on the Service.
The
holding of Boulez was followed in In
re Aberl, 159 B.R. 792 (Bankr. N.D. Ohio
1993), aff'd, 175 B.R. 915 (N.D. Ohio
1994), aff'd, 78 F.2d 241 (6th Cir.
Ohio
1996). The Aberl court refused to find
that oral negotiations between a taxpayer and
the Service constituted an offer in compromise.
"This Court agrees...that '[Treas. Reg.
§301.7122-1(d) ], which requires that all
compromises be reduced to writing, has the force
and effect of law, and that the [
IRS
] lacked authority to waive it." In re
Aberl, 159 B.R. at 799, citing Boulez,
810 F.2d at 211 [87-1
USTC ¶9177 ] (alteration in original)
(citations omitted).
The
issue you have presented, however, deals with an
oral term within a written offer in compromise
rather than an entirely oral agreement. In Keating
v.
United States
, 794 F.Supp. 888 (D. Neb. 1992) [92-2
USTC ¶50,413 ] the district court concluded
that an oral agreement could not supersede the
written terms of Form 656. The Keatings
submitted a written offer in compromise on Form
656, which expressly informed taxpayers that the
United States
would retain any tax refunds that arose within
the period of the offer.
Id.
at 889. The Keatings then negotiated with the
Service to increase the amount of their offer
with the oral understanding that the Service
would refund any tax overpayments,
notwithstanding the language of Form 656.
Id.
The Service kept the Keatings' refund and
applied it to their tax liability.
Id.
at 888.
The
District Court stated:
Even
assuming that an oral agreement existed between
the parties that attempted to supersede Form
656, an oral agreement with the Internal Revenue
Service with respect to federal income tax
liability cannot bind the government...The
Internal Revenue Code and the Treasury
regulations specifically require a written offer
and acceptance of an offer in compromise.
(citations omitted)
Id.
at 891. Thus, according to the statutory scheme
and regulations governing offers in compromise,
an oral term cannot be added to a written offer2
But see, Engelken v.
United States
, 823 F.Supp. 845 (D. Colo. 1993) (denying
summary judgment because plaintiffs should have
been allowed to show an oral modification to
their offer in compromise). Without a contract
term tying the two offers together, they must
each stand alone. The joint offer in compromise
has been fully paid. Assuming Taxpayers have
complied with all of the filing and payment
requirements of the I.R.C. for the five year
period following acceptance of their offer as
required by condition (d) of Form 656 (Rev.
9-93), the liability has been extinguished. See,
Temp. Treas. Reg. §301.7122-1T(d)(5); Treas. Reg.
§301.7122-1(c) (1960).
Contract Rules Governing Oral Terms
It
is our position that I.R.C. section
7122(a) and the regulations thereunder
govern the requirements of an offer in
compromise and that pursuant to these
authorities all the terms of the offer and
acceptance of the offer must be in writing. Even
under general contract principles, we believe
the conclusion would be the same
At
the outset, in considering an offer in
compromise a court should look to "the
rules applicable to contracts generally." Lane,
303 F.2d at 4 [62-1
USTC ¶9467 ]; see also, United
States v. Wainer, 211 F.2d 669, 673 (7th
Cir. 1954) [54-1
USTC ¶49,032 ] (applying common law when
analyzing a compromise agreement with the
Service).
The
parole evidence rule governs when testimony will
be allowed to prove an oral term of a written
contract. The general rule is that evidence of a
prior or contemporaneous agreement, not included
in an integrated writing, is not admissible to
prove the existence of that agreement.
Restatement (Second) of Contracts §§215
, 216 (1981); Samuel Williston, 4 Williston
on Contracts §631
(3d ed. 1961).3 Parole evidence
is admissible to prove: (1) that the writing is
not integrated; (2) the writing is only
partially integrated; (3) the meaning of the
writing; (4) illegality, fraud, duress, mistake,
lack of consideration, or other invalidating
cause; (5) grounds for recission, reformation,
specific performance, or other remedy.
Restatement (Second) of Contracts §214
(1981). Thus, parole evidence may be used to
show that an agreement is not integrated. If the
Service were able to prove that Form 656 is not
integrated then it could introduce evidence of a
contemporaneous oral agreement to tie the two
offers in compromise together.
An
agreement is determined to be integrated when
the writing constitutes "a final expression
of one or more terms of an agreement."
Restatement (Second) of Contracts §209 (1981).
Whether an agreement is integrated is to be
determined by the court, however, written
agreements are presumed to be integrated.
Id.
; Samuel Williston, 4 Williston on Contracts §633
(3d ed. 1961). This presumption is particularly
strong when the parties use a standardized
agreement. Restatement (Second) of Contracts §211
(1981). Even if an agreement is not fully
integrated courts generally will not allow
parole evidence of an additional term if that
term would normally be included in that type of
agreement. Arthur Linton Corbin, 3 Corbin on
Contracts §583 (1960).
A
further hazard for the Service is the rule that
"in choosing among the reasonable meanings
of a promise or agreement or a term thereof,
that meaning is generally preferred which
operates against the part who supplies the words
or from whom a writing otherwise proceeds."
Restatement (Second) of Contracts §206 (1981).4
A court is particularly likely to construe a
contract against the government as the drafting
party. Restatement (Second) of Contracts §207
cmt. a (1981).
The
use of parole evidence is decided on a case by
case basis by the courts, however, given the
rules of contracts as discussed above it is
unlikely that the Service would prevail in
proving that Form 656 is an unintegrated
agreement and that evidence of an oral agreement
should be admitted.
This
writing may contain privileged information. Any
unauthorized disclosure of this writing may have
an adverse effect on privileges, such as the
attorney client privilege. If disclosure becomes
necessary, please contact this office for our
views.
If
you have any further questions please contact
the attorney assigned to this matter at
(202)
622-3620
.
1
Acceptances must also be in writing. Temp.
Treas. Reg. §301.7122-1T(d)(1). These writing
requirements were also in effect when the offers
at issue were accepted. See, Treas. Reg.
§301.7122-1(d) (1960).
2 It does
not matter that the Keating court dealt
with an attempt to supersede a written term of
the offer whereas this case deals with an
attempt to add a consistent term because the
analysis under the statutory scheme is the same.
Oral agreements are not enforceable.
3
Michigan
law is in accord with the common law on parole
evidence. NAG Enterprise, Inc. v. All State
Industries, Inc. 407
Mich.
407 (1979);
UAW-GM
Human
Resource
Center
v. KSL Recreation Corp., 228
Mich.
App. 486 (1998).
4
Michigan
law is in accord. Hanley v. Porter, 238
Mich.
617 (1927); Stark v. Kent Products, Inc.
62
Mich.
App. 546 (1975); Elby v. Livernois Eng'g Co.,
37
Mich.
App.
[2002-1 USTC ¶50,173] Michael J. Roberts, Plaintiff v.
United States of America
, Defendant
U.S.
District Court, East. Dist.
Mo.
, East. Div., 4:99CV489 ERW,
12/10/2001
, Previous decisions in this same case, 99-2
USTC ¶50,959 , 2001-1
USTC ¶50,306
MEMORANDUM
AND
ORDER
WEBBER,
District Judge:
This
matter is before the Court on Defendant's Motion
to Dismiss [doc. #46] and Defendant's Motion for
Summary Judgment [doc. #46]. Plaintiff has filed
his Acquiescence in Defendant's Limited Motion
to Dismiss, indicating that he consents to the
motion to dismiss filed by the Government.
Therefore, Plaintiff's claim for tax refund
relative to the 1993 tax year will be dismissed
based on the fact that Plaintiff's claim for a
refund of federal income taxes for the 1993
taxable year is time-barred under §6511 of the
Internal Revenue Code.
I. Statement of Facts.
A. Circumstances Leading up to the Offer in Compromise.
Plaintiff
Michael J. Roberts, the plaintiff and taxpayer
in this case, resides at
10428 Jade Forest Drive
in
St. Louis
,
Missouri
and has lived there since 1991. Before that, he
lived at 10627 Tesshire,
St. Louis
,
Missouri
. In 1984 or 1985, Plaintiff started two
businesses: (1) M.J. Roberts Construction, which
provided demolition and excavation services, and
(2) Roberts Disposal, Inc., a construction
debris trash company. Both of these were formed
as sub-chapter S-Corporations, and were located
at 10627 Tesshire,
St. Louis
,
Missouri
. Plaintiff was the president and majority
stockholder in both businesses, and his brother,
Thomas E. Roberts, was an employee. Arnold J.
Lohbeck, a certified public accountant in
Fenton, prepared corporate income tax returns
(Forms 1120) for M.J. Roberts Construction, Inc.
He has known Plaintiff since he was sixteen
years old, and has prepared Plaintiff's personal
income tax returns (Forms 1040) since the 1983
taxable year. Plaintiff was divorced from his
former wife, Diane, in 1988.
By
1989, both of Plaintiff's businesses, according
to Plaintiff, "were on real shaky
ground," and went out of business around
1990. On January 7, 1992,
IRS
Revenue Agent Donna R. Mecey sent Plaintiff a
letter informing him that his 1989 federal
income tax return had been selected for
examination by the Internal Revenue Service.
After Plaintiff received the January 7, 1992
IRS
letter, he asked his CPA, Mr. Lohbeck, to help
with the
IRS
audit. Lohbeck then prepared Plaintiff's 1989,
1990 and 1991 federal income tax returns. The
first page of Plaintiff's 1989 tax return shows
that Agent Mecey received his 1989 return on May
4, 1992. The
IRS
subsequently received Plaintiff's 1990 and 1991
tax returns on September 2, 1993. Following her
examination of Plaintiff's 1989-1991 tax
returns, Agent Mecey prepared a Revenue Agent
Report (RAR) which proposed the assessment of
the following income tax deficiencies against
Plaintiff: for the taxable year 1989, a proposed
tax deficiency of $25,067; for the taxable year
1990, a proposed tax deficiency of $53,903; for
the taxable year 1991, a proposed tax deficiency
of $1,350. Together with statutory interest, the
amounts which the
IRS
determined Plaintiff owed for each of the
taxable years under examination were: $34,686
(1989), $68,089 (1990), and $1,521 (1991).
During the
IRS
examination of Plaintiffs' 1989-1991 federal
income tax returns, CPA Lohbeck and attorney
Charles M. Locke represented Plaintiff under a
"Power of Attorney and Declaration of
Representative" (
IRS
Form 2848). This "Power of Attorney"
form covered Plaintiff's 1989-1993 federal
income tax liabilities. Using the authority
given him under the "Power of
Attorney" form, Lohbeck signed the RAR
prepared by Agent Mecey on November 17, 1993 to
agree with her findings that Plaintiff was
liable for unpaid federal income taxes and
interest for the taxable years 1989-1991. Before
signing the RAR, Lohbeck discussed the RAR with
Plaintiff. By signing this RAR, Lohbeck waived
Plaintiff's right to contest the proposed
1989-1991 income tax deficiencies with the
United States Tax Court and consented to the
immediate assessment and collection of the
deficiencies. On the following dates, a delegate
of the Secretary of the Treasury properly and
timely made assessments against Plaintiff for
unpaid federal income taxes and statutory
interest:
Amount of Unpaid Balance of
Date of Assessment Accruals as of
Taxable Period Ending Assessment 1
November 1, 2001
12/31/89 ................ 10/05/92 $ 24,585.79(1)
1,809.40(2)
1,008.30(3)
2,599.92(4)
12/20/93 25,067.00(5)
9,733.04(4)
1,512.45(2)
1,336.09(5)
06/09/97 2,305.15(3)
$32,214.81
12/31/90 ................ 12/20/93 $ 54,903.00(5)
13,407.43(4)
05/09/94 1,445.25(3)
05/13/96 7,312.00(5)
04/28/97 10,323,26(3)
41,293.00(5)
$55,797.81
12/31/91 ................ 12/27/93 $ 2,873.00(5)
377.78(4)
12/20/93 1,350.00(5)
174.59(4)
04/13/98 3,128.00(5)
$ 2,703.43
12/31/92 ................ 3/14/94 $ 78,228.00(1)
2,859.21(6)
9,038.79(2)
3,682.47(3)
4,678,67(4)
04/13/98 2,859.21(6)
9,038.79(2)
66,954.00(5)
68,947.68
The
IRS
also assessed a $9,953.75 penalty against
Plaintiff under 26 U.S.C. §6672 of the Internal
Revenue Code in connection with Plaintiff's
wilful failure, as a person responsible for
withholding, collecting and paying over to the
IRS
the federal income and social security taxes
which were withheld from the wages of the
employees of Plaintiff's company, Roberts
Disposal, Inc., to pay over the withheld taxes
for the fourth quarter of 1989 to the
IRS
. 2
B. Plaintiff Enters into the Offer in
Compromise.
On
or about
August 24, 1994
, Plaintiff submitted an Offer in Compromise
(the "settlement agreement" or "OIC")
(Form 656) to the
IRS
with respect to his unpaid federal income tax
liabilities for 1989-1993 and a Trust Refund
Recovery Penalty (also referred to as a
"100-percent penalty" or "Section
6672 penalty") with respect to Roberts
Disposal, Inc., for the taxable quarter ending
December 31, 1989
. Plaintiff's OIC provided, in pertinent part,
that he was to pay $30,000 to the
IRS
to compromise his 1989-1993 federal income tax
liabilities and the Trust Fund Recovery Penalty
(TFRP) assessed against him. The OIC
specifically provided that the $30,000 was to be
paid within sixty days following notice of its
acceptance by the
IRS
. Paragraph 6 of the OIC stated that "I/we
submit this offer for the reason(s) checked
below:"
[X]
Doubt as to collectibility ("I can't
pay.").
As additional consideration for the Government's acceptance
of the OIC, Plaintiff agreed, in a collateral
agreement to the OIC, to waive the benefit of
any net capital losses that he might be entitled
to claim in connection with the failure, demise
or sale of M.J. Roberts Construction, Inc., and
Roberts Disposal, Inc. Paragraph (d) of the
"Terms and Conditions" printed on the
reverse side of the Form 656 OIC signed by
Roberts provided as follows: "I/we will
comply with all provisions of the Internal
Revenue Code relating to my filing my/our
returns and paying my/our required taxes for
five (5) years from the date
IRS
accepts the offer." Paragraph (o) of the
"Terms and Conditions" printed on the
reverse side of the Form 656 OIC signed by
Plaintiff provided as follows:
If
I/we fail to meet any of the terms and
conditions of the offer, the offer is in
default, and
IRS
may:
(i)
immediately file suit to collect the entire
unpaid balance of the offer;
(ii)
immediately file suit to collect an amount equal
to the original amount of the tax liability as
liquidated damages, minus any payments already
received under the terms of this offer;
(iii)
disregard the amount of the offer and apply all
amounts already paid under the offer against the
original amount of tax liability;
(iv)
file suit or levy to collect the original amount
of the tax liability, without further notice of
any kind.
IRS
will continue to add interest, as required by
section 6621 of the Internal Revenue Code, on
the amount
IRS
determines is due after default. . . .
At the time he submitted the OIC on August 24, 1994,
Plaintiff was represented by his attorney, Mr.
Locke. Plaintiff paid $30,000 to the
IRS
at the time he submitted the OIC in August 24,
1994. The $30,000 was a loan from his brother's
company, Commercial Development Company, Inc. By
letter dated September 28, 1994, the
IRS
notified Plaintiff that the OIC had been
accepted. This letter stated, in pertinent part,
that "We have accepted the offer in
compromise (Form 656) you submitted, subject to
the terms and conditions outlined in the
enclosed document(s). These terms including
filing and paying all taxes due for the next
five years." When asked at his deposition
about the significance or importance to him of
the
September 28, 1994
IRS
letter accepting the OIC, Plaintiff stated that
he had "to pay taxes on time over the next
five years and forfeit any refunds for M.J.
Roberts Construction or Roberts Disposal."
C. Plaintiff's Payment of his 1995 Tax
Return.
Plaintiff
obtained two extensions of time to file his 1995
U.S. Individual Income Tax Return (Form 1040),
prepared by CPA Ronald J. Kanterman of the
accounting firm of Brown, Smith & Wallace
LLC. Plaintiff signed his 1995 income tax return
on October 15, 1996. Plaintiff's 1995 federal
income tax return reported total income of
$726,902.00. This included a salary of $81,923
from Commercial Development Company, Inc.,
business income of $23,204, capital gain of
$479,292, and $137,214 from "rental real
estate, royalties, partnerships, S corporations,
trusts, etc." Plaintiff's 1995 Form
1040 also reported that he underpaid his federal
income tax liabilities by $246,254. Plaintiff
testified that he was aware of this underpayment
when he signed his 1995 tax return on October
15, 1996. Plaintiff also testified that he was
concerned about the $246,254 tax liability when
he signed his 1995 tax return because "[a]t
the time I don't believe we had money to pay
that." When asked why he was unable to pay
his 1995 tax liability, Plaintiff stated that he
though "it was invested in other
projects."
Prior
to signing his 1995 Form 1040, Plaintiff
discussed with his accountant, Ronald Kanterman,
the extent of his income tax liability for the
1995 taxable year. Kanterman was aware of the
amount of Plaintiff's 1995 tax liability at
least thirty days prior to October 15, 1996, the
date on which Plaintiff signed his 1995 tax
return. Kanterman was also aware of the OIC
which Plaintiff entered into with the
IRS
, and that the OIC required Plaintiff to file
his returns and pay his taxes for five years
from the date the OIC was accepted by the
IRS
. At the time Plaintiff signed his Form 1040 for
1995, he told Kanterman that he would be unable
to pay the $246,000 tax liability shown as due
and owing on that return. Plaintiff's 1040 shows
that he paid no estimated tax payments for the
1995 taxable year, despite Kanterman having
discussed Plaintiff's need to do so. Plaintiff
told Kanterman that he could not afford to make
the estimated payments.
The
Government states that Kanterman explained the
reasons for delaying the filing of Plaintiff's
1995 tax return until October 15, 1996, the
maximum time permitted by law. The Government
contends that Kanterman stated the first reason
for the delay was that Plaintiff lacked the
financial resources to pay his 1995 tax
liability in full. However, Plaintiff disputes
this contention, stating that Kanterman stated
that Plaintiff needed the six month extension
because "the company was short of money at
the time. . . ." Plaintiff's Response to
Defendant's Statement of Uncontroverted Facts ¶37.
This, according to Plaintiff, means that
Plaintiff did not have the cash on hand to pay
the bill, but could have borrowed the money to
do so. Plaintiff states in his Declaration,
attached as Plaintiff's Exhibit 2 to Plaintiffs
opposition to Defendant's Motion for Summary
Judgment, that although he lacked "any
appreciable amount of cash as of October 15,
1996, I did have the capacity to borrow sums at
this time. As of
January 1, 1997
, I stood ready, willing, and able to pay the
IRS
the amount shown as due upon my 1995 federal tax
return after all offsets were given for the
carryback of my 1996 net operating losses.
Id.
The other reasons that Kanterman expressed when
explaining the reason for the delay in filing
the 1995 return are not contested, and are (2)
the unavailability of records and the need to
complete tax returns for other entities; and (3)
Kanterman's concern that his firm would not be
paid its accounting fees.
Kanterman
also prepared the 1996 Form 1040 for Roberts and
his wife, filed with the
IRS
on or about January 8, 1997. Kanterman testified
that the reason for filing the 1996 return early
was that "[t]here was an amount due on the
1995 return to the
IRS
that was known by the taxpayer that there would
be a loss for 1996, 1996 taxable year that would
reduce the amount due for the 1995 year. It was
the taxpayer's wish that we complete the return
as fast as possible so that the taxpayer could
make payment to the
IRS
vis-a-vis the net operating loss carryback."
Plaintiff received notice and demand for payment
of his 1995 federal income tax liabilities from
the
IRS
prior to the preparation and filing of the 1996
return in January of 1996. Plaintiff's 1996
return indicated a negative total income of
$485,087 and a negative adjusted gross income of
$488,159. Plaintiff's net operating loss for the
1996 tax year was reported on an Application for
Tentative Refund (Form 1045) which was filed
simultaneously with Plaintiff's 1996 Form 1040,
and carried back, in order, to the 1993, 1994
and 1995 tax years.
Paragraphs
42 and 43 of Defendant's Statement of
Uncontroverted Facts are not disputed by
Plaintiff, but he attempts to clarify them in
his response. Paragraphs 42 and 43 read:
42.
Although plaintiff carried back a net operating
loss of nearly half a million dollars from the
1996 tax year to the 1993, 1994 and 1995 tax
years, he remained indebted to the United States
(according to his accountant's calculations) for
unpaid 1995 federal income taxes in the amount
of $129,539.00 after the 1996 loss had been
carried back to the preceding three taxable
years.
43.
Even after the income tax refunds generated by
the carryback of the 1996 net operating loss to
the 1993-1995 tax years were applied to Robert's
1995 tax liability, an unpaid balance of
$101,076 remained for that taxable year.
Plaintiff states the following to clarify these two
statements:
In
January and, again, in April of 1997, Plaintiff
made two separate Form 1045 filings carrying
back losses from 1996 to the three preceding tax
years--i.e., 1993, 1994, and 1995--as
required by the Internal Revenue Code §172 3.
Both of these filings separately generated
credits and offsets against the 1995 tax
liability as originally reported by Plaintiff.
Also, Plaintiff's 1996 individual income tax
return showed a refund due which constitutes a
third source of offsets against Plaintiff's 1995
tax liability. A reading of [Defendant's]
paragraphs 42 and 43 . . . , when read separated
[sic], appear to contradict each other. Also,
they do not clearly indicate that Mr. Kanterman
is giving subtotals in the process of
determining Mr. Robert's 1995 tax liability
after application of all credits and offsets
generated by his 1996 losses. To recap, there
were three sources of credits and offsets for
use to decrease the 1995 tax liability generated
by Mr. Roberts' 1996 individual income tax
return: (a) January 1997 form 1045 tentative
carryback application, (b) April 1997 form 1045
tentative carryback application and (c) the tax
refund reported on the 1996 return itself (as
originally filed in January 1997 and amended in
April of 1997). Although not stated (which leads
to confusion), paragraph 42 of Defendant's
Statement of Material Facts is a recitation by
Mr. Kanterman of a subtotal of his calculation
of the amount due by Mr. Roberts for his 1995
tax year after application of the credits and
offsets made available by the first named source
of said credits and offsets: i.e., the
January 1997 form 1045 tentative carryback
application. This is just one of three sources
for credits and offsets against Mr. Robert's
1995 tax liability. Paragraph 43 of Defendant's
Statement of Material Facts is again a
recitation by Mr. Kanterman of a second subtotal
of his calculation of the amount due by Mr.
Roberts for his 1995 tax return after
application of both the first and second named
sources of said credits: i.e., both the
January and April 1997 form 1045 tentative
carryback applications. Paragraphs 42 and 43 do
not clearly indicated [sic] their status as
merely subtotals, not final tabulations.
Paragraph 46 of Defendant's Statement of
Material Facts gives Kanterman's final
calculation of Roberts' 1995 tax liability after
application of the three sources of offsets and
credits generated by Roberts' 1996 tax losses:
$61,682.00.
Plaintiff's Response to Defendant's Statement of Material
Facts §42-43.
By
letter dated April 4, 1997, the
IRS
notified Plaintiff that he had not complied with
the terms of the OIC, and "therefore your
offer is declared in default and the
arrangements to compromise the liability are
terminated." In April of 1997, Plaintiff
filed an amended 1996 federal income tax return
(Form 1040X) and an amended Application for
Tentative Refund (form 1045) to carry back an
additional net operating loss of $99,481 from
1996 to the 1995 taxable year. Even after
Plaintiff's amended 1996 tax return and
Application for Tentative Refund were filed with
the
IRS
in April of 1997, Plaintiff remained indebted
for unpaid 1995 federal income taxes (according
to Kanterman) in the amount of $61,682. To pay
this amount, Kanterman sent the
IRS
in
Kansas City
,
Missouri
a check drawn on the account of Commercial
Development Co. in the amount of $65,000 to be
applied to Plaintiff's 1995 federal income tax
liabilities. The letter accompanying the check
stated, in pertinent part:
Enclosed
is the estimated balance due on the above-named
taxpayer's 1995 tax filing after carrybacks of
1996 net operating losses. If the amount due the
[
IRS
] is different than the amount estimated, please
contact me and we will provide an additional
check.
On the same day that Kanterman sent the $65,000 check to the
IRS
, he mailed another letter to the
IRS
in
Kansas City
which stated, in pertinent part:
We
received a communication last month from your
office that the taxpayers [sic] Offer in
Compromise would be revoked as a result of
having unpaid 1995 tax. We responded by calling
the indicated person requesting the remaining
balance due after the carryback claim [for the
1996 tax year]. I was told that this amount was
unknown.
We
are forwarding today to the
Kansas City
Service
Center
our estimate of the remaining tax due in 1995
for the taxpayer--$65,000. Any amount that
remains we will pay when you contact us.
We
request that you reconsider the revocation of
the taxpayers [sic] previous offer based on our
effort to determine the net tax due through the
Service and the taxpayers [sic] obvious attempt
to comply with all required tax payments.
D. THE
IRS
Dedclares the OIC to be in Default on
April 4, 1997
.
Three
months after Plaintiff filed his 1995 Form 1040
showing an unpaid income tax liability of
$246,254, and two weeks after he filed his 1996
Form 1040 tax return and Application for
Tentative Refund (form 1045) which carried back
a NOL from 1996 to the 1993-1995 tax years, the
IRS
sent him a letter dated
January 21, 1997
which demanded that he pay his reported 1995
income tax liability within thirty days. The
letter stated, in pertinent part:
When
your Offer in Compromise was accepted, you
agreed to comply with all provisions of the
Internal Revenue Code relating to the filing and
paying of required taxes due for five years from
the date we accepted the offer.
However,
a review of your account indicates the
following:
Our
records show that you have a balance owing for
the tax period ending December 31, 1995. To
remain in compliance with offer, you must pay
the balance within 30 days of the date of this
letter. The balance owed, with penalty and
interest computed to February 10, 1997, is
$2777,143.512.
If
you do not comply with our request, we will
refer your offer to the Missouri District Office
for possible termination of the Offer in
Compromise and reinstatement of the original tax
liability.
The "contact person" on the January 21, 1997 letter
described above was Clara Jacobs. The figure of
$2777,143.512, as set forth in the January 21,
1997 letter was erroneous. Plaintiff was not
indebted to the United States for unpaid 1995
federal income tax (and statutory additions to
tax) in the amount of $2777,143.512 on
January 21, 1997
. On
April 4, 1997
, six days before Plaintiff's representatives
sent a $65,000 check to the
IRS
to pay off the balance of his 1995 federal
income tax liabilities, the
IRS
sent Roberts a letter which declared his OIC to
be in default and terminated the arrangements
previously made to compromise his 1989-1993
federal income tax liabilities and his TFRP. The
April 4, 1997 letter stated, in pertinent part:
This
refers to our letter of September 28, 1994
accepting your offer of $30,000 in compromise of
your Individual Income Tax liability plus
statutory additions for December 31, 1989, 1990,
1991, 1992, and Trust Fund Recovery Penalty as a
responsible person of Roberts Disposal, Inc. for
the period ended December 31, 1989.
Under
the terms of your offer $30,000 was to be paid
within sixty (60) days of acceptance. On
November 28, 1994, $30,000 was paid as agreed
but as part of the consideration for the offer
you agreed to comply with all the provisions of
the Internal Revenue Code relating to the filing
of returns and the paying of taxes for a period
of five (5) years following acceptance of the
offer. As a conditional consideration of the
offer, you agreed to waive any net capital
losses for which you would be entitled
personally for all taxable years after 1993.
Our
records indicate that you have now incurred a
delinquent liability for your 1995 individual
income tax. You have also filed Form 1045,
Application for Tentative Refund to carry back
capital losses to years 1993, 1994 and 1995.
You
have not complied with the terms of the offer,
therefore your offer is declared in default and
the arrangements to compromise the liability are
terminated. All payments made toward the offer
will be applied to the liability.
The letter dated
April 4, 1997
erroneously stated or implied that Plaintiff had
improperly filed Form 1045, Application for
Tentative Refund, to carry back capital losses
to years 1993, 1994, and 1995, when in fact he
had filed the Form 1045 to carry back a net
operating loss from the 1996 taxable year to the
1993-1995 tax years. After the OIC was declared
in default, the
IRS
reassessed the amounts of the federal income
taxes which Plaintiff (through his authorized
representative, Lohbeck) agreed that he owed for
1989 through 1993, together with the TFRP.
E. Evants Following the Declaration of
Default by the
IRS
.
On
May 19, 1997, approximately six weeks after the
IRS
declared Plaintiff's OIC to be in default, CPA
Arthur M. Seltzer, a colleague of CPA Kanterman
at the accounting firm of Brown, Smith and
Wallace, submitted a sworn "Application for
Taxpayer Assistance Order (ATAO)" to the
IRS
on behalf of the Plaintiff, their client.
Attached to the ATAO was a narrative
"Description of Significant Hardship"
prepared by Seltzer. The ATAO stated, in
pertinent part:
As
the taxpayer's accountant and preparer of his
1995 and 1996 returns, colleague Ronald J.
Kanterman, CPA was aware that the taxpayer's
inability to pay the 1995 taxes in a timely
fashion constituted a technical breach of the
terms of the 1994 Offer, and might well result
in an effort by the
IRS
to rescind the Offer and attempt to collect the
compromised taxes. He was aware that the unpaid
balance due for 1995 would be substantially, if
not completely, offset by the carryback of 1996
losses. He therefore directed his efforts to
minimizing the economic impact of the breach by
arranging for prompt filing of the taxpayer's
1996 return and related carryback claim, and
full payment of the 1995 tax liability as
promptly as possible. . . .
On
April 4, 1997
, the taxpayer received a letter form [sic] the
Service Center . . . advising that, because of
the delinquent liability for 1995 and because of
a purported breach of the terms of the Offer,
the Service has declared in default. . . .
We
suggest that, although the Service has the right
to rescind the Offer because of the technical
breach committed by the taxpayer in failing to
pay his 1995 taxes in full in [sic] timely
fashion, rescission is not mandated but is
optional with the Service. We believe that if
the Service successfully persists in sustaining
the rescission of the Offer, unwarranted injury
totally disproportionate to the extent of the
offense would be sustained by a taxpayer who has
acted in good faith in a difficult situation,
and in fact at this time has overpaid his 1995
taxes.
On July 30, 1998, Plaintiff filed administrative claims for
refund with the
IRS
with respect to certain federal income taxes,
penalties and interest allegedly paid by him for
the 1989-1993 taxable years following the
termination of the OIC on April 4, 1997.
Plaintiff also filed an administrative claim for
refund with respect to that portion of the TFRP
which he allegedly paid following the
termination of the OIC on April 4, 1997.
Plaintiff commenced the instant civil action in
this Court on March 26, 1999.
II. Summary Judgment Standards.
The
standards applicable to summary judgment motions
are well settled. Pursuant to Federal Rule of
Civil Procedure 56(c), a court may grant a
motion for summary judgment if all of the
information before the court shows "there
is no genuine issue of material fact and the
moving party is entitled to judgment as a matter
of law." See Celotex Corp. v. Catrett,
477
U.S.
317, 322 (1986). The United States Supreme Court
has noted that "[s]ummary judgment
procedure is properly regarded not as a
disfavored procedural shortcut, but rather as an
integral part of the federal rules as a whole,
which are designed to 'secure the just, speedy
and inexpensive determination of every action.'
"
Id.
At 327 (quoting Fed. R. Civ. P. 1).
In
order to obtain summary judgment, the moving
party must demonstrate "an absence of
evidence to support the non-moving party's
case." Celotex, 477
U.S.
at 325. Once the moving party carries this
burden, the nonmoving party must "do more
than simply show there is some metaphysical
doubt as to the material facts." Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S.
574, 586 (1986). The nonmoving party may not
rest on allegations or denials in the pleadings,
but must "come forward with 'specific facts
showing that there is a genuine issue for
trial.' "
Id.
at 587 (quoting Fed .R .Civ .P. 56(3)).
In
analyzing summary judgment motions, the Court is
required to view the facts in a light most
favorable to the non-moving party, and must give
the non-moving party the benefit of any
inferences that can logically be drawn from
those facts. Matsushita, 475
U.S.
at 587; Buller v. Buechler, 706 F.2d 844,
846 (8th Cir. 1983). Moreover, this Court is
required to resolve all conflicts in favor of
the non-moving party. Robert Johnson Grain
Co. v. Chemical Interchange Co., 541 F.2d
207, 210 (8th Cir. 1976). The trial court may
not consider the credibility of the witnesses or
the weight of the evidence. White v. Pence,
961 F.2d 776, 779 (8th Cir. 1992).
Under
the standards applicable to summary judgment
motions, before ruling on the legal issues
presented, the Court must find that there are no
genuine issues of material fact. See Celotex
Corp., 477
U.S.
at 322.
[T]he
plain language of Rule 56(c) mandates the entry
of summary judgment, after adequate time for
discovery and upon motion, against a party who
fails to make a showing sufficient to establish
the existence of an element essential to that
party's case, and on which that party will bear
the burden of proof at trial. In such a
situation, there can be "no genuine issue
as to any material fact," since a complete
failure of proof concerning an essential element
of the nonmoving party's case necessarily
renders all other facts immaterial. The moving
party is "entitled to a judgment as a
matter of law" because the nonmoving party
has failed to make a sufficient showing on an
essential element of her case with respect to
which she has the burden of proof.
Id.
at 322-23. "By its very terms, [Rule
56(c)(1)] provides that the mere existence of some
alleged factual dispute between the parties will
not defeat an otherwise properly supported
motion for summary judgment; the requirement is
that there be no genuine issue of material
fact." Hufsmith v. Weaver, 817 F.2d
455, 460 n. 7 (8th Cir. 1987) (quoting Anderson
v. Liberty Lobby, Inc., 477
U.S.
242, 247-48 (1986) (emphasis supplied by Supreme
Court)). Material facts are "those 'that
might affect the outcome of the suit under the
governing law. . . .' "
Id.
" 'While the materiality determination
rests on the substantive law, it is the
substantive law's identification of which facts
are critical and which facts are irrelevant that
governs.' "
Id.
Rule 56 requires also that the material fact be
genuine.
Id.
A genuine material fact is one such that "
'a reasonable jury could return a verdict for
the nonmoving party.' "
Id.
III
.
Analysis.
The
Plaintiff states, in his Memorandum in
Opposition to Plaintiff's Motion for Summary
Judgment, that "[t]his entire case turns
upon the propriety of the
IRS
's termination of the OIC under contract
law." Plaintiff's Memorandum in Opposition
at 7. The ground upon which the
IRS
terminated the OIC and declared Plaintiff in
default is "a delinquent liability for
[his] 1995 individual income tax." Id.
Plaintiff argues that his failure to pay his
1995 income tax on time was at most an
immaterial breach of the OIC, and, as such, the
IRS
wrongfully declared him in default of the OIC,
terminated the OIC, and began the process of
collecting all taxes, plus penalties, originally
owed by Plaintiff.
"It
has long been settled that an agreement
compromising unpaid taxes is a contract and,
consequently, that it is governed by the rules
applicable to contracts generally. The cardinal
rule of contract construction 'is to ascertain
the intention of the contracting parties and to
give effect to that intention if it can be done
consistently with legal principles.' " United
States v. Lane [62-1 USTC ¶9467], 303 F.2d
1, 4 (5th Cir. 1962) (citations omitted). The
Government, based on the Court's review of the
undisputed facts in this case and the relevant
precedent, had the right to terminate the OIC
based on Plaintiff's failure to pay his 1995
taxes until April 10, 1997. Federal income taxes
are due, and constitute a liability as of, the
date the tax return is required to be filed. See
United States v. Ressler [77-1 USTC ¶9459],
433 F.Supp. 459, 463 (S.D. Fla. 1977)
("Regardless of when federal taxes are
actually assessed, taxes are considered as due
and owing, and constitute a liability, as of
date the tax return for the particular period is
required to be filed.") (citing Hartman
v. Lauchli [57-1 USTC ¶9571], 238 F.2d 881,
887 (8th Cir. 1956) ("by the terms of the
Internal Revenue Code income tax liability
matures on the day the return is required to be
filed, and the correct amount of the tax
liability becomes due at that time, regardless
of when the deficiency assessment may be made. .
. ."), cert. denied, 353 U.S. 965
(1957)). This means that Plaintiff breached his
obligation to pay his federal income taxes in
1995 when he failed to pay them by April 15,
1996. See Ott v. United States [98-1 USTC
¶50,331], 141 F.3d 1306, 1309 (9th Cir. 1998)
(in a case involving the non-payment of estate
taxes owed, the Ninth Circuit stated "The
Tax Code provides: 'when a return of tax is
required under this title or regulations, the
person required to make such return shall,
without assessment or notice and demand from the
Secretary . . . pay such tax at the time and
place fixed for filing the return (determined
without regard to any extension of time for
filing the return).' ") (quoting 26 U.S.C.
§6151(a)). According to the specific terms of
the OIC, entered into by the Government and the
Plaintiff, Plaintiff promised to "comply
with all provisions of the Internal Revenue Code
relating to filing my[] returns and paying my[]
required taxes for five (5) years from the date
the
IRS
accepts the offer." When Plaintiff failed
to pay his 1995 federal income tax liability of
$246,354.00 when it became due, he violated this
provision of the OIC, authorizing the Government
to declare Plaintiff in default of the express
terms of the OIC and "file suit or levy to
collect the original amount of tax liability,
without further notice of any kind." See
Statement of Facts, supra at 6 (quoting
Offer in Compromise at ¶(o)). The right of the
Government to terminate the Offer in Compromise
where there has been a breach by the taxpayer of
its provisions has been upheld in United
States v. Feinberg [67-1 USTC ¶9176], 372
F.2d 352, 357-58 (3d Cir. 1967). The Third
Circuit stated that "By the clear language
of the offer in compromise Mr. Saladoff agreed
that, upon his default, the Commissioner of
Internal Revenue could terminate the compromise
agreement." Feinberg [67-1 USTC ¶9176],
372 F.2d at 357-58. As in Feinbeirg, the
default by the Plaintiff is undisputed.
Plaintiff has admitted that he failed to pay his
1995 income taxes until April 10, 1997. Despite
Plaintiff's argument that the Government lacked
authority to terminate the OIC upon his default
of any of the provisions, the OIC specifically
empowered the Government to declare him in
default and pursue collection of his original
tax liability, effectively terminating the OIC.
With
respect to Plaintiff's argument that he did not
materially breach the OIC, the Court finds this
argument unpersuasive. Plaintiff promised and
agreed in the OIC that he would abide by the
terms of the Internal Revenue Code for the next
five years. Failure to abide by this promise
allowed the Government to declare him in default
and collect his original tax liability. Nothing
in the OIC allowed him to delay payment of his
1995 tax liability until
April 10, 1997
under the guise of the substantial performance
doctrine. While it is true that contract
principles guide the Court in interpreting and
OIC, this Court is not persuaded that the
Government, in this case, lacked authority to
declare Plaintiff in default of the OIC when he
failed to timely pay his 1995 income taxes. See
Lane [62-1 USTC ¶9467], 303 F.2d at 4
(holding that the language of the compromise
agreement allowing the Government to terminate
the OIC upon default was "so precise, and
the intention which it manifests is so evident,
as to leave no doubt that the course of action
taken by Government here was fully authorized by
the compromise agreement."). The doctrine
of substantial performance has no relevance in
this case as the Plaintiff completely failed to timely
pay his 1995 federal income tax liability,
and instead waited to pay it until
April 10, 1997
so that he could offset his tax liability for
1995 with his losses in 1996.
Finally,
with respect to Plaintiff's argument that the
Government's termination of the OIC will cause
him to suffer a forfeiture, the Court finds
United States
v. Lane on point.
There
was nothing illegal, immoral or inequitable in
the compromise agreement. It did not provide for
any 'forfeiture'. By express provision, the
amounts to be paid under the compromise
agreement, including both the Form 656- C and
the collateral agreement, could not exceed the
aggregate amount which the taxpayer conceded
that he owed the Government from the start. By
allowing the Government to revive the taxpayer's
original liability, the taxpayer will not
forfeit the amounts he has already paid, for
those amounts will be applied to reduce the
original liability. The agreement was precise,
it was fair, and it was freely consented to by
the taxpayer. There is no reason why it should
not be enforced as written.
Lane [62-1 USTC ¶9467], 303 F.2d at 4. The Court finds Plaintiff's argument
that he will suffer a forfeiture if the OIC is
enforced as written is without merit.
Accordingly,
IT IS HEREBY ORDERED that Defendant's Motion to Dismiss and Motion for Summary Judgment [doc.
#46] are GRANTED.
1 (1) Refers to tax assessed per tax return
(2)
Refers to the late tax return filing penalty
(3)
Refers to the late payment of tax penalty
(4)
Refers to the statutory interest
(5)
Refers to the additional tax assessed after
IRS
examination
(6)
Refers to the underpayment of estimated tax
penalty
2 At this point in Defendant's statement of material facts,
Defendant details certain facts concerning a
residence purchased by Michael Roberts that was
transferred to his brother's company. However,
Plaintiff objects to the inclusion of these
facts as immaterial because they are not
mentioned nor referred to in the argument
portion of Defendant's briefs. The Court
therefore will not include these facts in the
Court's statement of facts as they appear not to
be material to the issues involved in
Defendant's Motion for Summary Judgment.
3 IRC §172, as in effect in 1996, required carryback of NOLs
3 years. It has since been amended to require
NOL carrybacks of 2 years
[98-2 USTC ¶50,827] L.R. Ousley, Plaintiff v. J.F. Gritis, et al.,
Defendants
U.S.
District Court,
Dist.
Nev.
, CV-S-97-427-DWH(LRL), 10/6/98
.
Richard
Ousley, 236 So. Rainbow, Las Vegas, Nev. 89128, pro
se. Alisa Margolis, Department of Justice,
Washington, D.C. 20530, Kathryn Landreth, 701 E.
Bridger, Las Vegas, Nev. 89101, for defendants.
ORDER
HAGEN,
District Judge:
Before
the court is defendants' motion (#34) to dismiss
or, in the alternative, for summary judgment.
I. Factual Background
In
this action, plaintiff seeks to stop agents of
the Internal Revenue Service ("
IRS
") from collecting taxes under Form 940,
941, and 1040 tax returns that plaintiff
contends are not due and owing and to enforce a
settlement agreement between plaintiff and the
IRS
. First Amended Complaint (#20) at 1. Plaintiff
alleges that individual defendants J.F. Gritis,
Ron Smith and Bryon P McMahon, employees of the
IRS
, have acted outside the scope of their
employment by assessing and levying taxes and by
forcibly collecting taxes that were not due and
owing.
Id.
at 2. He also contends that defendants failed to
give notice of a deficiency as required by 26
U.S.C. §§6212(a) and 6213(a) and that the
IRS
has refused to grant plaintiff's request for a
formal hearing.
In
his complaint, plaintiff alleges the following
causes of action: (1) denial of due process; (2)
unlawful assessment and collection of taxes; (3)
breach of settlement agreement; (4) interference
with contract advantage; (5) slander of title;
(6) conspiracy to deny civil rights; (7)
intentional infliction of emotional distress:
and (8) injunctive relief.
Id.
at 2-10. Plaintiff asserts that this court has
jurisdiction over his complaint based upon 28
U.S.C. §§1331, 1340, 1343, 1346(a)(1), 1355,
1356, 1361, and 1367, 42 U.S.C. §§1985 and
1986, and Amendments 4, 5, and 16 of the United
States Constitution.
On
January 5, 1998, the court denied (#31)
plaintiff's motion for a preliminary injunction.
Defendants now move (#34) to dismiss or, in the
alternative, for summary judgment based on lack
of subject matter jurisdiction and plaintiff's
failure to state claims upon which relief can be
granted.
II. Analysis
A. Motion to Dismiss Standard
In
considering a motion to dismiss, all material
allegations in the complaint must be accepted as
true and construed in the light most favorable
to the nonmoving party. Russell v. Landrieu,
621 F.2d 1037, 1039 (9th Cir. 1980). The purpose
of a motion to dismiss under Fed.R.Civ.P.
12(b)(6) is to test the legal sufficiency of the
complaint. North Star Inter'l v. Arizona
Corp. Comm'n, 720 F.2d 578, 581 (9th Cir.
1983). If the motion is to be granted, it must
appear to a certainty that the plaintiff will
not be entitled to relief under any set of facts
that could be proven under the allegations of
the complaint. Rae v. Union Bank, 725
F.2d 478, 479 (9th Cir. 1984).
B. Sovereign Immunity As a Bar to Plaintiff's Claims
The
government and the individual defendants (all
IRS
employees) assert that plaintiff's First Amended
Complaint fails to allege a proper basis for the
court's subject matter jurisdiction because it
does not identify any specific statutory
provisions waiving the immunity of the
United States
as to plaintiff's claims. The
United States
may be sued only to the extent that it has
consented to suit by statute. United States
v. Dalm [90-1 USTC ¶50,154; 90-1 USTC ¶60,012],
494 U.S. 596, 608 (1990). Any waiver of
sovereign immunity cannot be implied but must be
unequivocally expressed and is strictly
construed in favor of the sovereign.
United States
v. Testan, 424
U.S.
392, 399-400 (1976). Thus, no suit may be
maintained against the
United States
unless the suit is brought in compliance with
the terms of a specific statute under which the
United States
has consented to be sued.
Id.
Where the
United States
has not consented to suit or the plaintiff has
not met the terms of the statute, the court
lacks jurisdiction and the action must be
dismissed. See Fed.R.Civ.P. 12(h)(3); Dalm
[90-1 USTC ¶50,154; 90-1 USTC ¶60,012], 494
U.S.
at 608.
Plaintiff
has the burden of identifying specific statutes
waiving the government's sovereign immunity and
showing that the requirements of such statues
have been met. Holloman v. Watt, 708 F.2d
1399, 1401 (9th Cir. 1983). In his First Amended
Complaint, plaintiff based jurisdiction on 28
U.S.C. §§1331, 1340, 1343, 1346(a)(1), 1355,
1356, 1361, and 1367, 42 U.S.C. §§1985 and
1986, and Amendments 4, 5, and 16 of the United
States Constitution. Most of the statutory
provisions relied upon by plaintiff confer
general jurisdiction and, without more, do not
constitute a waiver of sovereign immunity. See
28 U.S.C. §1331 (federal question
jurisdiction), §1340 (jurisdiction over actions
arising under the Internal Revenue Code), §1343
(jurisdiction over actions arising under the
Civil Rights Act), §1355 (jurisdiction over
actions by public officers on behalf of public
treasury to collect fines and penalties), §1356
(jurisdiction over seizures made pursuant to any
law of the United States not within admiralty or
maritime jurisdiction), §1367 (supplemental
jurisdiction over certain state claims); see
also Hughes v. United States [92-1 USTC ¶50,086],
953 F.2d 531, 539 n. 5 (9th Cir. 1992) (general
jurisdictional statutes such as sections 1331
and 1340 cannot waive the government's sovereign
immunity); Sipe v. Amerada Hess Corp.,
689 F.2d 396, 405-07 (9th Cir. 1982) (section
1355 only authorizes suit by public officer on
behalf of public treasury to collect fines and
penalties); Smith v. Grimm, 534 F.2d
1346, 1352 n.9 (9th Cir. 1976) (section 1361 not
a waiver); Rhyne v. Henderson County, 973
F.2d 386 (5th Cir. 1992) (section 1367 only
provides for supplemental jurisdiction, not
original jurisdiction); Brian v. Gugin,
853 F.Supp. 358, 363 (D. Idaho 1994) (section
1343 "cannot be used to waive the
government's sovereign immunity and the
government cannot be sued for damages for
alleged violations of the Constitution").
Other
statutory provisions and Constitutional
amendments cited by plaintiff do not operate to
waive sovereign immunity in this case. For
example, 42 U.S.C. §§1985 and 1986 are
inapplicable to actions against the
United States
and therefore cannot provide a basis for finding
a waiver of sovereign immunity. Hohri v.
United States, 782 F.2d 227, 245 n. 43)
(D.C. Cir. 1986), vacated on other grounds,
482 U.S. 64 (1987); United States v. Timmons,
672 F.2d 1373, 1380 (11th Cir. 1982); Unimex
v. Department of Housing and Urban Development,
594 F.2d 1060, 1061 (5th Cir. 1979). Likewise,
the Constitution does not waive sovereign
immunity. See
Arnsberg
v.
United States
, 757 F.2d 971, 980 (9th Cir. 1985). 1
Nor can plaintiff rely on section 1346(a)(1)'s
limited waiver of sovereign immunity because
plaintiff fails to show that he has meet the
prerequisites of obtaining relief under this
provision. 2
Relief under section 1346(a)(1) is only
available where plaintiff has paid the full
amount of tax assessed. United States v.
Williams [95-1 USTC ¶50,218], 514 U.S. 527,
531-532 (1995); see also Latch v.
United States
[88-1 USTC ¶9242], 842 F.2d 1031, 1033
(9th Cir. 1988). Because plaintiff's First
Amended Complaint fails to allege that he has
paid the disputed taxes in full, he cannot
invoke the jurisdiction of the court under
section 1346(a)(1).
Despite
plaintiff's failure to name a specific
applicable statute and his improper reliance on
other statutes, plaintiff's First Amended
Complaint need not be dismissed if the court can
determine the appropriate source of jurisdiction
from the allegations in the complaint. Boarhead
Corp. v. Erickson, 923 F.2d 1011, 1017-18
(3rd Cir. 1991) (citing 5 C. Wright & A.
Miller, Federal Practice and Procedure §1209,
at 112-13 (2d ed. 1990)); see also Haines v.
Kerner 404 U.S. 519 (1972) (per curiam)
(allegations of a pro se plaintiff's
complaint are held to a less stringent standard
than those drafted by a lawyer). Here,
plaintiff's complaint can be characterized as an
action to enjoin the collection of taxes
improperly assessed, to recover sums wrongfully
retained by the
IRS
, and to obtain damages for breach of settlement
agreement. Plaintiff also alleges common law
torts and constitutional violations.
Actions
to enjoin the assessment and collection of taxes
by the
IRS
are narrowly limited by the Anti-Injunction
Act., 26 U.S.C. §7421. Although the court ruled
on the motion for preliminary injunction that
some of plaintiff's claims may fall within a
statutory exception to the Act as set forth in
26 U.S.C. §6213, 3
section 6213 itself does not expressly authorize
suits against the government and thus cannot
form the basis for waiver of sovereign immunity.
See 26 U.S.C. §6213; but see Guthrie
v. Sawyer [92-2 USTC ¶50,391], 970 F.2d
733, 737 (10th Cir. 1992). Suits for a tax
refund are brought pursuant to 28 U.S.C. §1346(a)(1),
but, as noted above, plaintiff failed to show he
meets the prerequisites to suit under that
statute.
Moreover,
even though the government has waived its
sovereign immunity in taxpayer actions brought
pursuant 26 U.S.C. §7433 and 28 U.S.C. §2410,
neither statute applies in this case. Under
section 7433, a taxpayer can challenge improper
acts in connection with the collection of any
federal tax, but may not sue for damages in
connection with the determination or assessment
of tax. Miller v. United States [95-2
USTC ¶50,516], 66 F.3d 220, 223 (9th Cir.
1995). Similarly, under section 2410, a taxpayer
can contest the procedural validity of a tax
lien, but may not attack the merits of an
assessment. See Elias v. Connett [90-2
USTC ¶50,397], 908 F.2d 521, 527 (9th Cir.
1990). In addition to challenging the validity
of the tax assessment, plaintiff claims that the
government failed to send notices of deficiency
in compliance with section 6213(a) and breached
a purported settlement agreement. The Ninth
Circuit has held that "claims that the
IRS
failed to properly notice deficiencies address
the merits of an assessment." Huff v.
United States [93-2 USTC ¶50,633], 10 F.3d
1440, 1445 (9th Cir. 1993). Thus, such claims
are not actionable under sections 2410 or 7433. Id.;
Elias [90-2 USTC ¶50,397], 908 F.2d at
527; see also Miller [95-2 USTC ¶50,516],
66 F.3d at 222-23 (finding that violation of
"notice and demand" requirement in 26
U.S.C. §6303 could trigger section 7433
liability because section 6303 is contained in
Chapter 64 of the Internal Revenue Code entitled
"Collection"; in contrast, the
deficiency notice requirement at issue here is
part of section 6213 which is contained in
Chapter 63 entitled "Assessment").
As
to plaintiff's breach of settlement claim, the
motion to dismiss must be granted because the
regulations and procedures for compromises under
26 U.S.C. §7122 are the exclusive methods of
settling tax disputes, see Laurins v. C.I.R.
[89-2 USTC ¶9636], 889 F.2d 910, 912 (9th Cir.
1989), and plaintiff fails to demonstrate that
those procedures and regulations have been
followed in this case. For example, a taxpayer's
offer of compromise will not be considered to
have been accepted until and unless the taxpayer
is notified in writing of the acceptance.
Id.
; 26 C.F.R. §301.7122-1(d)(1), (d)(3).
Plaintiff fails to allege that he was notified
in writing that the
IRS
accepted his offer of compromise. Instead, he
relies on a letter from his own counsel
indicating only that an
IRS
agent has requested a $5,000 payment and that
plaintiff's money orders to the
IRS
in the amount of $5,000 were cashed. See
First Amended Complaint ¶9, Exhs. D & E.
This is insufficient to state a claim for breach
of settlement agreement. See id.; Bowling
v. United States [75-1 USTC ¶9333], 510
F.2d 112, 113 (5th Cir. 1975) ("no theory
founded upon general concepts of accord and
satisfaction can be used to impute a compromise
settlement [in a tax case] and therefore none
resulted from the government's accepting and
cashing of [taxpayer's] check").
Plaintiff
also alleges that the individual defendants (all
IRS
agents) have violated his constitutional rights.
Individual
IRS
agents acting as employees of the
United States
enjoy qualified immunity for constitutional
violations. Butz v. Economou, 438
U.S.
478, 507 (1978). Under the theory of qualified
immunity, an
IRS
agent "will not be liable for mere mistakes
in judgment," only intentional and knowing
constitutional violations.
Id.
at 498. Although plaintiff alleges that the
individual defendants in this case acted outside
the scope of their authority, these allegations
are wholly conclusory and do not meet the
standard set forth in Butz.
Plaintiff's
common law tort claims must also fail. The
government's waiver of sovereign immunity for
tort actions as set forth in the Federal Tort
Claims Act expressly excludes actions involving
the assessment or collection of tax. 28 U.S.C.
§2680(c); Hutchinson v. United States
[82-1 USTC ¶9405], 677 F.2d 1322, 1327 (9th
Cir. 1982). Thus, sovereign immunity bars the
plaintiff's tort claims against the
United States
and its agencies.
III
.
Conclusion
Accordingly,
IT IS ORDERED that defendants' motion to
dismiss (#34) be GRANTED without leave to
amend.
1 The Ninth Circuit in
Arnsberg
noted, however, that "actions brought under
the takings clause of the fifth amendment are,
of course, an exception to the rule that
sovereign immunity is a bar to damages against
the
United States
for direct constitutional violations."
Id.
at 980 n. 7. Here, plaintiff does not seek
relief under the takings clause of the Fifth
Amendment.
2 Section 1346 is a limited waiver of sovereign immunity that
confers federal courts with jurisdiction over
tax refund lawsuits brought by the taxpayer.
3 Only plaintiffs' claims regarding the assessment of personal
income taxes for the tax years 1981, 1982, and
1983 may fall within the exception of section
6213(a).
[69-2 USTC ¶9560]
Cooper
Agency
, Plaintiff v.
United States of America
, Defendant
U. S. Dist. Court, Dist. S. C., Columbia Div., Civil Action
No. 68-533, 301 FSupp 871, 7/16/69
[Code Sec. 7122]
Compromises: Equitable estoppel: Refund claim
after execution of compromise agreement:
Government's right of set-off or recoupment.--In
a follow-up action to Cooper Agency,
(CA-4) 65-2 USTC ¶9603, 348 Fed. (2d) 919, the
taxpayer was estopped from seeking recovery of a
payment made in a compromise settlement of
income tax assessments against it and some
fourteen other parties which was assigned to the
extinguishment or abatement of various tax
assessments against the taxpayer as transferee.
The taxpayer was barred by equitable estoppel
from violating the compromise agreement since
the agreement represented a so-called package
deal, involving several taxpayers in addition to
the taxpayer, and the Government, in reliance on
the settlement, had permitted the statute to run
against the claims against the other taxpayers
involved in the settlement and could not recoup,
through its right of set-off, against these
taxpayers. The taxpayer's contention that all
unabated assessments against it were paid in
full and not compromised or settled because the
Government, at the taxpayer's request, allocated
the payment to all unabated transferee claims
against the taxpayer was without merit. The
payment was made incident to a compromise
agreement against fifteen separate taxpayers,
including the taxpayer, and the fact that some
of the assessments against the taxpayer were
marked paid in full and others abated in full
did not change the fact that the payment,
however applied, was a part of a single
settlement figure and was made as an essential
part and parcel of the compromise agreement.
Charles
F. Cooper,
4813 Forst Dr.
,
Columbia
, S. C., for plaintiff. Wistar D. Stuckey,
Assistant United States Attorney, Columbia, S.
C., Sidney B. Williams, Washington, D. C.,
20530, for defendant.
Opinion and Order
RUSSELL,
District Judge:
This
suit seeks recovery of that portion of a payment
(i.e., $1,192,405.43) made in compromise
settlement of certain income tax assessments
against the plaintiff and some fourteen other
parties which was assigned to the extinguishment
or abatement of various tax assessments against
the plaintiff as transferee.
[Taxpayer's Contention]
It
is the contention of the plaintiff that its
liability on the assessments, refund of which is
sought herein, was as transferee and that such
derivative liability was imperfect both because
the transfers to it were for full value and
because the notices of deficiency on which the
assessments were based were defective. While
admitting the execution of a compromise
settlement by the terms of which it bound itself
not to seek a refund, it urges that such
compromise agreement is not a bar, since, as to
it, the agreement did not represent a compromise
and, even if it did, the agreement is voidable
for duress and coercion.
[Government Defense]
The
defendant, on the other hand, rests its defense
on (1) the compromise agreement and,
particularly, the express provision thereof
under which the plaintiff bound itself not to
seek or sue for a refund and (2) on an estoppel
against the plaintiff to repudiate such
settlement. It, also, asserts that a small part
of plaintiff's claim was not filed within time
and is accordingly barred in any event.
[Motions for Summary Judgment]
Certain
interrogatories have been exchanged between the
parties. In addition, both parties have filed
certain affidavits. They have both cited and
rely, though for different reasons, on the
compromise agreement between the parties. On the
basis of the record so made, both parties have
moved for summary judgment.
It
is obvious that, if the provision in the
undisputed compromise settlement agreement
proscribing any suit by the plaintiff for a
refund is valid and enforceable, the motion of
the defendant for summary judgment must be
granted and the motion of the plaintiff denied.
It is necessary, therefore, to review at the
outset the undisputed facts, about which there
is no genuine issue, leading up to and involved
in the compromise settlement.
[Facts]
From
the undisputed facts in the record before me, it
appears that on September 16, 1963, there were
tax assessments "in a total amount of
approximately $9,000,000" outstanding
against the plaintiff and "certain members
of the Cooper family" and their
"corporations and associations", as
well as "proposed additional deficiencies *
* * in substantial amounts." 1
None of the taxpayers involved either in such
outstanding or proposed assessments, within the
allowable period for that action, petitioned the
Tax Court for a redetermination of their
respective tax liabilities. To the contrary, the
plaintiff and its associated interests hastened
to file "ten actions", seeking of this
Court injunctive relief against the outstanding
or proposed assessments, contending, among other
things, that the notices of deficiencies upon
which the assessments were based were defective,
thereby rendering "null and void" the
assessments. Relief in those proceedings was
denied the plaintiff and its associated
interests. In the course of denying relief, the
Court explicitly sustained the sufficiency of
the notices of deficiency. 2
Following
the dismissal of this initial injunctive action,
the plaintiff and associated parties began
compromise negotiations. The plaintiff contended
that, during such negotiations, an agent of the
Commissioner "conceded" that the
plaintiff's liability was "at most, only
$198,000", even though, as plaintiff's
complaint thereafter alleged, the actual
assessments made against the plaintiff itself at
the time aggregated $1,508,033.10. The extent of
liability of the other transferees, as discussed
during these negotiations, was not indicated in
the record. Arguing that any assessments against
it in excess of $198,000 were void as a result
of such alleged "concession" and
renewing its objections to the assessments made
in its earlier action for defect in the notices
of deficiency, the plaintiff filed a second
injunctive suit against the District Director on
September 27, 19
65. Relief was denied plaintiff in this second
action on
October 28, 19
65. 3
[Settlement Negotiations]
Settlement
negotiations on behalf of both the plaintiff and
all associated parties were thereupon renewed.
In the meantime, the District Director had
levied upon certain property of the plaintiff
and its associated interests and was in the
process of advertising same for sale under levy.
On
November 24, 19
65, the plaintiff, acting "on behalf of
all taxpayers involved", and
represented by four able and experienced
counsel, submitted in writing an offer of
$1,250,000 in compromise settlement of "all
assessments made or proposed * * * including any
issues now pending before the Appellate
Division, Internal Revenue Service, whether
assessed or not" "for all years up to
and including taxable years ending in 1961"
against the plaintiff and related interests or
family connections. The taxpayers to be granted
relief under the proposed settlement included 10
corporate parties and 5 named individuals along
with "their children, wives, and
grandchildren." The offer included these
two specific conditions:
"1.
No claims or suits for refund will be made for
the years involved in the settlement.
* * *
"4.
The parties shall agree upon the allocation of
the payment made hereunder, upon any effect that
the payment hereunder may have on basis of
property and otherwise upon the basis of
property which may be involved, but it is
expressly stipulated and agreed that no
controversy or issue of any kind or character
whether as to basis or allocation or any other
dispute as to mechanics or details of carrying
out the agreement shall prevent or delay payment
of the $1,250,000.00 beyond sixty (60) days from
the date hereof."
After
submission to and approval by the Commissioner
of Internal Revenue and the Attorney General of
the United States, 4
the offer of the plaintiff, as incorporated in
its letter, was accepted and the District
Director, Internal Revenue Service, duly
evidenced such acceptance on their behalf by
affixing his signature to a form of acceptance
included in the letter of the plaintiff, copy of
which was furnished the plaintiff.
After
acceptance of the offer, the plaintiff paid,
within the sixty days provided, the sum agreed
upon and the District Director proceeded to
release the federal tax liens and property
seizures, to abandon any sales under
advertisement and to cancel all collection
activities arising out of the assessments
described in plaintiff's letter of
November 24, 19
65. In addition, the Internal Revenue Service
abandoned its claims of liability pending in the
Appellate Division and agreed to Orders in the
Tax Court to the same effect, thereby fulfilling
that part of its agreement.
[Allocation of Compromise Payment]
After
payment was made by the taxpayers, the District
Director requested the plaintiff and its
associated taxpayers to submit their proposed
allocation of the compromise settlement payment
among the various assessments as contemplated in
condition 4, quoted supra, of the
settlement offer. The plaintiff, acting
apparently again for all the taxpayers, proposed
that $1,192,405.43 be "allocated to cover
full payment of any transferee liability claims
against Cooper Agency" and that the
remaining $57,594.57 "be allocated to the
complete settlement of all tax deficiencies
through the year 1961 and all transferee
liabilities of all those named in the agreement
except any amounts owed by Cooper Agency as
transferee." As of
November 24, 19
65, the net outstanding assessments against the
plaintiff totaled, with interest and penalties,
$1,795,466.63, and the outstanding assessments
against the other parties involved in the
settlement were in excess of $15,000,000. An
employee of the District Director thereafter
advised the plaintiff that the District Director
accepted the proposal for allocation of the
payment as submitted by the plaintiff.
[Claim for Refund]
Exactly
two years to the day after the settlement
agreement (but within two years of payment of
all the settlement save $70,000 thereof), the
plaintiff filed a claim for refund in the amount
of $1,192,405.43, being the amount of the
settlement assigned to the discharge of
plaintiff's tax liabilities. The basis for such
claim, as assigned therein by the plaintiff, was
that the plaintiff was "not liable for any
amount as a transferee of property from any
taxpayer at any time." Upon the rejection
of that claim this action was commenced.
[Recovery Barred]
The
defendant, by its motion, contends that the
admitted compromise agreement and settlement
between the parties, in which the plaintiff
specifically waived any right to sue for a
refund, bars the plaintiff from recovery herein
and requires summary judgment in its favor. I
agree.
[Compromise Settlement]
It
is well-settled that a compromise settlement of
tax liabilities, conforming to the requirements
of Section 7122, 26 U. S. C. A., is a contract,
governed by the rules applicable to contracts
generally; 5
and its terms are to be enforced as expressed,
unless they violate some public policy. And this
is true, even though it later appears no tax was
due. Seattle-First Nat. Bank v.
United States
(D. C. Wash. 1942) [42-1 USTC ¶9447] 44 F.
Supp. 603, 610, aff. [43-1 USTC ¶9454] 136 F.
2d 676, aff. [44-1 USTC ¶9259] 321
U. S.
583, 64 S. Ct. 713, 88 L. Ed. 944. The instant
settlement includes as one of its express terms
and conditions, the explicit agreement of the
plaintiff, that "No claims or suits for
refund will (would) be made" by it. Such a
condition does not transgress public policy.
There is nothing improper or even unusual in
such a condition in a tax settlement agreement.
In varying phraseology, sucy a condition is a
standard provision in tax settlements; and,
where the settlement is properly authorized, the
provision has been enforced without question. Monge
v. Smyth (C. C. A. Cal. 1956) [56-1 USTC ¶9213]
229 F. 2d 361, 368, cert. den. 351
U. S.
976, 76
S. Ct.
1055, 100 L. Ed. 1493; Hamilton v. United
States (Ct. Cl. 1963) [63-2 USTC ¶9829] 324
F. 2d 960, 964-5. The plaintiff does not contend
that this settlement was not properly
authorized. The affidavit of the District
Director shows that the settlement was
authorized by the Attorney General, who, since
these cases had been referred to the Department
of Justice, was the proper official under
Section 7122 to approve and authorize it on
behalf of the Government. 6
It accordingly follows that the voluntary
renunciation by the plaintiff in its settlement
offer of any right either to claim or to sue for
a refund forecloses it from the maintenance of
this suit.
Even
were there some defect in the settlement
agreement--even were it not properly authorized
by the Attorney General 7--the
plaintiff would be estopped, by its express
renunciation of a right to institute this suit
for refund, from maintaining this action. It is
true that there is a sharp conflict in the
decisions on the necessary elements of an
estoppel in tax refund cases. Under one line of
authorities, permitting the statute of
limitations to run against the affirmative
assertion of the tax liability in reliance on
the finality of an imperfect settlement is
deemed such prejudice to the Government as to
support an equitable estoppel against the
maintenance of a suit for refund by the
taxpayer. 8
The other view is that, in tax refund cases, an
estoppel will not arise merely because the
statute of limitations, in reliance on the
agreement, has matured as a bar to any claim by
the Government; there must have been an actual
misrepresentation by the taxpayer, inducing the
prejudicial inaction of the Government. 9
But to a substantial extent this second view is
influenced, it would appear from observations
made in a number of opinions sustaining such
view, by a circumstance peculiar to tax refund
cases. In any such action, the Government, even
though the statute has run, may, by way of
equitable recoupment, set-off its otherwise
barred claim against that asserted by the
taxpayer. Cuba Railroad Co. v.
United States
(C. C. A. N. Y. 1958) [58-1 USTC ¶9461]
254 F. 2d 280, 282, cert den. 358
U. S.
840, 79
S. Ct.
64, 3 L. Ed. 2d 5. In such a situation, of
course, the Government cannot be prejudiced; and
it is that want of prejudice which lies at the
heart of this "strict" rule as to
estoppel in tax refund cases. 10
[Right of Set-off v. Recoupment]
But,
even in those jurisdictions in which the
"strict" rule is applied, it would
seem that where there is not a full right of
set-off or recoupment by the Government, an
estoppel based upon the maturing of the statute
of limitation against suit by the Commission, in
reliance of the agreement, may properly arise.
Thus, where the settlement agreement (invalid
for want of approval as required under Section
7122) represents a so-called "package
deal", involving several taxpayers in
addition to the plaintiff, and the Government,
in reliance on the settlement, has permitted the
statute to run against the claims against the
taxpayers involved in the settlement other than
the plaintiff-taxpayer and cannot recoup,
through its right of set-off, against these
other taxpayers in the suit filed by the
plaintiff-taxpayer, 11
then the running of the statute will bar, by way
of an equitable estoppel, any right of the
plaintiff-taxpayer to violate his agreement.
This principle is illustrated in the
well-reasoned opinion in Girard v. Gill
(D. C. N. C. 1956) [56-2 USTC ¶9849] 142 F.
Supp. 770, 772, aff. [57-1 USTC ¶9584] 243 F.
2d 166. And this principle is applicable to this
case.
[Settlement on Behalf of All Taxpayers]
The
Government had tax assessments against the
plaintiff and some fourteen other persons and
corporations. This settlement agreement was made
on behalf of all of them and settled, by
compromise, the tax claims for the years stated
against all of them. The Government relied on
the agreement, particularly the agreement not to
seek a refund, and permitted the statute to run
against its claims against each of the fifteen
taxpayers involved in the settlement; indeed, as
to some of such taxpayers (but not including the
plaintiff) it abandoned proceedings in the
Appellate Division and consented to adverse
decrees in the Tax Court. Only one of the
taxpayers, the plaintiff, has sued for a refund.
The Government has, by operation of the statute
of limitations, thus lost its right to collect
from the fourteen other taxpayers embraced in
the settlement and has no right of recoupment
against them in this action. This prejudice is
sufficient to support an estoppel under either
statement of the essential elements of an
estoppel in a tax refund action, as set forth in
the two lines of authority outlined above.
[Allocation of Settlement Payment]
Actually,
as has been noted already, the plaintiff does
not challenge the settlement or question its
validity, including the prohibition against a
suit for refund. The theory of its claim follows
an entirely different line. It points to its
request of the District Director that "the
$1,192,405.43 paid by Cooper Agency (be applied)
to the payment of any of these transferee claims
you choose; however, we assume that you will
abate the excessive claims above this amount,
under Section 6404 of the Internal Revenue Code,
so that your records will show full payment of
all unabated, transferee claims against Cooper
Agency, which will of course be in accordance
with our agreement of
November 24, 19
65." (Italics added.) This request
followed the language of paragraph 4 of the
compromise agreement. The District Director
agreed to this request. As a result of these
allocations, the plaintiff argues in its brief
herein that "all unabated assessments
against the plaintiff, totaling $1,192,405.43,
were paid in full, and not compromised or
settled", and that, so far as any valid
assessments against it were concerned, there was
no compromise, it has paid all it validly owed.
It would thus deny any application of the
conditions of the settlement agreement to its
suit. Accordingly, it asserts the basis for the
defendant's motion for summary judgment (i.e.,
the settlement agreement) passes from the
picture, and the plaintiff is entitled to
contest in this action the validity of the tax
assessments asserted originally against it.
Such
argument overlooks the fact that the payment of
$1,250,000 was made pursuant to and as an
incident of the compromise agreement involving
well over $9,000,000 in assessments against
fifteen separate taxpayers, including
approximately $1,900,000 in assessments against
the plaintiff, and that the allocation of such
payment among the assessments against these
fifteen parties was, by the plaintiff's own
language, "in accordance with our agreement
of
November 24, 19
65." It is impossible, under these
circumstances, to isolate that portion of the
settlement figure, which, for bookkeeping
purposes, was thereafter allocated to the tax
liabilities of the plaintiff from the over-all
compromise agreement covering all the taxpayers.
The mere fact that, as a result of the manner of
application and of bookkeeping entries, some of
the assessments against the plaintiff were
marked paid in full and others abated in
full--not, on the basis of the respective merits
of the assessments but simply because plaintiff
requested it that way--cannot obscure the fact
that the payment, however, applied, was a
portion of a single settlement figure of
$1,250,000 and was made as an essential part and
parcel of the compromise agreement, indeed, of
section 4 of that very agreement, under which
the Government released tax assessments in
excess of $9,000,000. The argument of the
plaintiff is thus based on fiction, not reality.
It cannot, by such an argument, escape from the
conditions it proposed and the defendant
accepted.
Plaintiff's
argument really boils down to the contention
that, by its inducing the District Director to
apply the compromise payment in a particular way
on the books of the Commissioner, it could
transform what was a part payment, made by way
of a compromise settlement, into a payment in
full of a portion of the assessments. Such an
agreement would make a nullity of the settlement
and the intention of the parties and would
invest a bookkeeper in the office of the
District Director with the power to create a
liability for refund on the part of the
Government, where, by the very agreement under
which the payment was made by authority of the
Attorney General, there was no such right. This
would be creating a right where none existed
before. It would elevate form over substance.
[Compromise Under Duress]
Equally
without merit is plaintiff's point that its
compromise payment was made under duress. One
who seeks to void a contract for duress must
show that he was without other remedy. This
plaintiff had two plain remedies whereby it
could legally have contested the validity of the
assessments against it. By acting in due time,
the plaintiff could have tested the noticed
deficiencies in the Tax Court, as Judge Martin
remarked in 235 F. Supp. 283. The plaintiff was
not ignorant of this right. Several of the
parties involved in this settlement, including
this plaintiff, and represented by the same
counsel as appears for the plaintiff here
followed this procedure in connection with
earlier assessments against the plaintiff and
parties associated with it. See, Biltmore
Homes, Inc. v. C. I. R. (C. A. S. C. 1961)
[61-1 USTC ¶9344] 288 F. 2d 336, cert. den. 368
U. S.
825, 82 S. Ct. 46, 7 L. Ed. 2d 30, and Cooper's
Estate v. C. I. R. (C. A. S. C. 1961) [61-2
USTC ¶9548] 291 F. 2d 831, cert. den. 368
U. S.
919, 82
S. Ct.
241, 7 L. Ed. 2d 135. Perhaps its previous lack
of success under this procedure induced the
plaintiff to avoid this remedy. But, even after
it had foregone this remedy, the plaintiff could
have paid the assessments against it. It is true
that this would have required a payment greater
than that paid under the compromise agreement
(assuming, of course, that the plaintiff's share
of the compromise payment was $1,192,405.43). It
may have been a hardship, but, "Hardship in
raising money with which to pay taxes is now
common to all taxpayers", (Reams v.
Vrooman-Fehn Printing Co. (C. A. Ohio 1944)
140 F. 2d 237, 241) and does not represent
duress. 12
The plaintiff chose to follow neither of these
remedies; it compromised the assessments. Under
such circumstances, the plaintiff may not avoid
its compromise settlement. Little v. Bowers
(1889) 134
U. S.
547, 556, 10 S. Ct. 620, 33 L. Ed. 1016; cf.,
however, Girard v. Gill (C. C. A. N. C.
1958 [59-1 USTC ¶9144] 261 F. 2d 695, 699.
Moreover, even if this right existed on the part
of the plaintiff, it is ordinarily the rule that
the plaintiff is required promptly to disaffirm
the agreement and, as a condition of relief,
restore the opposite party to its former
position. Without question, the plaintiff in
this case could not restore the defendant to the
position it enjoyed against all the fifteen
taxpayers involved in the settlement. The
defendant has lost its claims against these
other taxpayers and the plaintiff cannot revive
such claims.
[Unfair Dealings]
While
unnecessary to the decision I have reached, one
additional argument of the plaintiff might be
noted. Even if sound, it probably would not
invalidate the settlement. It would indicate,
however, that the Government had been unfair in
its dealings with the plaintiff. Thus, the
plaintiff argues that, as evidenced by an
admission extracted from the defendant by one of
plaintiff's interrogatories, the total
outstanding assessments against the plaintiff on
September 16, 1963, were only $463,118.55.
Despite this, the defendant, through threat of
levies, forced the plaintiff to pay
$1,192,405.43 in settlement of such assessments.
This is not the full story, though; and the
facts will not support the plaintiff's
contentions in this regard. On September 16,
1963, the defendant issued against the plaintiff
additional notices of deficiencies in the
aggregate of $1,412,522.58, plus interest.
Before the plaintiff filed its injunction suits,
these notices had matured into assessments. As a
consequence, the assessments outstanding against
the plaintiff at the filing of its injunctive
suits were $1,508,033.10, by the allegations of
plaintiff's own complaint in the second
injunction suit. What was involved in the
subsequent settlement was thus not assessments
in the amount of $463,118.55 but assessments
aggregating $1,795,466.63, 13
against the plaintiff. Plaintiff would
apparently disregard these additional
assessments because, in its view, the notices of
deficiencies were defective. However, this
objection of the plaintiff had been raised and
decided adversely to it in both of the
injunction suits. Moreover, the plaintiff would
completely disregard the fact that the
compromise settlement covered not only its one
tax liability but also those of fourteen other
parties and that the aggregate tax liabilities
involved totaled well over $15,000,000.00.
The
motion of the defendant for summary judgment
herein is accordingly granted.
AND
IT IS SO ORDERED.
1 235 F. Supp. (D. C. S. C. 1964) 276, 278.
2 Cooper Agency, Inc. v. McLeod (D. C. S. C. 1964)
[64-2 USTC ¶9776] 235 F. Supp. 276, 283, [65-2
USTC ¶9603] affirmed, 348 F. 2d 919.
3 Cooper Agency v. McLeod (D. C. S. C. 1965) [65-2 USTC
¶9745] 245 F. Supp. 57.
4 Apparently, since time for appealing had not expired in the
injunction suit, the Department of Justice
retained control over the proceedings and the
approval of the Attorney General was required
for any compromise settlement.
5 United States v. Lane (C. C. A. Fla. 1962) [62-1 USTC
¶9467] 303 F. 2d 1, 4; Lowe v. United States
(D. C. Mont. 1963) [63-2 USTC ¶9778] 223 F.
Supp. 948, 949; United States v. McCue
(D. C. Conn. 1959) [60-1 USTC ¶9147] 178 F.
Supp. 426, 432.
6 Compliance is presumed in the absence of a contrary showing.
Anderson v. P. W. Madsen Inv. Co. (C. C.
A. Utah 1934) [4 USTC ¶1334] 72 F. 2d 768, 771.
Or, as phrased in Stearns Co. v. United
States (1934) [4 USTC ¶1210] 291
U. S.
54, 64, 54 S. Ct. 325, 78 L. Ed. 647, there is
always a "presumption of official
regularity".
See,
also, Hamilton v. United States (Ct. Cl.
1963) [63-2 USTC ¶9829] 324 F. 2d 960, 964:
"Plaintiffs
(taxpayers) have not shown us that the
requirements of section 7122 have not been met.
Before their claim for refund can be considered,
in face of the unequivocal terms of the
compromise agreement and the express prohibition
against the filing or prosecution of a claim for
refund, they must show that this section has not
been complied with. This they have not done. On
the contrary, on the face of the documents that
have been exhibited, it would seem that the
section has been complied with."
7 See 11 A. L. R. 2d 913:
"There
are several thousand cases each year in which
there are proposed deficiencies and which are
suitable material for a formal agreement such as
will preclude the reopening of the question of
tax liability under §3760 of the Internal
Revenue Code, and there are numerous cases in
which a final compromise agreement under §3761
would be the ideal way of closing the matter.
But the administrative burden placed on the
Secretary and Undersecretary of the Treasury by
these statutes makes it impossible for them to
handle more than a small proportion of the cases
and the remainder must be closed by agents not
authorized by law to enter into binding
agreements. The Commissioner has attempted to
devise an informal type of agreement which will
be binding on both parties and end
controversies, but without success. See Dean
Griswold's article in 57 Harv. L. Rev.
912."
8 Daugette v. Patterson (C. A. Ala. 1957) [58-1 USTC ¶9156]
250 F. 2d 753, 757, cert. den. 356
U. S.
902, 78 S. Ct. 561, 2 L. Ed. 580; Cain v.
United States (C. A. Ark. 1958) [58-1 USTC
¶9476] 255 F. 2d 193, 198-9; Guggenheim v.
United States (Ct. Cl. 1948) [48-1 USTC ¶9232]
77 F. Supp. 186, cert. den. 335
U. S.
908, 69 S. Ct. 411, 93 L. Ed. 441, reh. den. 336
U. S.
911, 69 S. Ct. 513, 93 L. Ed. 1075; Girard v.
Gill (D. C. N. C. 1956) [56-2 USTC ¶9849]
142 F. Supp. 770, 772, aff. [57-1 USTC ¶9584]
243 F. 2d 166; Schneider v. Kelm (D. C.
Minn. 1956) [56-1 USTC ¶9280] 137 F. Supp. 871,
875-6, aff. [56-2 USTC ¶9995] 237 F. 2d 721; Lowe
v. United States (D. C. Mont. 1963) [63-2
USTC ¶9778] 223 F. Supp. 948, 949.
9 Joyce v. Gentsch (C. A. Ohio, 1944) [44-1 USTC ¶9277]
141 F. 2d 891, 896-7; Bank of New York v.
United States (C. A. N. J. 1948) [48-2 USTC
¶10,636] 170 F. 2d 20, 24; Bennett v. United
States (C. A. Ill. 1956) [56-1 USTC ¶11,600]
231 F. 2d 465, 467; Cooney v. United States
(D. C. N. J. 1963) [63-2 USTC ¶12,149] 218 F.
Supp. 896, 898; Hamil v. Fahs (D. C. Fla.
1955) [55-1 USTC ¶11,546] 129 F. Supp. 837,
841-2; Steiden Stores v. Glenn (D. C. Ky.
1950) [50-2 USTC ¶9423] 94 F. Supp. 712, 721.
In
a note, Morris White Fashions, Inc. v. United
States (D. C. N. Y. 1959) 176 F. Supp. 760,
766, lists Girard v. Gill (C. C. A. N. C.
1958) [59-1 USTC ¶9144] 261 F. 2d 695, 698-700,
as indicative of a leaning in this direction by
this Circuit.
See,
also, Finality of Administrative Settlement
in Tax Cases, 57 Harv. L. Rev. 912 (1944).
10 In Morris White Fashions, Inc. v. United States (D.
C. N. Y. 1959) [60-1 USTC ¶9146] 176 F. Supp.
760, 765, the Court, after an exhaustive review
of the conflicting authorities, thus stated the
reasoning behind the strict rule:
"The key factor ignored in the Guggenheim and Cain
v. United States decisions, supra, is that
the defense of equitable recoupment may be
pleaded by the Government as a set-off to
plaintiff's claim for refund, even though the
statute of limitations has run against the
Government. Such a defense is never barred by
the statute of limitations, so long as the main
action is timely."
See, also, Joyce v. Gentsch (C. C. A. Ohio 1944) [44-1
USTC ¶9277] 141 F. 2d 891, 895-6.
11 That the right of recoupment is strictly limited to the
actual parties to the action, see Smith v.
United States (C. C. A. Md. 1966) [67-1 USTC
¶9161] 373 F. 2d 419, 421.
12 Walker v. Alamo Foods Co. (C. A. Texas, 1927) [1 USTC
¶207] 16 F. 2d 694, cert. den. 274
U. S.
741, 47
S. Ct.
587, 71 L. Ed. 1320.
13 The difference between this item (i.e., $1,799,466.63) and
that stated in the second injunction suit (i.e.,
$1,508,033.10) was apparently represented by
additional interest and penalties accruing
subsequent to the date referred to in the
injunction suit.
14 The District Court held that Treas. Reg. §301.7701-2(h) is
invalid in its entirety. We hold it to be
invalid only to the extent stated in this
opinion.
[69-1 USTC ¶9407]R. C. Hoskins v.
United States of America
U. S. District Court, East.
Dist.
Tenn.
, No. Div., Civil Action No. 6464, 299 FSupp
1229, 4/16/69
[Code Sec. 7122]
Compromises: Collateral agreements: Breach:
Contracts: State law: Implied promises.--The
taxpayer failed to fulfill his obligations under
an agreement collateral to an executed offer in
compromise--where the agreement called for
additional consideration to be based on
graduated percentages of annual income--by
transferring income-producing property held at
the time of the agreement without consideration.
Contract rules under
Tennessee
law permit the implication of terms in a
contract. Were the promise not to transfer
income-producing property held at the time of
the agreement not to be implied, the taxpayer
could have effectively destroyed the value of
the collateral agreement. However, the implied
promise did not apply to income-producing
property acquired after execution of the
collateral agreement.
Harold
B. Stone, Anna F. Hinds, Stone & Bozeman,
Hamilton Bank Bldg.,
Knoxville
,
Tenn.
, for plaintiff. Robert E. Simpson, United
States Attorney,
Knoxville
,
Tenn.
, for defendant.
Memorandum
TAYLOR,
District Judge:
Plaintiff
seeks refund of sums paid the Internal Revenue
Service under assessments which the Government
claims were due under an agreement to compromise
a tax liability. Jurisdiction is derived from
Title 28 U. S. C. 1346(a)(1).
In
1945 and 1946 plaintiff, R. C. Hoskins, failed
to pay the proper amount of taxes. In 1955 he
entered an agreement with the Internal Revenue
Service whereby he admitted he was liable for
taxes and penalties in excess of $200,000.00.
The agreement provided that his businesses would
be operated under the supervision of a
Government agent. The contract listed his
business assets, then provided at page two that
before plaintiff could sell and transfer any
business assets he would have to get permission
of the Nashville Director of Internal Revenue
and pay at least part of the proceeds of sale
toward satisfaction of his tax debt.
During
the period of Government supervision the
businesses lost money. As a consequence on
November 2, 19
66 Hoskins and the Government agreed to
compromise plaintiff's remaining tax liability
of some $183,000.00. The first section of the
two part agreement was entitled "offer in
compromise" and provided that plaintiff
should pay $75,000.00 in six annual
installments. Attached to the offer in
compromise was a statement of plaintiff's net
worth and a list of all his business and
personal property. This statement showed that
the fair market value of his equity in all
property held at that time was $81,973.42 (see
affidavit and brief filed by plaintiff's counsel
on
February 24, 19
69).
The
second section of the contract, called the
collateral agreement, provided in part as
follows:
"The purpose of this collateral agreement . . . is to
provide additional consideration for acceptance
of the above-described offer in compromise. It
is understood and agreed:
"That in addition to the payment of the aforesaid sum of
$75,000 the taxpayer will pay out of annual
income for the years 12-31-57 to 12-31-64,
inclusive:
"(a) Nothing with respect to the first $5,000 of annual
income.
"(b) 20% of annual income in excess of $5,000 and not in
excess of $7,000.
"(c) 30% of annual income in excess of $7,000 and not in
excess of $10,000.
"(d) 50% of annual income in excess of $10,000.
"That the term 'annual income' as used herein means
adjusted gross income as defined in section 62
of the Internal Revenue Code of 1954, (except
that in computing such 'annual income,'
deductions for depreciation, depletion, and
losses from sales or exchange of property shall
not be allowed) plus all nontaxable earnings,
profits, bequests, devises, or inheritances)
minus (a) the Federal income tax due for the
year in question and paid, and (b) the payments
made on the offer in compromise during the year
in question."
There
is no expressed limitation on plaintiff's rights
to dispose of his property in the contract.
Although plaintiff was married to Katherine
Hoskins before any negotiations for compromise
began, she did not sign the contract because the
marriage date in 1949 was after Mr. Hoskins had
incurred the tax liability.
In
full performance of his obligation under the
offer in compromise Hoskins paid a total of
$87,000.00 including interest over a period of
seven years. The question in this controversy is
whether he fulfilled his obligations under the
collateral agreement.
In
conjunction with his wife and two other persons,
Hoskins in 1958 incorporated and capitalized the
Acme Drug Company. Plaintiff contributed
$2,600.00 for 26% of the shares and Mrs. Hoskins
purchased 24%. Plaintiff testified that he
purchased his share of the enterprise from that
portion of his income which was left to his use
under the collateral agreement. Three years
later, on
December 31, 19
61, Hoskins made a gift to his wife of the 26%
interest which he held in Acme and paid the gift
tax thereon.
In
1962 Hoskins incorporated Hoskins Drug Store No.
1, in which he owned a 75% interest, and Norris
Drug Store, in which he owned 100% of the
shares. In December of that year he transferred
without any consideration all his interests in
the two businesses to Mrs. Hoskins and paid the
appropriate gift tax.
Hoskins
testified that he turned the stores over to his
wife as he did not have time to oversee their
operations, because of his state of health, and
upon the advice of his accountant as a
recommended estate planning device. Katherine
Hoskins exercised control over the stores after
the transfer and exerted substantial efforts in
their operation. During the time remaining under
the collateral agreement all three stores made
substantial earnings.
After
the transfers plaintiff reported the income from
the three businesses as income of Katherine
Hoskins but did not include for the years
1962-64 any earnings from them in his statements
of gross income on which were figured the
amounts due under the collateral agreement. The
Government contended that the part of the
earnings from those stores which is proportional
to plaintiff's former ownership interest should
be charged to his gross income for purposes of
the contract. It accordingly assessed against
him the following amounts:
1962 .... $ 4,886.34
1963 .... 7,781.89
1964 .... 16,976.23
Plaintiff paid those sums and proceeded under
the refund procedure to contest his liability.
All
of the facts in this case have been stipulated
or testified to without contradiction. After
introduction of all the testimony and after both
parties had moved for a directed verdict, it
appeared that there was no question of fact for
the jury. The liabilities of the respective
parties depend upon the construction of the
contract in light of all the circumstances,
which is a question for the Court rather than
for a jury. Petty v. Sloan, 197
Tenn.
630; Hibernia Bank & Trust Co. v. Boyd,
164
Tenn.
376.
The
Government insists that the collateral agreement
impliedly prohibited Hoskins from transferring
his income-producing property without
consideration because otherwise the purpose of
the agreement could readily be thwarted.
Plaintiff
argues that the contract is a public contract in
which nothing may pass by implication and in
support of his argument relies on Volunteer
Electric Cooperative v. TVA, 139 F. Supp. 22
(E. D. Tenn., S. D., 1954). Further, plaintiff
insists that Hoskins' uncontradicted testimony
establishes that he did not intend such an
implication when he signed the agreement twelve
years ago, and that an implied promise may only
be found when consistent with the intent of the
parties. See, E. O. Bailey & Co. v. Union
Planters Title Guaranty Co., 33
Tenn.
App. 439. Plaintiff relies on the rule that the
inclusion of some matters of a class in a
contract means the exclusion of all other
matters in the same class. Aetna Life Ins.
Co. v. Bidwell, 192
Tenn.
627.
The
parties agree that the collateral agreement is
to be construed as an ordinary
Tennessee
contract without reference to the Internal
Revenue Code. See United States v. Lane
[62-1 USTC ¶9467], 303 F. 2d 1 (C. A. 5, 1962).
Because this case presents a new question, an
extensive discussion of the authorities is
necessary.
A
contract in compromise of a tax liability is not
such a contract for public services as was
involved in Volunteer Electric Cooperative v.
TVA, supra, which held that nothing can pass
by implication. Rather, it has been held that a
compromise agreement with relation to interest
due on a disputed tax liability was subject to
the implied condition that if the ultimate
liability for the principal was not subsequently
found, the Government must return the interest
agreed upon in the compromise. Phelps v.
United States [39-2 USTC 9583], 105 F. 2d
904 (C. A. 2, 1939); Big Diamond Mills Co. v.
United States [2 USTC ¶791], 51 F. 2d 721
(C. A. 8, 1931).
The
contract rules followed in
Tennessee
permit the implication of terms in a contract. Dunlap
Lumber Co. v. Nashville, C. & St. L. Ry.
Co., 129
Tenn.
163. The rule was stated in Weatherly v.
American Agricultural Chemical Co., 16
Tenn.
App. 613, that a covenant may be implied when
necessary to give effect to the purpose of the
contract as a whole. Our Sixth Circuit has
applied this rule in a case arising in
Tennessee
that, "when the whole contract is 'instinct
with an obligation', an agreement by a party to
perform may be implied." Big Cola
Corporation v. World Bottling
Co.
, 134 F. 2d 718, 721.
The
most recent word of the Sixth Circuit on the
subject is contained in the case of
United States
ex rel. TVA v. Hughes,
April 9, 19
69, as follows:
". . . Obviously, the provision requiring removal of
existing structures by necessary implication
prohibits the erection later of identical or
similar structures." Slip Opinion, p. 4.
No
case has been cited or discovered by the Court
which determines whether an obligation not to
give away income-producing property must be
implied when, as part of consideration for the
compromise of a tax liability, the taxpayer
agrees to pay portions of his income for
subsequent years. However, closely analogous are
those cases in which is implied a covenant to
produce income when the consideration for a
grant of property lies wholly in the payment of
sums of money based on the earnings of the
property transferred. Mechanical Ice Tray
Corp. v. General Motors Corp., 144 F. 2d 720
(C. A. 2, 1944), and cases cited therein; Parev
Products Co. v. I. Rokeach & Sons, 124
F. 2d 147 (C. A. 2, 1941); Crossland v.
Kentucky Blue Grass Seed Growers' Coop. Ass'n,
103 F. 2d 665 (C. A. 6, 1939) (contract for
employment of a sales agent); Kentucky Rock
Asphalt Co. v. Milliner, 234 Ky. 217, 27 S.
W. 2d 937 (lease of mineral rights).
Considering
all the circumstances and the language of the
collateral agreement and offer in compromise,
the Court must construe the contract to require
plaintiff not to dispose of his business
property without consideration. Otherwise,
plaintiff could destroy the value of the
agreement by giving away all his sources of
income. To the offer in compromise was attached
a list of plaintiff's business and personal
assets which included both the Hoskins Drug
Store No. 1 and the Norris store. That it was
intended and expected that the property left in
Hoskins' hands would produce either income or
liquidation proceeds for the Government is the
only logical construction of the collateral
agreement under the circumstances and when read
with the offer in compromise. The Government
could have taken all plaintiff's property in
satisfaction of the tax liability, but the
Government chose to allow plaintiff to retain it
if he would pay $75,000.00 and portions of his
income during the next seven years. The reason
for accepting the offer (including the
collateral agreement) was stated in the offer in
compromise to be that selling the assets would
not yield the amount tendered in settlement.
Hoskins
Drug Store No. 1 and Norris Drug were owned by
plaintiff at the time he entered the compromise
and were listed in the schedule attached to the
offer. Those properties were clearly
contemplated to be the source of further
consideration for the Government. However, the
Acme store stands on a different footing. The
Internal Revenue office left portions of
plaintiff's income for his own use. At the time
he paid his part of Acme's original capital in
1958, he was paying all amounts due under the
agreements. Hoskins testified that he purchased
the $2,600.00 interest from those sums left to
him. Under the contract plaintiff could dispose
in any way of that income not due the Government
and that right carries with it the right to give
away the property acquired from savings that
were exempt under the compromise agreement.
In
summary, the Government in computing Hoskins
income under the collateral agreement may treat
as belonging to plaintiff the income
proportionate to his former interest in Hoskins
Drug Store No. 1 and Norris Drug, but may not
include any earnings of Acme after plaintiff
gave the stock to Katherine Hoskins. The parties
will compute the amount of the refund to
plaintiff in conformity with the principles
declared herein.
Brief
mention should be made of plaintiff's contention
that Hoskins Drug Store No. 1 and Norris Drug
Store should be charged with reasonable salaries
for the work done by Mrs. Hoskins during the
years involved in the tax dispute. This is a
matter that addresses itself to the Commissioner
of Internal Revenue rather than the Court. For
purposes of this suit, the Court is bound by
what was done rather than what could have been
done.
[74-1 USTC ¶9270]Alfred J. Parenteau v.
United States of America
U. S. District Court, Dist. N. J., No. 1297-72,
12/20/73
[Code Secs. 6501 and 7122]
Compromises: Breach of agreement: Statute of
limitations: Waiver: Compromise as.--The
government was awarded summary judgment in the
suit brought by the taxpayer who protested that
taxes he owed were collected after the running
of the statute of limitations. The government
and the taxpayer had entered into a compromise
agreement as to the amount of taxes owed by the
taxpayer. A provision of the agreement provided
that the statute of limitations would be
extended if the taxpayer missed a payment, and
the court concluded that, since the taxpayer
showed no detriment suffered, the provision was
not void as against public policy.
Raymond
E. Caruso, 103 E. Front St., Red Bank, N. J.,
for plaintiff. Scott P. Crampton, Assistant
United States Attorney General, Daniel J. Dinan,
Stephen T. Lyons, Department of Justice,
Washington, D. C. 20530, for defendant.
Opinion and Order
BARLOW,
District Judge:
This
case is before the Court on cross-motions for
summary judgment.
FED
. R.
CIV
. P. 56.
The
plaintiff seeks to recover certain income and
employment taxes which the Internal Revenue
Service (
IRS
) collected by distraint in 1971 and 1972. The
plaintiff insists that the collection was barred
by the applicable statute of limitations, 26
U. S.
C. A. §6502. The Government demurs, asserting
that it acted in timely fashion.
The
plaintiff made an offer to compromise his
original tax liability, which the
IRS
accepted on February 23rd, 1962. 26 U. S. C. A.
§7122. There is no dispute that, once accepted,
the terms of the offer became binding
contractual obligations on both parties. United
States v. Lane [62-1 USTC ¶9467], 303 F. 2d
1, 4 (5th Cir. 1962). The agreement called for
plaintiff to pay over the entire compromised sum
on March 30th, 1962. Plaintiff failed to make
the required payment and, on April 9th, 1962,
the Government warned him, by letter, that he
might be declared in default of the agreement.
Plaintiff responded on April 23rd, 1962, by
"withdrawing" his offer, or, in
contractual terms, repudiating the agreement. 1
Plaintiff received no further communication from
the
IRS
until February 17th, 1965, some three years
later, when he was notified that the compromise
agreement had been declared in default.
Of
critical importance to the resolution of thses
motions is Paragraph 6 of the compromise
agreement (Government Form 656, entitled
"Offer in Compromise"). Paragraph 6
tolls the applicable statute of limitations
under certain explicit circumstances:
"6.
The undersigned proponent waives 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 statutory period of
limitations on assessment and collection for the
period during which the offer is pending or
the period during which any installment remains
unpaid, and for one year thereafter."
(Emphasis added.)
It
is the Government's view that the statute of
limitations remained tolled until the February
17th, 1965, notification of default; however,
the plaintiff argues that the statute should
have commenced running once again on April 23rd,
1962, the date plaintiff sent his letter
repudiating the compromise agreement.
Plaintiff's Motion for Summary Judgment
Since
the Government refuses to concede, for the
purpose of this motion, that the plaintiff
actually sent the April 23rd letter, there
exists a factual dispute which precludes
resolution of the plaintiff's motion for summary
judgment.
FED
. R.
CIV
. P. 56. Accordingly, that motion is denied.
Defendant's Motion for Summary Judgment
The
explicit language of Paragraph 6 of Form 656, supra,
supports the Government's calculation of the
statutory period of limitation. The statute
remains tolled, according to that paragraph, as
long as ". . . any installment remains
unpaid". Clearly, the one-installment
payment due on March 30th, 1962, remained unpaid
until February 17th, 1965, when the entire
compromise agreement became a nullity as a
result of the Government's declaration of
default. Accordingly, we accept the contention
of the
United States
that the statute of limitations did not expire
until after the monies in question had been
collected.
However,
the plaintiff alternatively asks this Court to
void Paragraph 6 as offensive to public policy.
The fact that the Government, when confronted
with a breach of the compromise agreement, has
no time limit within which it must choose its
remedy 2
is, the plaintiff contends, unfair to a
taxpayer. We disagree.
First,
despite a conclusory assertion to the contrary,
the plaintiff has pleaded no specific detriment
suffered as a result of the delay in the
collection of the taxes. Indeed, in view of this
plaintiff's history of bankruptcy and subsequent
recovery, the hiatus was, in all probability,
beneficial rather than detrimental. Further, the
fact that plaintiff made no attempt to
communicate with the
IRS
after his April 23rd letter also dilutes his
assertion of hardship. Finally, the Third
Circuit has previously upheld the default
provision and, by implication, the waiver of the
statute of limitations provision contained in
Form 656. United States v. Feinberg [67-1
USTC ¶9176], 372 F. 2d 352, 356 (3rd Cir.
1967). In that case, the Court sustained a
governmental declaration of default which was
received more than four years after the initial
breach of the compromise agreement.
Under
all of the circumstances, we cannot accept
plaintiff's contention that Paragraph 6 of Form
656 is so blatantly unfair to the taxpayer that
it must be declared void as against public
policy.
Accordingly,
the defendant
United States
' motion for summary judgment must be granted,
without costs.
1 The fact that plaintiff did send such a letter of
repudiation is stipulated for the purpose of the
Government's motion only.
2 Paragraph 4 of the compromise agreement basically allows the
Government, in the event of a default, to
institute action to collect either the
compromised or the original liability.
"4.
It is further agreed that upon notice to the
proponent of the acceptance of this offer in
compromise of the liability aforesaid, the
proponent shall have no right to contest in
court or otherwise the amount of the liability
sought to be compromised; and that in the event
this offer is a deferred payment offer and there
is a default in payment of any installment of
principal or interest due under the terms of the
offer, the Commissioner of Internal Revenue (or
his delegate), at his option, (a) may proceed
immediately by suit to collect the entire unpaid
balance of the offer, or (b) may proceed
immediately by suit to collect as liquidated
damages an amount equal to the liability sought
to be compromised, minus any deposits already
received under the terms of the offer in
compromise, with interest on the unpaid balance
at the rate of 6 percent per annum from the date
of default, or (c) may disregard the amount of
such offer and apply all amounts previously
deposited thereunder against the amount of the
liability sought to be compromised and may,
without further notice of any kind, assess
and/or collect by levy or suit the balance of
such liability, the right of appeal to the Tax
Court of the United States and the restrictions
against assessments and/or collection being
hereby waived."
[82-1 USTC ¶9191]Dr. Jerry Fortenberry, Plaintiff v.
United States of America
, Defendant
U. S. District Court, So.
Dist.
Miss.
,
Hattiesburg
Div., Civil No. H 80-0119(C),
8/28/81
[Code Sec. 7122]
Compromises of tax liability: Breach of
agreement: Notice.--A taxpayer was not
entitled to a reasonable notice of the amount
due under an offer in compromise nor was he
entitled to a reasonable period of time in which
to raise such amount prior to the Internal
Revenue Service's declaration that his offer was
in default. The taxpayer's failure to make the
required payments constituted a default and
under the terms of the collateral agreement, the
IRS
was authorized to collect the balance of the
original liability without further notice of any
kind.
Zachary
& Zachary, P. O. Box 24, Hattiesburg, Miss.
39401, George E. Gillespie, Jr., P. O. Box 1921,
Hattiesburg, Miss. 39401, for plaintiff. George
Phillips, United States Attorney, Daniel E.
Lynn, First Assistant United States Attorney,
Jackson, Miss. 39205, William D. M. Holmes, Jack
D. Warren, Department of Justice, Washington, D.
C. 20530, for defendant.
COX
,
District Judge:
This
cause came on for hearing before the Court on
August 20, 1981, on the motion of the defendant,
United States of America
, for summary judgment and the Court having
considered the record herein and having heard
the argument of counsel now makes the following
findings of fact and conclusions of law:
Findings of Fact
1.
This action was instituted by the plaintiff, Dr.
Jerry Fortenberry, against the defendant, the
United States of America
, seeking the refund of federal income taxes and
statutory additions thereto for the years
1962-1967, inclusive, in the amount of
$22,055.82, plus interest as provided by law.
2.
For the years 1962-1967, inclusive the Internal
Revenue Service assessed federal income taxes
and statutory additions thereto against the
plaintiff, Dr. Jerry Fortenberry, in the
aggregate amount of $23,835.70.
3.
Under date of
June 13, 19
69, the plaintiff submitted to the Internal
Revenue Service an Offer in Compromise of the
foregoing assessed tax liability for the total
sum of $7,000, payable in installments. In the
Offer in Compromise, the plaintiff stated that
his offer should be accepted because he was
unable to pay the tax liability assessed against
him.
4.
The plaintiff thereafter submitted to the
Internal Revenue Service, on
IRS
Form 2261, a Collateral Agreement as additional
consideration for the acceptance of the
foregoing Offer in Compromise. By letter of
July 17, 19
69, the Internal Revenue Service notified the
plaintiff of its acceptance of the Offer of
Compromise and the Collateral Agreement.
5.
Under the terms of the Offer in Compromise and
Collateral Agreement, the plaintiff could, by
making payments of graduated percentages of his
1969-1976 annual income in excess of $10,000,
satisfy his 1962-1967 tax liability for less
than the full amount assessed against him for
those years. However, the plaintiff was required
to make the indicated payments on a timely
basis, (i. e. by April 15th of the year
following the year of receipt of such annual
income), and upon default in that regard, the
Internal Revenue Service was authorized to
disregard the amount of the offer and the
Collateral Agreement, apply the amounts
previously paid thereunder against the
plaintiff's 1962-1967 tax liability, and without
notice of any kind, proceed to collect from him
the full remaining balance of such liability. 1
6.
The plaintiff complied with the provisions of
the offer in Compromise referred to in paragraph
3 above by making the prescribed payment of
$7,000 to the Internal Revenue Service.
7.
For the years 1974 and 1975, the plaintiff filed
statements with the Internal Revenue Service
reflecting annual income in the respective
amounts of $5,744.13 and $12,838.30; and
remitted a payment for the year 1975 under the
Collateral Agreement in the amount of $387.93,
plus interest of $1.94. However, the plaintiff's
1974 and 1975 income tax returns were
subsequently audited by the Internal Revenue
Service, and in December of 1974, the plaintiff
agreed to certain deficiencies which increased
his annual income for those years to $17,734.09
and $21,954.18, respectively.
8.
Notwithstanding the plaintiff had annual income
in each of the years 1974 and 1975 in excess of
$10,000, he failed to pay over to the Internal
Revenue Service on or before the due dates
(April 15, 1975 and
April 15, 1976
, respectively) the percentages of such excess
as required by the Collateral Agreement.
Consequently, the Internal Revenue Service, by
letter dated July 5, 1978, declared the
plaintiff's offer to be in default, applied the
payments previously made under the Offer in
Compromise and Collateral Agreement to the tax
liability assessed against the plaintiff for
1962-1967 and collected from him the remaining
balance of such liability.
9.
Even though the Collateral Agreement expressly
provides that for each year his annual income
for 1969-1976 was in excess of $10,000 the
plaintiff was required to make an annual payment
of a graduated percentage of such excess without
the necessity of notice of any kind from the
Internal Revenue Service, on
January 18, 1978
, the Internal Revenue Service, as a matter of
courtesy, mailed a letter to the plaintiff
advising him that the sum of $6,748.82 was due
under the terms of the Collateral Agreement for
the years 1974 and 1975, including interest of
$26.50 for the year 1976. On
June 2, 1978
, when no payment was received as a result of
such advice, the Internal Revenue Service mailed
a second letter to the plaintiff indicating that
such liability, including interest accrued to
June 30, 1978
, amounted to $6,897.68, and that the offer
would be declared in default if the payments due
under the Collateral Agreement were not made by
June 30, 1978
. Payment was not made by June 30, 1978, and, as
heretofore noted, the Internal Revenue Service
declared the offer to be in default on July 5,
1978.
10.
By a Letter dated May 24, 1979, the plaintiff
forwarded $22,055.82 to the Internal Revenue
Service in full satisfaction of the remaining
liability due for the years 1962 through 1967.
Subsequently, he filed a claim for refund
thereof. The instant suit, in which the
plaintiff seeks to recover such amount, was
thereafter timely filed.
11.
The plaintiff contends that the Internal Revenue
Service was without right to declare the offer
in default because (1) he performed under the
contract in good faith and was entitled to
reasonable notice of the amount due and a
reasonable period of time to raise such amount;
and (2) because he substantially performed the
terms of the contract.
Conclusions of Law
1.
None of the plaintiff's factual contentions has
any merit.
2.
The Internal Revenue Service is authorized by 26
U. S. C. §7122(a) to compromise any civil case
arising under the internal revenue laws (prior
to reference to the Department of Justice for
prosecution or defense) and as a condition to
the acceptance of a taxpayer's offer in
compromise, the Internal Revenue Service may
require such a taxpayer to enter into any
collateral agreement which it deems necessary
for the protection of the interest of the United
States (Treasury Regulation on Procedure and
Administration (1954 Code), §301.7122-(d)(3)).
3.
The law is well-settled that the Offer in
Compromise and Collateral Agreement submitted by
the plaintiff and accepted by the Internal
Revenue Service on
July 17, 19
69, constitute a contract and that the
plaintiff, as a party thereto, is bound by its
terms. James v. First National Bldg. Corp.
[46-1 USTC ¶9270], 155 F. 2d 815 (10th Cir.
1946); Colorado Milling & Elevator Co. v.
Howbert, 57 F. 2d 769 (10th Cir. 1932).
Accordingly, when the plaintiff failed to make
the payments required thereunder with respect to
1974 and 1975, the Internal Revenue Service was
authorized thereby, at its option, inter alia,
to "disregard the amount of the offer and
[the Collateral Agreement], and apply all
amounts previously paid thereunder against the
amount of the liability sought to be compromised
and [could] without further notice of any kind,
assess and/or collect by levy or suit [the
restrictions against assessment and/or
collection being specifically waived) the
balance of such liability." United
States v. Lane [62-1 USTC ¶9467], 303 F. 2d
1 (5th Cir. 1962). Provisions were made in both
the Offer in Compromise and the Collateral
Agreement for the Internal Revenue Service to
notify the plaintiff of the acceptance of the
offer. Such notice was given by letter of
July 17, 19
69, and thereafter the default provisions of the
Offer in Compromise and the Collateral Agreement
were effective "without further notice of
any kind" from the Internal Revenue
Service.
3.
The plaintiff had annual income in excess of
$10,000 for each of the years 1974 and 1975, but
failed to pay over to the Internal Revenue
Service the required percentages of such excess
on or before the due dates. Therefore, in
accordance with the terms of the Collateral
Agreement, the defendant properly declared the
contract in default and collected the full
balance of the liability assessed against the
plaintiff for 1962-1967.
4.
In United States v. Lane, supra, a case
involving facts which are very similar to those
involved herein, the United States Court of
Appeals for the Fifth Circuit held that the
United States was, upon violation of its terms,
entitled to declare in default a collateral
agreement identical to the one here in question
and concluded that the issue of the property of
such action was appropriate for summary judgment
in the Government's favor. In reaching this
conclusion, the Fifth Circuit stated (p. 4):
This language is so precise, and the intention which it
manifests is so evident, as to leave no doubt
that the course of action taken by the
Government here was fully authorized by the
compromise agreement.
There was nothing illegal, immoral or inequitable in the
compromise agreement. It did not provide for any
"forfeiture". By express provision,
the amounts to be paid under the compromise
agreement, including both the Form 656-C and the
collateral agreement, could not exceed the
aggregate amount which the taxpayer conceded
that he owed the Government from the start. By
allowing the Government to review the taxpayer's
original liability, the taxpayer will not
forfeit the amounts he has already paid, for
those amounts will be applied to reduce the
original liability. The agreement was precise,
it was fair, and it was freely consented to by
the taxpayer. There is no reason why it should
not be enforced as written.
5.
The plaintiff contends that the Internal Revenue
Service was without right to declare his offer
in default because he substantially performed
its terms, because he was entitled to reasonable
notice of the amount due thereunder, and because
he was entitled to a reasonable period of time
to raise said amount. Such contentions, however,
are without merit. The plaintiff failed to make
the required payments for 1974 and 1975 on the
due dates therefor. Each such failure
constituted a default and, upon either such
default, under the express terms of the
Collateral Agreement, the Internal Revenue
Service was authorized, "without further
notice of any kind" to the plaintiff, to
collect, as it did, the balance of the original
liability.
6.
The fact that the Internal Revenue Service
mailed courtesy letters to the plaintiff in
January and June of 1978, advising him of his
past due liability for 1974 and 1975 under the
Collateral Agreement, does not alter the
conclusions reached herein. The Collateral
Agreement provides (par. 4) that payment of the
liability for each of those years should have
been made, respectively, "to the District
Director, without notice from him, on or before
the fifteenth day of the fourth month next
following the close of the calendar * * *
year." As stated by the Third Circuit in United
States v. Feinberg [65-2 USTC ¶9645], 372
F. 2d 353, 357 (1965), "by the clear
language of the Offer in Compromise, Mr.
Saladoff agreed that, upon his default, the
Commissioner of Internal Revenue could terminate
the Compromise Agreement. The default is
undisputed. The Government cannot be held to the
'warning shot' the appellant suggests is
required here."
7.
The Defendant's Motion for Summary Judgment is
well-taken. There is no genuine issue as to any
material fact and the defendant is entitled to
judgment as a matter of law. Accordingly, the
defendant's motion should be, and is hereby,
granted and summary judgment should, and will,
be entered herein in favor of the defendant,
United States of America
, dismissing the plaintiff's Complaint with
prejudice.
Summary Judgment
The
defendant, United States of America, having
moved the Court to enter summary judgment herein
in its favor on the grounds that there is no
genuine issue as to any material fact and that
the defendant is entitled to judgment as a
matter of law and the Court having entered its
Findings of Fact and Conclusions of Law to the
effect that said motion is well-taken, it is, in
accordance with such Findings of Fact and
Conclusions of Law--
ORDERED
and ADJUDGED that the plaintiff, Dr. Jerry
Fortenberry, take nothing, that the action be
dismissed with prejudice, that the defendant,
the United States of America, recover of the
plaintiff, Dr. Jerry Fortenberry, its costs of
action.
1 The default provision of the Collateral Agreement (par. 6)
provides as follows:
That
upon notice to the taxpayer of the acceptance of
the offer in compromise of the liability
aforesaid, the taxpayer shall have no right, in
the event of default in payment of any
installment of principal or interest due under
the terms of the offer and this agreement, or in
the event any other provision of this agreement
is not carried out in accordance with its terms,
to contest in court or otherwise the amount of
the liability sought to be compromised; and that
in the event of such default or non-compliance,
or in the event the taxpayer becomes the subject
of any proceeding under the Bankruptcy Act, or
the subject of any proceeding whereby the
affairs of the taxpayer are placed under the
control and jurisdiction of a court or other
party, the Commissioner or his delegate at his
option, (a) may proceed immediately by suit to
collect the entire unpaid balance of the offer
and this agreement, or (b) may proceed
immediately by suit to collect as liquidated
damages an amount equal to the tax liability
sought to be compromised minus any payments
already received under the terms of the offer in
compromise and this agreement, with interest at
the rate of 6% per annum from the date of
default, or (c) may disregard the amount of such
offer and this agreement, and apply all amounts
previously paid thereunder against the amount of
the liability sought to be compromised and may,
without further notice of any kind, assess
and/or collect by levy or suit (the restrictions
against assessment and/or collection being
specifically waived) the balance of such
liability.
[72-2 USTC ¶9703]
D.
D.
I.
, Inc., et al. v. The
United States
U. S. Court of Claims, No. 258-71, 199 CtCls 380, 467 F2d
497,
10/13/72
[Code Sec. 7122(a)]
Compromises: Authority to enter: Attorney
General: Package settlement of cases pending and
cases not in suit: Estoppel from opening
agreement: Interest as part of compromise.--Where
a compromise agreement called for the settlement
by the Attorney General of three pending suits
conditioned on the agreement that accumulated
earnings tax deficiencies of the plaintiff
corporations would be settled at the same time
on the same basis, the Attorney General was
found to have had the authority to enter the
compromise. The plaintiffs' requirement that
settlement of their deficiencies be a condition
to settlement of the three tax refund suits
caused their deficiency settlements to be
germane to the refund suits and within the
Attorney General's authority. Also, the Treasury
Department authorized the Department of Justice
to make the settlement. Further, the plaintiffs
are estopped from opening the compromise
agreement since the Commissioner cannot open the
cases of the litigating corporations and, in a
package deal such as this, does not have a full
right of set-off or recoupment. Finally, the
compromise included the payment of interest
computed according to the law as both parties
thought it to be at the time of the compromise
(interest commencing to run from tax return due
date) and not just the lawful interest according
to a later decision in Motor Fuel Carriers,
Inc., (Ct. Cls.) 70-1 USTC ¶9191
(taxpayer's liability for interest on
accumulated earnings tax beginning 10 days after
date of Notice and Demand).
W.
R. Anchors, Richard H. Hunt, Jr., Smathers &
Thompson, for plaintiffs. Scott P. Crampton,
Assistant Attorney General, Michael H. Singer,
Philip R. Miller, Theodore D. Peyser, Department
of Justice, Washington, D. C. 20530, for
defendant.
Before
COWEN, Chief Judge, LARAMORE, Senior Judge,
DAVIS
, SKELTON, NICHOLS,
KASHIWA
and KUNZIG, Judges.
On Plaintiffs' Motion and Defendant's Cross Motion for
Summary Judgment
KUNZIG,
Judge, delivered the opinion of the court:
Plaintiffs
are suing for a refund of interest paid as part
of a settlement of accumulated earnings taxes.
After
audit, the Commissioner of Internal Revenue
proposed to assess accumulated earnings taxes 1
of varying amounts against the plaintiffs. As a
result of negotiations between plaintiffs and
the Commissioner, it was agreed that the years
under audit would remain "in suspense"
until the outcome of three tax refund suits
involving identical facts and circumstances with
three other corporations.
On
April 16, 19
68, counsel for the litigating corporations (who
was also counsel for plaintiffs) proposed to the
Assistant Attorney General a settlement of the
three pending suits. The offer however was
conditioned upon agreement by the Commissioner
to settle the plaintiffs' cases at the same time
and on the same basis (twenty-five per cent of
the proposed assessment plus interest).
After
consultations between the Justice Department and
the Commissioner, the settlement offer was
accepted on
December 17, 19
68 conditioned on the
.
. . payment of the deficiencies of the
corporations not in suit within thirty days of
verification of the amounts thereof by the
service under the terms of settlement, plus
interest.
On
February 17, 19
69, the Commissioner prepared and submitted
verified deficiencies to plaintiffs on Form 870
in accordance with the settlement. On the same
date plaintiffs duly executed and delivered to
the Commissioner these Forms 870. Each
plaintiff, except Volusia Locations, Inc.,
received a Notice and Demand dated
April 18, 19
69, for payment of the agreed deficiencies along
with interest computed from the due date of each
plaintiff's tax return for the year in respect
to which the accumulated earnings tax was
assessed. Each of the plaintiffs, except
Volusia, paid the full amount of tax and
interest shown on its Notice and Demand on Arpil
24, 1969. 2
No
closing agreement or other document purporting
to bind the Government or plaintiff was
executed.
On
July 18, 19
69, pursuant to the Settlement Agreement, the
three refund suits then pending were dismissed
on stipulation of the parties.
On
January 23, 1970
, this court issued its opinion in Motor Fuel
Carriers, Inc. v. United States [70-1 USTC
¶9191], 190 Ct. Cl. 385, 420 F. 2d 702 (1970),
which held that a taxpayer's liability for
interest on accumulated earnings tax commences
ten days after the date shown on the Notice and
Demand, and not on the due date of the tax
return for the taxable year in respect to which
the accumulated earnings tax was assessed.
Upon
learning of Motor Fuel Carriers,
plaintiffs filed claims for refund of the
deficiency interest paid on the Section 531
compromise. These claims for refund were
disallowed by Notices of Disallowances dated
August 21, 1970 and September 3, 1970. Suit was
thereafter timely instituted in this court.
The
matter is presently before this court on motions
for summary judgment by both parties. We agree
with the position of the defendant.
There
are three primary issues involved in this case:
(1)
Whether the Attorney General had the authority
to enter into a compromise with plaintiffs;
(2)
Whether, assuming there were valid informal
compromises, plaintiffs are estopped from
opening these agreements; and
(3)
Whether the interest payments were part of the
compromise.
Plaintiffs
first contend that the Attorney General had no
authority to enter into a compromise with them,
since the statute merely authorizes him to
"compromise any . . . case after reference
to the Department of Justice for prosecution or
defense." 3
An opinion of the Attorney General 4
states that the Attorney General has authority
to compromise any matters "germane to the
case which the Attorney General may find it
necessary and proper to consider . . .."
This authority has been exercised for almost
forty years. It is a reasonable interpretation
of Section 7122, which divides the compromise
authority between the two departments. We see no
compelling reason now to disapprove of this
administrative practice.
Since
the plaintiffs in this case required the
Attorney General to settle their cases as a
basis for settling the tax refund suits (which
were undeniably within the jurisdiction of the
Attorney General) it may be said that it is the
plaintiffs themselves who made their cases
"germane." Furthermore, plaintiffs do
not contest the fact that the Treasury
Department authorized the Department of Justice
to make this settlement.
On
the basis of the above, we find that plaintiffs'
case is germane to the refund suits. We,
therefore, hold that the Attorney General was
acting within the purview of his authority when
the settlements were made.
Plaintiffs
next assert that either side was free to open
the case because the settlement was made only
pursuant to Forms 870 and letters between the
parties. There was no formal closing agreement,
which plaintiffs contend is necessary in order
to make a binding settlement. The Supreme
Court's decision in Botany Worsted Mills v.
United States [1 USTC ¶348], 278
U. S.
282, 288 (1929) made it clear that the exact
requirements of the Internal Revenue Code had to
be followed in order to make a compromise
binding on the parties. However, the case left
open the question of estoppel to be decided on
an individual case basis.
This
court has held that where the statute of
limitations has run on the collection of further
deficiencies between the time an informal
compromise agreement was executed and the time
the refund claim was filed, the principle of
estoppel would prevent the plaintiff from
pursuing the matter further. The court said:
[i]t
would obviously be inequitable to allow the
plaintiff to renounce the agreement . . .
[since] the Commissioner cannot be placed in the
same position he was when the agreement was
executed. A clear case for the application of
the doctrine of equitable estoppel exists . . ..
Guggenheim v. United States
[48-1 USTC ¶9232], 111 Ct. Cl. 165, 182, 77 F.
Supp. 186, 196 (1948), cert. denied, 335
U. S.
908, rehearing denied, 336
U. S.
911 (1949).
The
Guggenheim rationale was successfully
overcome by taxpayers in Morris White
Fashions, Inc. v. United States [60-1 USTC
¶9146], 176 F. Supp. 760 (S. D. N. Y. 1959)
where that court stated that,
[t]he
key factor ignored in the Guggenheim
[case] . . . is that the defense of equitable
recoupment may be pleaded by the Government as a
set-off to plaintiff's claim for refund, even
though the statute of limitations has run
against the Government. . . . Clearly equitable
estoppel would not be appropriate where the
Government could set off against taxpayer's
claim an amount sufficient to compensate for its
inability to assess additional deficiencies
because of the tolling of the statute of
limitations.
Id.
at 765.
However
valid the reasoning of Morris White might
be in a case concerning an informal compromise
with a single taxpayer, it is totally invalid
when the compromise is a "package
deal." Defendant, in this case, cannot open
the cases of the litigating corporations even
for use as set-offs. In a case similar to ours,
a district court, in Cooper Agency v. United
States [69-2 USTC ¶9560], 301 F. Supp. 871
(D. S. C. 1969), aff'd per curiam, [70-1
USTC ¶9321] 422 F. 2d 1331 (4th Cir. 1970), cert.
denied, 400
U. S.
904 (1970), distinguished Morris White by
stating that,
.
. . where there is not a full right of set-off
or recoupment by the Government, an estoppel
based upon the maturing of the statute of
limitations against suit by the Commission, in
reliance of the agreement, may properly arise.
Id.
at 877. Accord, Cain v.
United States
, 255 F. 2d 193 (8th Cir. 1958); see also
Girard v. Gill [56-2 USTC ¶9849], 142 F.
Supp. 770 (M. D. N. C 1956), aff'd per curiam,
[57-1 USTC ¶9584] 243 F. 2d 166 (4th Cir.
1957). That situation clearly exists in the
instant case.
We,
therefore, hold that plaintiffs are estopped
from opening the compromise agreement entered
into between plaintiffs and the Attorney
General.
The
third and last issue is whether the interest was
part of the compromise. Plaintiffs contend that
they intended to settle their tax liability, but
that they only intended to pay
"lawful" interest. However, we feel
that under a common sense understanding of
compromise, it is not possible to believe that
plaintiffs entered into a compromise settlement
of $652,247.52 and totally ignored the
$204,800.00 of interest which they were to pay.
This
large amount of interest was assumed by both
plaintiffs and defendant to be the correct
amount due. Plaintiffs admit that at the time of
the compromise they believed that interest was
to be computed from the filing dates of the tax
returns. Not until our decision in the Motor
Fuel Carriers case did plaintiffs think
otherwise. 5
The
law to be applied in the instant case is the law
as the parties thought it to be at the time of
the settlement. Even if it is subsequently
determined that that law would not have required
payment, the settlement will be deemed binding
on the parties. Trumbull Steel Co. v. United
States [1932
CCH
¶9533], 76 Ct. Cl. 391, 1 F. Supp. 762 (1932).
This court has clearly stated:
In testing the validity of the settlement we must consider
the circumstances and the law then
applicable thereto. [emphasis added.]
Id.
at 400. Accord, Bankers Reserve Co. v. United
States [2 USTC ¶556], 70 Ct. Cl. 379, 42 F.
2d 313, cert. denied, 282
U. S.
871 (1930); see Hord v. United States [3
USTC ¶955], 75 Ct. Cl. 516, 59 F. 2d 125
(1932).
The
Attorney General properly entered into a
compromise with plaintiffs, as part of a
settlement with the litigating corporations.
Plaintiffs are now estopped from opening that
compromise. This compromise included payment of
interest computed according to the law as both
parties thought it to be at the time of the
compromise.
Accordingly,
plaintiffs' motion for summary judgment is
denied and defendant's cross-motion for summary
judgment is granted. Plaintiffs' petition is
hereby dismissed.
1 Int. Rev. Code of 1954, §531. All Section references
hereinafter are to the Internal Revenue Code of
1954.
2 In the case of Volusia Locations, Inc., payment was effected
through an offset of an over-assessment from the
calendar year 1961 arising from a net operating
loss carryback from the calendar year 1964.
3 §7122(a).
4 38 Op. Att'y Gen. 98,102 (1934).
5 The present case is clearly distinguishable from those cases
which allow a recomputation of interest based
upon Motor Fuel Carriers because they do
not entail compromise settlements between the
parties. See generally Bardahl Mfg. Corp. v.
United States [72-1 USTC ¶9158], 452 F. 2d
604 (9th Cir. 1971); Ray E. Loper Lumber Co.
v. United States [71-2 USTC ¶9514], 444 F.
2d 301 (6th Cir. 1971); Alexander Proudfoot
Co. v. United States, 197 Ct. Cl. 219 [72-1
USTC ¶9256], 454 F. 2d 1379 (1972).
[67-1 USTC ¶9176]
United States of America
v. Bernard Feinberg, Administrator of the Estate
of Joseph Saladoff, Deceased, Appellant
(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 15036, 372
F2d 352, 1/13/67, Denying rehearing on appeal,
65-2 USTC ¶9645
[1954 Code Secs. 6501 and 7122]
Compromise agreement: Default: Statute of
limitations: Suit on assessment after 3-year
period: Failure to plead limitations as a
defense: Compromise as a waiver.--Where the
taxpayer failed to plead in the District Court
the 3-year statute of limitations on assessment
as a defense to the Government's suit on a 1954
assessment to collect 1948 and 1949 taxes, after
the taxpayer had defaulted on payments to be
made under a compromise agreement entered into
after the 3-year limitations period had passed,
he could not raise for the first time on appeal
the question of whether the compromise agreement
was an effective waiver of the limitations
period. According to CA-3, a waiver of the
statute of limitations found in the compromise
agreement was fully effective against the
taxpayer. Three dissents.
Morton
Rothschild, Tax Division, Department of Justice,
Washington
, D. C. 20530, for appellee. Israel Packel, Fox,
Rothschild, O'Brien &
Frank
el,
1401 Walnut St.
,
Philadelphia
,
Pa.
, for appellant.
Before
STALEY, Chief Judge, and BIGGS, MCLAUGHLIN,
KALODNER, HASTIE, FORMAN, SMITH, FREEDMAN, and
SEITZ, Circuit Judges.
Opinion of the Court
FORMAN,
Circuit Judge:
Following
the filing of an opinion on
September 17, 19
65 [65-2 USTC ¶9645], by the panel that heard
the above appeal a petition for rehearing was
presented by the appellant. 1 Argument on the appeal was heard by the original panel.
Subsequently reargument was ordered before the
court en banc, with the parties
addressing themselves particularly to the
question: whether the compromise agreement with
the Commissioner of Internal Revenue into which
appellant's decedent entered can be adjudged an
effective waiver of the statute of limitations
on the assessments?
Upon
such reargument the decision reached by the
panel was found to be reinforced by the
following considerations:
The
petition for rehearing now injects into this
appeal issues neither raised before the District
Court during the pendency of the action nor in
the appeal herein, namely:
(1)
Whether the 1954 deficiency assessments on
taxpayer's 1948 and 1949 tax returns (which
together with the assessment for 1950 formed the
subject of the compromise agreement involved in
this case) were invalid as assessed beyond the
three year statute of limitations period, 26 U.
S. C. §6501(a); and
(2)
Whether the waiver of this statute found in the
compromise agreement is invalid as it was
entered into subsequent to the running of the
three year period, 26 U. S. C. §6501(c)(4)?
Appellant challenges neither the validity of the
deficiency assessment made on the 1950 tax
return nor the propriety of the Government's
demand to the extent of the amount stated in the
compromise agreement.
No
serious denial is made that Paragraph 5 of the
Government's complaint and both Paragraph 5 and
the Third Affirmative Defense in the answer of
appellant's predecessor all relate to a pleading
of the six year statute of limitations for
commencement of suit (26 U. S. C. §6502(a)(1)),
2
rather than to a pleading of the three year
limitations period for the filing of assessments
(26 U. S. C. §6501(a)). 3
It is plain that there was no intention, prior
to the adverse decision of this court, to raise
the three year statutory bar to the assessment
of taxes for 1948 and 1949 4
and appellant's suggestion that now the
pleadings should be permitted to be so amended
falls of its own weight. Such an approach is not
helpful for the law governing the existent offer
in compromise is dispositive of the case
adversely to the appellant.
Section
7122 of Title 26 authorizes the Secretary of the
Treasury or his delegate to compromise any civil
or criminal case arising under the internal
revenue laws prior to, or after, reference to
the Department of Justice for prosecution or
defense. In the pattern of the Internal Revenue
Code this section has no relationship to, or
dependency upon, 26
U. S.
C. §6501(a) which prescribes the three year
statute of limitations for the assessment of
taxes. Staten Island Hygeia Ice & Cold S.
Co. v. United States, 5
appears persuasive of the proposition that a
compromise agreement and the waiver of the
statute of limitations incorporated therein may
be effective even if entered into beyond the
limitations period. As stated by the Second
Circuit, supra at 70:
".
. . An agreement of compromise, however, is not
an agreement 'which would be within the
provisions of subdivisions (c) or (d)' [now §6501(c)(4)].
They relate respectively to waivers extending
the period for assessment and collection. . . .
Compromise agreements are authorized by R. S. §3229
(26
U. S.
C. §1661 and note) [now §7122]. This contains
no requirement that the compromise must be
executed before the tax is barred by the statute
of limitations, and it would be quite
unjustifiable to find in section 278(f) [a
transitional section, replaced by §6501(a)] an
expression of congressional intent to add such a
condition."
In
Staten Island Hygeia, the Government was
only attempting to enforce the amount of the
compromise in the face of the statute of
limitations defense, while in the instant case
the Government is seeking to invoke a provision
of the compromise agreement authorizing suit for
the entire amount of the pre-compromise tax
liability, because of the default in payment of
the compromised amount. This difference is
inconsequential for if the running of the
statute of limitations were to be considered a
bar to the assessment of taxes unless that
period were extended prior to its running, a
compromise agreement entered into subsequent to
its running would not be effective as to even
the compromised amount. A fortiori, if the
expiration of the statutory period is not a bar
to the enforcement of the amount of the
compromise even though the statute was waived
only subsequent to its running, that statute of
limitations may not with any sense of logic be
raised to negate another provision of the
compromise provision providing for a suit for
the full amount of the pre-compromise liability
in case of default on the compromised amount.
All provisions of the compromise have the same
legal force and effect vis-a-vis the statute of
limitations defense. The statute of limitations
has been waived, therefore, as to all provisions
of the compromise agreement.
To
give other than this legal effect to a
compromise agreement would distort both the
compromise as a contract and the place of the
contract in the scheme of the Internal Revenue
Code. In return for the Government's accepting
less than the taxes owing, generally due to a
realistic appraisal of a taxpayer's financial
situation, a taxpayer agrees to pay the
compromised amount, usually in set installments.
If a taxpayer employing the statute of
limitations defense could defeat a suit for the
full amount of the precompromise liability when
there is a default in the installments, the
taxpayer's obligations would be hollow ones, and
mutuality would be absent from the contractual
relationship.
As
to the statutory scheme, the 26 U. S. C. §6501(c)
exceptions to the three year statute of
limitations provide the very reasons why a
taxpayer would enter into a compromise agreement
subsequent to the running of the statute of
limitations. Fearing that the three year period
may not be applicable and that the assessment
may in fact have been timely in face of the
exceptions, it is reasonable to infer that a
taxpayer would be willing to waive the three
year period in return for a reduction in the
amount owing the Government.
Therefore,
all provisions of a compromise effected under 26
U. S.
C. §7122 are properly to be considered as not
being affected by the statutory bar of 26
U. S.
C. §6501. The independence of 26
U. S.
C. §7122 and compromises authorized by it fit
neatly into the statutory scheme. On these
considerations we conclude that the judgment of
the United States District Court for the Eastern
District of Pennsylvania should be affirmed.
1
Upon the death of Mrs. Sara Saladoff during the
pendency of this appeal Mr. Bernard Feinberg was
substituted as administrator of the estate of
Joseph Saladoff, deceased, and as appellant
herein.
2
"Where the assessment of any tax imposed by
this title has been made within the period of
limitation properly applicable thereto, such tax
may be collected by lvey or by a proceeding in
court, but only if the levy is made or the
proceeding begun--
"(1)
within 6 years after the assessment of the tax,
. . ."
3
"Except as otherwise provided in this
section, the amount of any tax imposed by this
title shall be assessed within 3 years after the
return was filed (whether or not such return was
filed on or after the date prescribed) or, if
the tax is payable by stamp, within 3 years
after such tax become due, and no proceeding in
court without assessment for the collection of
such tax shall be begun after the expiration of
such period."
4
Indeed in appellant's predecessor's brief on
this appeal she maintained her readiness to pay
the full amount due under the compromise
agreement but contested only a summary judgment
for the full amount of the tax.
5
[36-2 USTC ¶9425] 85 F. 2d 68 (2 Cir. 1936).
Dissenting Opinion
FREEDMAN,
Circuit Judge, dissenting:
Judge
Forman's original opinion for the panel
demonstrates that aside from the statute of
limitations the government would be entitled by
the express terms of the compromise agreement to
recover from the taxpayer the full amount of the
taxes assessed, with interest and costs, after
crediting him with the amount of the payments
received under the compromise agreement.
What
concerns us now, however, is the claim made in
the petition for rehearing, which led us to
grant rehearing, first before the panel and then
before the court en banc, that some of the
assessments are barred by the statute of
limitations. The income taxes here involved were
assessed on
March 12, 19
54, for the years 1948, 1949 and 1950, in the
amounts of $11,108.06, $8,078.70 and $3,120.10,
respectively. The compromise agreement was
signed by the taxpayer on
November 10, 19
55, and was accepted by the government on
April 18, 19
56. It provided for the installment payments by
the taxpayer of the total sum of $15,000 in
compromise of his tax liability for the years
1948, 1949 and 1950. It provided also that in
the event of default in payment of any
installment of principal or interest due under
the agreement, the taxpayer should have no right
"to contest in court or otherwise the
amount of the liability sought to be
compromised, and that in the event of such
default the Commissioner of Internal Revenue, at
his option, (1) may proceed immediately by suit
to collect the entire unpaid balance of the
offer, or (2) may disregard the amount of such
offer and apply all amounts previously paid
thereunder against the amount of the liability
sought to be compromised and may, without
further notice of any kind, assess and/or
collect by distraint or suit (the restrictions
against assessment and/or collection being
hereby specifically waived) the balance of such
liability." The compromise agreement
contained a further provision that the taxpayer
"hereby expressly waives: . . . 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, or the period during which any
installment remains unpaid, and for 1 year
thereafter."
Section
6501(a) of Title 26 prescribes a general
limitation period for the assessment of taxes of
three years after the filing of the return.
Section 6501(c)(4) authorizes an extension by
agreement of the period of limitations for
assessment of taxes, but expressly limits this
to agreements entered into "before the
expiration of the time prescribed. . . ."
Further extensions must be made "before the
expiration of the period previously agreed
upon." 1
The
government has made no factual denial of the
claim of the petition for rehearing that the
assessments on
March 12, 19
54 for the 1948 and 1949 taxes were made after
the statutory period of limitations had run,
although it filed a memorandum in opposition to
the petition for rehearing. It has called our
attention to the statutory provisions which
eliminate the statute of limitations if there
was a fraudulent return made with intent to
evade tax, or a wilful attempt to defeat or
evade tax (§6501(c)(1), (2)), and which extend
the statutory period of limitations to six years
if there was an omission from gross income in
excess of twenty-five per cent (§6501(e)(1)(A)).
But it has interposed no facts which would
indicate that these statutory provisions have
any application here. Instead the government has
argued that the defense of the statute of
limitations comes too late because it was not
properly alleged in the pleadings in the court
below, as required by Rule 8(c).
The
presentation of a new claim or defense for the
first time on appeal ordinarily is not favored.
But when all is said and done, "Rules of
practice and procedure are devised to promote
the ends of justice, not to defeat them." Hormel
v. Helvering [41-1 USTC ¶9322], 312
U. S.
552, 557 (1941). While the statute of
limitations is an affirmative defense and Rule
12(h) provides that affirmative defenses not
pleaded are waived, Rule 15(a) provides that
leave to amend the pleadings "shall be
freely given when justice so requires." As
Judge Forman's opinion shows, the case has come
to us on summary judgment. The record reveals
that early in the proceedings the government
itself, over the taxpayer's objection, obtained
leave to amend its complaint by adding a new
count alleging that the taxpayer induced the
government's acceptance of the compromise offer
by means of fraudulent misrepresentation as to
his financial condition. The defendant has
opposed the amendment on the ground that the
claim would be barred by the statute of
limitations, but the court below alleged the
amendment after pointing out that the defendant
could assert the bar of the statute in the
answer to the amended complaint.
So
far as it is relevant to the problem before us,
the answer to the amended complaint referred
back to and incorporated the averments of the
original answer. Paragraph 5 of the answer to
the complaint "denied that the commencement
of this suit was timely made." This
allegation clearly was made in response to the
averment in the comparable paragraph of the
complaint, which alleged that by the offer of
compromise "the statute of limitations for
the commencement of this suit was extended, and
the commencement of this suit is therefore
timely made." In its Third Defense the
answer expressly alleged: "The alleged
right of action set forth in the Complaint did
not accrue within the Statute of Limitations as
extended by the Offer in Compromise dated
November 9, 19
55, nor within the time it was extended by the
Contract which arose from the acceptance of the
said Offer in Compromise."
The
taxpayer argues that these allegations
adequately alleged the bar of the statute of
limitations against the assessment of the taxes
on
March 12, 19
54, for the years 1948 and 1949. It is clear,
however, that the original denial was couched in
terms which followed the allegation of the
complaint and this in turn dealt with the
extension by the compromise agreement of the
time within which the suit for collection
of the taxes might be brought. This is far
different from the statutory period for the assessment
of the taxes. The Third Defense, which has just
been quoted, is more expansive, but read in the
circumstances which show that the defense of the
statute of limitations was not thereafter
pressed, it is fairly treated as a mere
amplification of the earlier allegation and not
as a new assertion of the bar of the statute of
limitations against the assessment of these
taxes.
I
would therefore hold that the affirmative
defense of the statute of limitations was not
adequately pleaded by the defendant.
Nevertheless, in the present circumstances I
believe that the interests of justice would be
served by affording the taxpayer an opportunity
to seek an amendment of its answer in the court
below. 2
The court below would have the facilities for
the determination of any factual controversy
regarding the existence of any barriers to the
claim of the statute of limitations, either
because of earlier compromise agreements whose
existence was the subject of some speculation at
bar, or for any other proper reason that may be
presented. It would exercise its enlightened and
informed discretion, and unless there appears
clear reason to the contrary, I believe it
should, in the interests of justice, allow the
amendment. In that case, either on renewed
motions for summary judgment or on trial, it
could readily determine whether any of the
assessments are barred by the statute of
limitations and what claims nevertheless are
still enforceable by the government either as
the balance due on the compromise agreement or
on assessments validly made within the period of
the statute of limitations and now the subject
of appropriate action.
Of
course, if the statute of limitations had not
run, or was no longer available to the taxpayer
because of the waiver contained in the
compromise agreement, amendment of the pleading
would be useless. It is therefore necessary to
consider the significant element of the right of
the government to assess taxes for the years
1948 and 1949, beyond the three year period
fixed by the statute, absent the exceptional
circumstances which would either eliminate any
applicable statute or prolong the period from
three to six years. It seems from the face of
the record that in two of the three years
involved in the present suit taxes were assessed
after the statutory period to do so had expired.
Such assessment, it seems to me, could not be
validated retroactively by the compromise
agreement. Congress has expressly commanded in
§6501(c)(4) that waivers of the statute of
limitations are effective only if entered into
"before the expiration of the time
prescribed . . . for the assessment of any
tax." The provision on its face is
mandatory and the legislative history emphasizes
that Congress intended to forbid assessment or
collection of taxes after the running of the
statutory period. The House version of §276(b)
of the Revenue Act of 1928, which first dealt
explicitly with the subject (now §6501(c)(4)),
expressly provided for waiver of the statute of
limitations, "Where before or after
the expiration of the time prescribed . . . for
the assessment of the tax, [the parties] . . .
have consented in writing to its assessment
after such time. . . ." 3
The Senate Committee on Finance, however,
disapproved of this provision. It reported:
"In the interest of keeping cases closed
after the running of the statute of limitations,
the committee has stricken out the provisions in
the House bill which make waivers in the case of
taxes for 1928 and future years valid when they
have been executed after the limitation period
has expired." S. Rep. No. 960, 70th Cong.,
1st Sess., 31 (1928). The Senate adopted its
Committee's proposed amendment to the bill and
struck out the words "or after." The
House receded and accepted the Senate's
amendments. 4
Other sections of the same enactment make it
clear that this provision is part of a fabric of
revenue legislation by which Congress sought to
confer repose on taxpayers after the statute of
limitations had run. 5
In
the light of this settled policy, I do not
believe that the statutory prescription that a
waiver of the statute of limitations must be
made before the statute has expired may be
obliterated by the simple device of including it
as part of a compromise agreement under §7122.
The authority which Congress gave to the
secretary or his delegate to enter into
compromises of civil or criminal cases does not
authorize hom to assess or collect taxes after
the statutory period has run. He may not,
therefore, confer on himself by the agreement
the right to do so. 6
Indeed, a payment made after an untimely
assessment is treated by the Internal Revenue
Code as an "overpayment" 7
which the taxpayer may recover by suit refund. 8
The
compromise agreement is valid. Such an agreement
swallows up all possible claims, including those
for which there is no statute of limitations as
well as those for which there are varying
periods of limitations. It is authorized by §7122
and is supported by the consideration that the
controversy which it settles might include
circumstances extending or even eliminating
entirely the statute of limitations. A
compromise agreement obligates a taxpayer to the
payments required thereunder even though it may
later turn out that the claim which the
government had made against him was barred by
the statute of limitations. This is far
different, however, from a provision in a
compromise agreement which, beyond the
obligation to make the payments therein
provided, undertakes in addition to waive the
bar of a statute of limitations which has
already run against the assessment or collection
of the tax. The compromise provision is in
harmony with §7122. The provision waiving the
statute of limitations flouts the prohibition of
§6501(c)(4) and is not necessary to the
effectiveness of §7122. A recognition of this
distinction will preserve the right of the
taxpayer and the government to compromise
possible liability without thereby uprooting the
settled Congressional policy of repose from
assessment or collection of taxes after the
statutory time has run. In Staten Island
Hygeia Ice & Cold Storage Co. v. United
States [36-2 USTC ¶9425], 85 F. 2d 68 (2
Cir. 1936) the taxpayer in a suit for refund
sought to avoid a compromise agreement and
recover some of the payments made under it. The
Court of Appeals rejected the taxpayer's
argument that the agreement was unenforceable
because it was executed at a time when the
collection of the compromise tax was barred by
the statute of limitations. In the
Staten Island
case the taxpayer sought to invalidate the
compromise agreement. Here the government does
not seek recovery of the balance due under the
compromise agreement. Instead it sues for the
full amount of the taxes assessed even though
they had already been compromised by the
agreement. Those assessments which at that time
were already barred by the statute of
limitations may not be revived by the agreement,
whether cast in the form of an express waiver of
the statute of limitations or as a penalty in
the event of default in the payment of the
installments fixed in the agreement.
I
would therefore vacate the summary judgment and
remand the cause to the court below with
direction to consider and act upon an
application by the defendant for leave to amend
his answer to the amended complaint by expressly
pleading the bar of the statute of limitations
to the assessment of taxes for the years 1948
and 1949; the cause thereafter to proceed
according to law.
I
am authorized to state that Chief Judge Staley
and Circuit Judge Biggs concur in the views
expressed in this dissent.
1
Section 6501(c)(4) provides: "Where, before
the expiration of the time prescribed in this
section for the assessment of any tax . . . both
the Secretary or his delegate and the taxpayer
have consented in writing to its assessment
after such time, the tax may be assessed at any
time prior to the expiration of the period
agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing
made before the expiration of the period
previously agreed upon."
2
28
U. S.
C. §2106 authorize us to "remand the cause
and . . . require such further proceedings to be
had as may be just under the
circumstances." See also Cahill v. N.
Y., N. H. R.R. Co., 351
U. S.
183 (1956).
3
H. R. 1, 70th Cong., 1st Sess., §276(b); see
also H. R. Rep. No. 2, 70th Cong., 1st Sess., 29
(1927). Compare, 1 Report of the Joint Committee
on Internal Revenue Taxation, 16-17, 71-72
(1927).
4
The conference report reads: "Amendments
Nos. 131, 132, 133 and 134: The House bill
provided that waivers filed after the expiration
of the period of limitation, in the case of
income taxes imposed by the new law, should be
valid. The Senate amendments eliminate this
provision; and the House recedes." H. R.
Rep. No. 1882, 70th Cong., 1st Sess., 18 (1928).
5 See §607 (now §6401(a)); §506, amending §278(c) and (d)
of the Revenue Act of 1926.
6 Compare Botany Worsted Mills v. United States [1 USTC
¶348], 278
U. S.
282 (1929) and Uinta Livestock Corp. v.
United States [66-1 USTC ¶9193], 355 F.2d
761 (10th Cir. 1966) holding settlements valid
only if procedure and substance are within §7122.
7 The 1939 Code, §3770(a)(2) provided: "Any tax (or any
interest, penalty, additional amount, or
addition to such tax) assessed or paid after the
expiration of the period of limitation properly
applicable thereto shall be considered an
overpayment and shall be credited or refunded to
the taxpayer if claim therefor is filed within
the period of limitation for filing such
claim." The 1954 Code, §6401(a) contains a
substantially similar provision.
8
Los Angeles
Shipbuilding & Drydock Corp. v.
United States
[61-1 USTC ¶9329], 289 F.2d 222, 231-32 (9
Cir. 1961); see McEachern v. Rose [37-2
USTC ¶9531], 302
U. S.
56 (1937), construing §607 of the 1928 Act.
[65-2 USTC ¶9645]
United States of America
v. Sara Saladoff, Administratrix of the Estate
of Joseph Saladoff, Deceased, Appellant
(CA-3), U. S. Court of Appeals, 3rd Circuit, No. 15036,
9/17/65, Affirming District Court, 64-2 USTC ¶9698,
233 F. Supp. 255
[1954 Code Sec. 7121 and similar 1939 Code Sec.
3761]
Compromise: Delinquency in paying
installments: Termination of agreement: Estoppel.--Although
the Government had accepted a taxpayer's
payments of installments under a compromise
agreement in amounts smaller than those called
for by the compromise for more than five years,
it could, without due notice, declare a default
and termination of the compromise and sue for
the balance of the liability. The failure of the
Government to insist upon installments in the
specified amounts or to give notice that unless
they were so made the compromise would be
terminated worked neither a waiver, modification
of the terms, nor an estoppel to reinstate the
original assessment.
Morton
Rothschild, Department of Justice, Tax Division,
Washington
, D. C. 20530, for appellee. Nochem S. Winnet,
Fox, Rothschild, O'Brien &
Frank
el, 1401 Walnut St., Philadelphia, Pa., for
appellant.
Before
BIGGS, Chief Judge, and FORMAN and FREEDMAN,
Circuit Judges.
Opinion of the Court
FORMAN,
Circuit Judge:
This
is an appeal from the judgment of the United
States District Court for the Eastern District
of Pennsylvania. 1
Only a sketchy reference to the factual
background of the case is required for it is
amply detailed in the reported opinion of the
District Court. 2
[Compromise Offer]
The
United States
had assessed the late Joseph Saladoff with
income tax liability of $22,303.16 for the years
1948, 1949 and 1950. On
November 9, 19
55, Mr. Saladoff offered to compromise his
liability in writing on the Government Official
Form 656C. It provided for the payment of
$15,000, of which $7,500 was to be paid within
one year from the date of the acceptance and the
balance in installments of $300 each month
thereafter with interest at six percent on all
deferred payments until liquidation of the
amount of the compromise. One of the provisions
contained in the offer was an agreement by Mr.
Saladoff that upon its acceptance, he should
have no right in the event of default in any
payment of principal or interest due, to contest
in court or otherwise, the amount of liability
sought to be compromised and that the
Commissioner of Internal Revenue had the option
to immediately sue for the entire unpaid balance
of the offer or to disregard it and collect by
distraint or suit the balance of the liability
sought to be compromised after applying all
amounts previously paid. 3
On
November 15, 19
55 the Director of Internal Revenue at
Philadelphia received another agreement signed
by Mr. Saladoff as a further consideration for
the acceptance of the offer in which he
committed himself, in addition to the compromise
amount of $15,000, to pay, in each of the years
1955 to 1964 inclusive, twenty percent of his
annual income in excess of $3,500 and not in
excess of $5,000; thirty percent of any excess
of $5,000 and up to $10,000; and fifty percent
in excess of $10,000. It was also stipulated
that he would make annual statements of his
income and that the amount of the offer and
additional installments should not exceed the
liability covered by the offer plus accrued
interest to the dates of payments.
[Delinquency in Installments]
On
April 18, 19
56 the Government accepted the offer in
compromise as supported by the collateral
agreement. Mr. Saladoff made an immediate
payment of $3,500. Thereafter, between
July 30, 19
57 and
May 24, 19
61, he made twenty-eight installment payments in
amounts ranging from $50.00 to $538.64 each,
aggregating $4,468.64, which, with the payment
of $3,500, totalled $7,968.64. Except for the
$3,500 payment only five installments were in
amounts of $300 or more--four were for $200, one
for $80, another for $50, and the balance were
$100 each.
The
record shows only one written communication from
the Government to Mr. Saladoff concerning his
delinquency in meeting his installments. It was
a letter from the District Director of the
Internal Revenue Service at
Philadelphia
dated
July 24, 19
59 informing him that the Collection Division
felt that the payments on his offer in
compromise were insufficient and suggesting that
he call the office for an appointment to make
new arrangements. 4
We know only that thereafter payments were made
at the rate of $100 per month except for
November and December of 1959 when they were
$200 each; that no payment was made in January
and February of 1960 and that the last
remittance of $50 occurred
May 24, 19
61, thirteen days before Mr. Saladoff's death on
June 6, 19
61.
On
October 12, 19
61 the District Director addressed a letter to
the appellant noting that only $7,968.64 had
been paid on account of the offer in compromise.
The letter declared the offer in default and
terminated. 5
A
complaint was filed on
February 7, 19
63 by the United States against Mrs. Saladoff as
Administratrix of the Estate of Joseph Saladoff,
Deceased, in the United States District Court
for the Eastern District of Pennsylvania
alleging that after the reflection of credits
amounting to $7,968.64 there was due to the
United States a balance of unpaid income taxes
of the decedent for the years 1948, 1949 and
1950 in the amount of $23,754.97. It sought
judgment therefore with interest from
May 31, 19
62 and costs. The complaint was amended and
answers were filed to the original and amended
complaints. The
United States
thereafter filed a motion for summary julgment
in the sum of $14,338.22 together with interest
and costs. A motion also for summary judgment
was made by the administratrix for dismissal of
the action.
Argument
was heard on both motions at which the
Administratrix conceded that judgment should be
entered in favor of the
United States
but only for $7,031.36, the balance she admitted
to be due under the offer in compromise. The
District Court on
June 26, 19
64 granted the motion for summary judgment of
the
United States
for $14,338.22 and denied the motion of the
Administratrix. 6
In the order therefor he gave the
United States
leave to file an appropriate motion for interest
and costs. Pursuant thereto and upon written
admission by the Administratrix of the accuracy
of the interest and costs statement of the
United States another order was filed on
July 22, 19
64 adjudging that the Administratrix pay
interest of $6,733.40 and costs of $38.24. This
appeal is from these orders for judgment.
The
argument of the appellant raises the basic
question: When the United States accepted the
taxpayer's payments in amounts smaller than
called for by the installment schedule of the
compromise agreement for over five years, could,
it without due notice, declare a default? Her
answer is in the negative. She seeks to support
it by reference to a number of cases and texts,
a detailed analysis of which would be
purposeless here. Suffice it to say, none
involves the Government and the collection of
its taxes; rather, they refer to contractual
relationships between private parties. We do not
find them apposite.
The
only authorization for the acceptance of a
lesser amount of income tax than that duly
assessed is found in the provisions of the
Internal Revenue Code of 1954 7
and in the Treasury Regulations promulgated
thereunder. 8
Mr. Saladoff sought the compromise of his income
taxes for the years 1948, 1949 and 1950 on one
of the grounds covered by the regulations,
namely, doubt as to the collectibility of the
indebtedness. 9
Upon the acceptance of the offer a contract was
formed binding the Government to refrain from
pressing him for his taxes by either distraint
or suit as long as he performed his undertaking
to pay the stipulated installments. After the
very first installment he seldom met the
required payments. It is a fact that the
Government accepted the lesser amounts with
objection save for its letter of July 24, 1959 10
and even thereafter it continued to accept some
twenty payments of sums less than those called
for by the schedule. Finally Mr. Saladoff died
and the payments ceased altogether, his estate
having made none.
[Estoppel]
The
appellant urges that the tenor of the letter of
July 24, 19
59 is such as to lead to the inference that the
Government, in any event, would have granted Mr.
Saladoff more favorable terms of payment had he
answered it and that its conduct in accepting
many small payments thereafter proves that the
Government, in effect, modified the agreement or
estopped itself from now claiming the original
taxes, particularly since no notice that it
would so act had ever been given to Mr. Saladoff
or his estate. We cannot agree with appellant's
theroy. Indeed, the statement in the letter
notifying him--"The Collection Division
feels that payments are insufficient, therefore
new arrangements should be made."--is as
readily susceptible of the interpretation that
more stringent compliance would be required as
more lenient.
When
the Government declared the compromise agreement
terminated, the time for the liquidation in full
of the compromise undertaking had long since
expired and only approximately half the
compromised indebtedness had been paid.
Moreover, a period of over four months elapsed
after Mr. Saladoff's death in which no payment
whatever was forthcoming from the estate. As was
aptly held by Judge Higginbotham the failure of
the Government to insist upon installments in
the specified amounts or to give notice that
unless they were so made the compromise would be
terminated worked neither a waiver, modification
of its terms, nor an estoppel to the
reinstitution of the original assessment. The
collection of revenue by the Government is such
a colossal operation that it may be expected
that incidents of acceptance of smaller than
specified payments over even a period as long as
the one in the case at bar can occur. Actions on
the part of landlords and mortgagors in
systematically accepting less than contractual
payments are not to be considered on a par with
the Government's collection of its revenue.
The
surmise of the appellant is very probably
accurate that the Government's declaration of
termination and its insistence upon the
liquidation of the unpaid balance of the taxes
were precipitated by the settlement by the
appellant of a suit concerning property of Mr.
Saladoff which resulted in possession by the
estate of substantial funds upon which the
unpaid taxes could fasten. The record is not
clear as to the amount of funds which have come
into the hands of the appellant but her very
resistance to the Government's declaration of
default and demand for liquidation of full
liability raises the reasonable inference that
the funds are now available to wholly or
substantially discharge the entire tax
liability. The taxing authorities would
certainly have been remiss in their duties had
they not sought to enforce the breached
compromise agreement, the collateral supplement
to which made quite clear that the Government
was not unqualifiedly forgiving Mr. Saladoff his
1948, 1949 and 1950 taxes. Any feeling
entertained by him or the appellant that it was
within the power of the taxing authorities by
their conduct to waive or modify the terms of
the method by which he was to liquidate his
taxes was and is badly conceived. The method by
which the taxing authorities could enter into
compromise agreements with taxpayers was
restricted by the limitations placed upon them
by the Internal Revenue Act and the Regulations.
The
appellant calls attention to the comment found
in the dissenting opinion in Federal Crop
Ins. Corp. v. Merrill 11
to the effect that those who deal with the
Government should do so fairly and that the
Government should reciprocate similarly. We find
the remarks in the majority opinion more to the
point when it charged anyone entering into an
agreement with the Government with taking the
risk of having accurately ascertained that those
who purport to act for the Government stay
within the bounds of their authority. 12
Appellant's
lament that she has worked hard to enhance the
estate of which much or even all will now be
swallowed by the Government's tax claims may
inspire sympathy but it hardly furnishes a legal
bolster for her resistance to the Government's
demand for satisfaction of the entire tax
indebtedness. By the clear language of the offer
in compromise Mr. Saladoff agreed that, upon his
default, the Commissioner of Internal Revenue
could terminate the compromise agreement. The
default is undisputed. The Government cannot be
held to the "warning shot" the
appellant suggests is required here. And the
fact that the Government accepted numerous
payments in less than the agreed scheduled
amounts did not modify the clear and precise
obligation of the agreement.
[Suit for Larger Amount]
The
appellant further submits that a reading of the
agreements in their entirety commands that they
be construed as distinguishing "between the
smaller amount which was agreed to and the
larger amount which the Government originally
claimed." Under such construction she
contends it is clear that the Government has the
option "either to accelerate the payments
under the compromise agreement with no right to
defend as to the agreed compromised amount or to
completely terminate the compromise agreement
and to sue for the larger amount claimed by the
Government just as if there had been no
compromise. . . ." To such a claim for the
larger amount the appellant insists she should
now have the opportunity to defend and calls
upon United States v. Lane 13
for support, a case also cited by the appellee
and considered by the District Court. That case
has striking similarity to the case at bar
because it is based upon an offer in compromise
on Form 656C and a collateral agreement,
identical with the offer on Form 656C and the
collateral agreement which Mr. Saladoff signed,
except that the amounts of taxes, compromised
figure and installment payments were different.
To be sure there was a different turn in Lane
for there the taxpayer had made all of the
installment payments required under the
compromise agreement. It was by reason of the
failure of the taxpayer Lane subsequently to
file annual statements of his income as required
by the terms of the collateral agreement that
the Government sued him for the unpaid balance
of his assessed taxes over and above the
compromised amount which he had paid. This
distinction, however, does not detract from the
applicability of the principles enunciated by
Chief Judge Tuttle in that case, which may be
quoted with equal cogency in this case:
"In the present case, the contracting parties expressed
their mutual intention in clear and unmistakable
terms. The collateral agreement specifically
stated that the default provisions of the main
agreement on Form 656-C were to applicable
should the taxpayer fail to perform his
obligations with respect to the making of annual
payments and filing of sworn statements of
annual income. Form 656-C, in turn, expressly
provided that the Commissioner, upon default by
the taxpayer, could terminate the compromise
agreement and proceed to collect the unpaid
balance of the original tax liability. This
language is so precise, and the intention which
it manifests is so evident, as to leave no doubt
that the course of action taken by the
Government here was fully authorized by the
compromise agreement.
"There was nothing illegal, immoral or inequitable in
the compromise agreement. It did not provide for
any 'forfeiture'. By express provision, the
amounts to be paid under the compromise
agreement, including both Form 656-C and the
collateral agreement, could not exceed the
aggregate amount which the taxpayer conceded
that he owed the Government from the start. By
allowing the Government to revive the taxpayer's
original liability, the taxpayer will not
forfeit the amounts he has already paid, for
those amounts will be applied to reduce the
original liability. The agreement was precise,
it was fair, and it was freely consented to by
the taxpayer. There is no reason why it should
not be enforced as written." 14
The
appellant also stresses that error was committed
in awarding summary judgment in favor of the
Government in the face of her denial in her
answer that she was liable for the taxes for
which the Government sued. Such a bare assertion
in her answer and an equally abstract denial of
any liability greater than the amount of the
compromise made in her affidavit opposing the
motion for summary judgment does not now raise a
genuine material issue of fact sufficient to
thwart the granting of the motion for summary
judgment. At the time this motion was made
(February 3, 1964) the amendment to Federal Rule
56 of Civil Procedure was in effect (July 1,
1963). The amending language is singularly
pertinent here:
"When a motion for summary judgment is made and
supported as provided in this rule, an adverse
party may not rest upon the mere allegations or
denials of his pleading, but his response, by
affidavits or as otherwise provided in this
rule, must set forth specific facts showing that
there is a genuine issue for the trial. If he
does not so respond, summary judgment, if
appropriate, shall be entered against him."
15
For a clarifying discussion of the effect of the amendment
see the recent decision of this court in Robin
Construction Company v.
United States
. 16
In
the face of the affidavits and documents
supporting the Government's motion for summary
judgment for the unpaid balance of the income
taxes assessed for the years 1948, 1949 and
1950, appellant's opposing affidavit sets forth
no specific facts showing that there was any
genuine issue for a trial as to the correctness
of the income tax assessments against Mr.
Saladoff for the years in question. 17
Her affidavit, it is true, contained numerous
denials that there had been a default in the
payments due under the compromise agreement and
that the unpaid balance of taxes was due, all
based on theories of modification or waiver of
the terms of the compromise agreement or by
estoppel. These assertions, however, raised only
issues of law and they were properly adjudicated
in the District Court.
In
addition to the matters discussed above we have
examined all other points raised by appellant.
The summary judgment emerges impervious to any
of the appellant's attacks. Hence the order of
the United States District Court for the Eastern
District of Pennsylvania of
June 26, 19
64 granting the motion of the Government for
summary judgment in its favor and denying the
motion of the appellant for summary judgment of
dismissal of the complaint will be affirmed. 18
The order of the District Court of
July 22, 19
64 covering the computation of interest on the
judgment will also be affirmed.
1 On
March 3, 19
65, during the pendency of this appeal, a
suggestion of the death of Mrs. Sara Saladoff
was filed and Mr. Bernard Feinberg was
substituted for her as administrator of the
estate of Joseph Saladoff. This opinion will be
entitled as in the original cause but the title
of the judgment in this court will show the
substitution.
2 United States v. Saladoff [64-2 USTC ¶9698], 233 F.
Supp. 255 (1964).
3 The pertinent provision of the offer in compromise is as
follows:
"As
a part of this offer, it is agreed that upon
notice to the proponent of the acceptance of
this offer in compromise of the liability
aforesaid, the proponent shall have no right, in
the event of default in payment of any
installment of principal or interest due under
the terms of the offer, to contest in court or
otherwise the amount of the liability sought to
be compromised, and that in the event of such
default the Commissioner of Internal Revenue, at
his option, (1) may proceed immediately by suit
to collect the entire unpaid balance of the
offer, or (2) may disregard the amount of such
offer and apply all amounts previously paid
thereunder against the amount of the liability
sought to be compromised and may, without
further notice of any kind, assess and/or
collect by distraint or suit (the restrictions
against assessment and/or collection being
hereby specifically waived) the balance of such
liability. (This paragraph shall not apply when
a surety bond is given to secure payment of the
amount offered in compromise.)"
4
"
U. S.
TREASURY DEPARTMENT INTERNAL REVENUE SERVICE
District Director 1300
Gimbel
Building
Philadelphia
7,
Pa.
July 24, 1959
In Reply Refer To Code C:A:AC:
Phone: 3-2400 Ext. 431 Joseph Saladoff 1319
Duval
St. Phila.
,
Pa.
Re: Offer in Compromise
Dear Mr. Saladoff:
We
suggest you telephone Mr. Eley for an
appointment before
August 15, 19
59 regarding new arrangement for payments on
your Offer in Compromise.
The
Collection Division feels that payments are
insufficient, therefore new arrangements should
be made.
Very truly yours,
E. A. McGinnes,
District Director."
5
"
U. S.
TREASURY DEPARTMENT INTERNAL REVENUE SERVICE
Office of the District Director Post Office
Box 269
Philadelphia
,
Pa.
Oct 12, 1961
In Reply Refer to Au:F:19:LFE
Sarah R. Saladoff, Administratrix Estate of
Joseph Saladoff 1319 Duval Street
Philadelphia
,
Pennsylvania
Dear Mrs. Saladoff:
This
refers to a letter dated
April 18, 19
56, in which Joseph Saladoff was advised that
his installment offer of $15,000, together with
waiver of refunds, interest and default
agreements, and other provisions on Form 656-C
to compromise his liability for income taxes for
the years 1948, 1949 and 1950, had been accepted
upon the terms proposed.
Under
the terms of his offer, the sum of $15,000 was
to have been paid as follows:
$7,500
within one year of the date of acceptance of the
offer, plus $300 per month beginning on or
before the 10th day of the 13th month after
notice of acceptance of the offer and on each
successive month thereafter until paid in full.
The
records of this office indicate that only
$7,968.64 has been paid on the offer. Since
Joseph Saladoff failed to make payments in
accordance with the terms of the offer as set
forth in the acceptance letter, there is an
absence of mutuality in the intention of the
parties and, therefore, no compromise was
effected. The arrangements looking to the
promise of Joseph Saladoff's tax liability are
hereby terminated.
The
default agreement contained in the offer
provides that in case of default the
Commissioner of Internal Revenue at his option,
may disregard the amount of such offer and apply
all amounts paid thereunder against the
liability sought to be compromised and may,
without further notice of any kind, assess
and/or collect by levy or suit (the restrictions
against assessment and/or collection being
specifically waived) the balance of such
liability.
The
amount paid on the offer will be applied against
the liability of Joseph Saladoff.
Very truly yours,
E. A. McGinnes,
District Director."
6 Based on the opinion cited in note 1 supra.
7 "The Secretary or his delegate may compromise any civil
or criminal case arising under the internal
revenue laws prior to reference to the
Department of Justice for prosecution or
defense; . . ." 26 U. S. C. §7122(a)
(1965).
8 ". . . As a condition to accepting an offer in
compromise, the taxpayer may be required to
enter into any collateral agreement or to post
any security which is deemed necessary for the
protection of the interests of the
United States
." 26 C. F. R. §301.7122-1(d)(3) (1961).
9 In his offer of compromise he represented that he was
"almost insolvent as he has assets with a
forced sale value of approximately $9,500.00
whereas actual and estimated liabilities amount
to almost $42,000.00."
10 See note 3 supra.
11 Justice Jackson said in this dissent:
".
. . It is very well to say that those who deal
with the Government should turn square corners.
But there is no reason why the square corners
should constitute a one-way street." 332
U. S.
380, 387-88 (1947).
12 Justice
Frank
furter speaking for the majority stated:
"The
case no doubt presents phases of hardship. We
take for granted that, on the basis of what they
were told by the Corporation's local agent, the
respondents reasonably believed that their
entire crop was covered by petitioner's
insurance. And so we assume that recovery could
be had against a private insurance company. But
the Corporation is not a private insurance
company. In it too late in the day to urge that
the Government is just another private litigant,
for purposes of charging it with liability,
whenever it takes over a business theretofore
conducted by private enterprise or engages in
competition with private ventures. Government is
not partly public or partly private, depending
upon the governmental pedigree of the type of a
particular activity or the manner in which the
Government conducts it. . . . Whatever the form
in which the Government functions, anyone
entering into an arrangement with the Government
takes the risk of having accurately ascertained
that he who purports to act for the Government
stays within the bounds of his authority. The
scope of this authority may be explicitly
defined by Congress or be limited by delegated
legislation, properly exercised through the
rule-making power. . . ." (Footnote
omitted.)
Id.
, at 383-84.
13 [62-1 USTC ¶9467] 303 F. 2d 1 (5 Cir. 1962).
14
Id.
at 4.
15 See 6
Moore
, Federal Practice, 1964 Supp., p. 79 (2d ed.
1953).
16 345 F. 2d 610, 613-15 (1965).
17 In the motion for summary judgment made by the appellant (as
defendant) for dismissal of the action she,
herself, asserted that "there is no genuine
issue as to any material fact and that the
defendant is entitled to judgment as a matter of
law."
18 The disposition of the case by the District Court on the
motions for summary judgment on the first count
of the amended complaint made it unnecessary to
reach any issue on the second count in which the
Government alleged fraud upon the part of Mr.
Saladoff in inducing the acceptance of the
compromise by misrepresenting his lack of
resources.
[64-1 USTC ¶9273]Robert C. Lane, Appellant v. United States of America,
et al., Appellees Robert C. Lane and Dorothy S.
Lane, Appellants v. United States of America,
Appellee
(CA-5), U. S. Court of Appeals, 5th Circuit, No. 20545, 328
F2d 602, 2/25/64, Affirming an unreported
District Court decision
[1954 Code Secs. 7122 and 7421 and similar 1939
Code Secs. 3761 and 3653]
Compromises: Default by taxpayer: Revival of
original tax liability: Suit to enjoin
collection.--Where the Fifth Circuit in 62-1
USTC ¶9467, 302 F. 2d 1, decided that the
taxpayer had breached his compromise agreement
and that the Government was entitled to collect
the full amount of the original tax claim,
subject to credit for sums paid under the offer
in compromise, the trial court was required to
enter a summary judgment for the amount of the
taxes proved by the Government to be due. Also,
the trial court correctly dismissed a separate
injunction suit in light of the earlier
decision.
Curtiss
B. Hamilton, 12595 N. E. 7th Ave., North Miami,
Fla., Robert C. Lane, Huntington Bldg., Miami,
Fla., for appellant. Edith House, United States
Attorney, Miami, Fla., Louis F. Oberdorfer,
Assistant Attorney General, Lee A. Jackson
Joseph Kovner, Earl J. Silbert, Tax Division,
Department of Justice, Washington D. C. 20530,
for appellee.
Before
TUTTLE, Chief Judge, and PHILLIPS *
and JONES, Circuit Judges.
PER
CURIAM:
This
is the second appeal in connection with these
taxpayers' effort to prevent the collection of
taxes in excess of the sum agreed to in an
accepted offer in compromise. The case was
reported on its last appearance here at [62-1
USTC ¶9467] 303 F. 2d 1. We decided then that
when taxpayer breached his compromise agreement,
under the terms of the agreement the Government
was permitted to collect the full amount of the
original tax claim, with credit being given for
sums paid under the offer in compromise.
On
the second trial the
United States
offered proof of the amount of the unpaid taxes
and there was no counter proof. The trial court
was therefore justified, in fact required, to
enter a summary judgment for the Government for
the amount of the taxes proved to be due. All
other questions sought to be raised by the
taxpayers on the second trial had been
foreclosed by our disposition of the case on the
first appeal.
The
trial court also correctly dismissed the
separate injunction suit in light of our earlier
decision.
Judgments
AFFIRMED.
* Of the Tenth Circuit, sitting by designation.
[62-1 USTC ¶9467]United States of America, Appellant v. Robert C. and
Dorothy S. Lane, Appellees United States of
America, Laurie W. Tomlinson, District Director
of Internal Revenue Service, Philip T. McEnery,
Revenue Officer, Henry W. McMillian, Chief,
Collection Division, and Furman L. Engelo,
Revenue Agent, Appellants v. Robert C. Lane,
Appellee
(CA-5), U. S. Court of Appeals, 5th Circuit, Nos. 19142,
19143, 303 F2d 1, 5/9/62
[1954 Code Sec. 7122 and 1939 Code Sec. 3761]
Compromises: Default by taxpayer: Revival of
original tax liability.--Where the taxpayer
failed to file sworn statements of annual income
pursuant to the terms of a collateral income
agreement which accompanied an agreement for
compromise of his tax liability for the years
1947 through 1953, the compromise agreement was
breached and the Government was entitled to
revive the original tax liability, subject to
credit for previous payments made under the
compromise agreement. The compromise agreement
was a contract and the provisions for revival of
original tax liability upon default were clear
and unmistakable. Judgment of District Court was
reversed.
Louis
F. Oberdorfer, Assistant Attorney General, Lee
A. Jackson, I. Henry Kutz, John A. Bailey,
Thomas H. McPeters, Department of Justice,
Washington 25, D. C., Edward F. Boardman, United
States Attorney, Miami, Fla., for appellant.
Robert C. Lane, Huntington Bldg., Curtiss B.
Hamilton,
Miami
,
Fla.
, for appellee.
Before
TUTTLE, Chief Judge, and JONES and
BELL
, Circuit Judges.
TUTTLE,
Chief Judge:
The
primary issue on this appeal is whether the
Government can revive the original income tax
liability of a taxpayer who has breached a
compromise agreement covering the liability. The
District Court resolved this question adversely
to the Government. We reverse.
The
facts giving rise to this controversy are
undisputed. During 1954 and 1955, the taxpayer,
Robert C. Lane, 1
made offers to representatives of the
Commissioner of Internal Revenue in compromise
of his outstanding income tax liability for the
years 1947, 1948, 1949, 1952 and 1953. The
indebtedness, amounting to $54,253.69, arose
from the taxpayer's failure to pay liabilities
disclosed on his returns and was not
attributable to any deficiency assessment.
Liability for this indebtedness was not
contested by the taxpayer, negotiations at all
times being based on his financial inability to
pay.
On
December 2, 19
55, the taxpayer was notified by letter from the
office of the Commissioner that his previously
submitted offer in compromise, the terms of
which were contained in two documents, was
accepted upon the terms proposed. Part of the
taxpayer's offer in compromise was submitted on
standard Treasury Form 656-C, a document
entitled "Offer in Compromise (Deferred
Installment Payments)", and provided for
the payment by the taxpayer of $29,816.78 as
follows:
"$2500.00 remitted with this Offer and; Balance payable
$400.00 per month until paid in full.
Installments to begin on the 1st day of month
following notification of acceptance of
offer."
This document also contained the following provision:
"As part of this offer, it is agreed that upon notice to
the proponent of the acceptance of this offer in
compromise of the liability aforesaid, the
proponent shall have no right, in the event of
default in the payment of any installment of
principal or interest due under the terms of the
offer, to contest in court or otherwise the
amount of the liability sought to be
compromised, and that in the event of such
default the Commissioner of Internal Revenue, at
his option, (1) may proceed immediately by suit
to collect the entire unpaid balance of the
offer, or (2) may disregard the amount of
such offer and apply all amounts previously paid
thereunder against the amount of the liability
sought to be compromised and may, without
further notice of any kind, assess and/or
collect by distraint or suit (the restrictions
against assessment and/or collection being
hereby specifically waived) the balance of such
liability." (Italics added).
The
second document making up the compromise
agreement was a so-called "collateral
income agreement". This document recited
that its purpose was "to offer additional
consideration for the acceptance of the offer in
compromise." In addition to the sum of
$29,816.78 mentioned above, the collateral
income agreement obligated the taxpayer to make
annual payments, from 1955 through 1967, based
upon a graduated percentage of "Annual
Income" in excess of $15,000, the term
"Annual Income" being expressly
defined in the agreement. Although by the terms
of the collateral agreement the taxpayer would
not be liable for any annual payments unless his
income exceeded $15,000, he was required to
furnish the District Director of Internal
Revenue with an annual statement of his income
for the preceding calendar year regardless of
the amount. The annual payments were to be paid
to the District Director on or before the
fifteenth day of the fourth month next following
the close of the calendar year and were to be
accompanied by a sworn statement of annual
income. The collateral agreement expressly
stated:
"That the default agreement and the waiver of the
statute of limitations on assessment and
collection as contained in the printed Form
656-C are also applicable in the event any
provision of this collateral agreement is not
carried out in accordance with its terms."
On
March 22, 19
56, the District Director requested the
taxpayer, by letter, to furnish a sworn
statement of annual income for 1955, and
cautioned him that failure to comply could
result in an action to collect the full amount
of the liability sought to be compromised. The
taxpayer did not comply with this request.
However, on
May 8, 19
56, the taxpayer delivered to the Internal
Revenue Service a cashier's check for
$26,008.36, thereby satisfying his installment
obligations under the main agreement.
Certificates of Release of Federal Tax Lien were
delivered to the taxpayer and were filed on
May 9, 19
56, discharging the liens of record. There was
no suggestion in any, of the correspondence
exchanged with regard to the cashier's check
that the obligations contained in the collateral
agreement were to be affected in any way.
On
May 29, 19
56, another letter was written to the taxpayer
calling his attention to the earlier request of
March 22, 19
56 that he furnish a sworn statement of annual
income for 1955. In answer, the taxpayer's
accountant replied that the audit for 1955 was
incomplete and, therefore, that annual income
could not be computed. On
July 11, 19
56, about three months after the annual payment
for 1955 was due to be paid and the sowrn
statement of income due to be filed, the
taxpayer wrote the District Director, claiming
for the first time that he had terminated all
liability to the Government with the cashier's
check of
May 8, 19
56. Further correspondence was exchanged and
conferences were held, the taxpayer insisting at
all times that he had no further liability and
the Internal Revenue Service insisting to the
contrary.
The
taxpayer likewise refused to make an annual
payment and file a sworn statement of income for
1956. As a result, the Commissioner, on
November 5, 19
57, notified the taxpayer that the compromise
agreement was terminated and that the balance of
the original tax liability would be declared
due, with credit to be applied in reduction of
the balance for payments previously made.
Shortly thereafter, tax liens covering
uncomputed accrual and unsatisfied assessments
were filed against the taxpayer.
On
October 29, 19
58, the taxpayer filed a complaint against the
United States
, the District Director and the two other
employees of the Internal Revenue Service,
seeking to enjoin the collection of any taxes or
interest based upon the reasserted liens. The
Government filed an answer to the complaint and,
on
March 16, 19
59, the Government commenced its own action
against the taxpayer seeking to recover the
unpaid balance of the taxpayer's original tax
liability plus interest. The amount claimed was
$31,326.
The
two cases were consolidated for trial. The
taxpayer contended (1) that his tax liability
was completely satisfied with the cashier's
check of
May 8, 19
56 and (2) that, if his liability was not
completely satisfied by the payment on
May 8, 19
56, his only remaining liability was for the
annual payments due at the time of trial and not
for the unpaid balance of the original tax
liability.
The
first issue was submitted to the jury, which
found that the cashier's check did not terminate
the taxpayer's liability under the collateral
agreement. The taxpayer has not appealed this
finding, and thus it is not at issue here. On
the other hand, the District Court agreed with
the taxpayer that the Government's recovery was
limited to the total amount of annual payments
due and owing at the time of trial and that the
Government was not entitled to recover the
unpaid balance of the original tax liability.
The jury then determined that the total amount
due the Government under the District Court's
ruling was $6,554.90. The Court entered judgment
for that amount in favor of the Government but
directed the Government to discharge the liens
which had been reasserted against the taxpayer.
The
District Court reasoned as follows in holding
that the Government could not recover the unpaid
balance of the taxpayer's original liability:
"When a man settles with the government on the basis of
a reduced amount, if he doesn't carry out this
compromise settlement, he is merely liable for
not carrying it out; and this is a breach of
contract for the purpose in [sic] the measure of
what damages would be.
"We are telling them now [i. e. the jurors] that
this would be the difference between what he
should have paid under his settlement agreement
and what he didn't pay, to live up to that
settlement agreement.
"I rule that the taxpayer can't be pushed back for years
and years and after a settlement is made and
have a forfeiture so to speak, of everything he
paid in under that settlement agreement.
"Of course, while I know that we are not always dealing
in equity in tax cases, still it is always
fundamental with this Judge that he is trying to
do justice among all the parties and under all
the circumstances of the case. Whether he
breached the contract or whether he didn't--if
he did breach it, it is a difference as to what
he should have paid under the settlement
agreement and what he should have done and what
he had actually done; so if I am wrong, the
Court of Appeals or the Supreme Court can decide
otherwise."
It
has long been settled that an agreement
compromising unpaid taxes is a contract and,
consequently, that it is governed by the rules
applicable to contracts generally. Walker v.
Alamo Foods Co., 5 Cir., [1 USTC ¶207] 16
F. 2d 694. The cardinal rule of contract
construction "is to ascertain the intention
of the contracting parties and to give effect to
that intention if it can be done consistently
with legal principles." Jacksonville
Terminal Co. v. Railway Express Agency, 5
Cir., 296 F. 2d 256, 259.
In
the present case, the contracting parties
expressed their mutual intention in clear and
unmistakable terms. The collateral agreement
specifically stated that the default provisions
of the main agreement on Form 656-C were to be
applicable should the taxpayer fail to perform
his obligations with respect to the making of
annual payments and filing of sworn statements
of annual income. Form 656-C, in turn, expressly
provided that the Commissioner, upon default by
the taxpayer, could terminate the compromise
agreement and proceed to collect the unpaid
balance of the original tax liability. This
language is so precise, and the intention which
it manifests is so evident, as to leave no doubt
that the course of action taken by the
Government here was fully authorized by the
compromise agreement.
There
was nothing illegal, immoral or inequitable in
the compromise agreement. It did not provide for
any "forfeiture". By express
provision, the amounts to be paid under the
compromise agreement, including both the Form
656-C and the collateral agreement, could not
exceed the aggregate amount which the taxpayer
conceded that he owed the Government from the
start. By allowing the Government to revive the
taxpayer's original liability, the taxpayer will
not forfeit the amounts he has already paid, for
those amounts will be applied to reduce the
original liability. The agreement was precise,
it was fair, and it was freely consented to by
the taxpayer. There is no reason why it should
not be enforced as written.
Nor
can we discern any sound reason for refusing to
allow the Government to reinstate its tax liens
against the taxpayer upon revival of the
taxpayer's original liability. We think that the
Commissioner's undoubted right to recover the
unpaid balance of the original liability carried
with it the right to secure payment of this
amount by reasserting the tax liens. Section
6325(d) of the Internal Revenue Code of 1954
does not require a contrary conclusion. That
section merely provides that a certificate of
discharge of a tax lien is conclusive that the
lien upon the property covered by the property
is extinguished. The Government does not contend
that the liens on the taxpayer's property were
not extinguished when certificates of discharge
were issued to the taxpayer in May, 1956. It
claims merely that the liens could be revived
upon revival of the obligation on which the
liens were based. The Government's right to
recover the unpaid balance of the original
liability would be illusory indeed, if it was
not also entitled to the security which the tax
liens represented.
The
judgment is REVERSED and the cause is REMANDED
to the District Court for further proceedings
not inconsistent with this opinion.
1 Robert C. Lane will hereafter be referred to as the
"taxpayer" although his wife,
Dorothy C. Lane
, joined with him in filing returns for certain
of the taxable years in question.
[1 USTC ¶348]Botany Worsted Mills v. The
United States
Supreme Court of the
United States
, No. 31. October Term, 1928, 278 US 282, 49 SCt
129, Decided January 2, 1929
On Writ of Certiorari to the Court of Claims of
the United States.An informal agreement between
subordinate officials of the Bureau of Internal
Revenue and a taxpayer for settlement of
disputed items of tax liability is not binding
as an estoppel and it is not a compromise within
Rev. Stat. Sec. 3229 because, while it may have
been ratified by the Commissioner, it was not
done with the advice and consent of the
Secretary of the Treasury and upon the
recommendation of the Attorney General. Where
the Court of Claims does not make a finding upon
the ultimate question of fact upon which the
rights of the parties depended, but merely makes
findings as to subsidiary circumstantial facts
which bear upon it, such findings will not
support a judgment unless the circumstantial
facts as found are such that the ultimate fact
follows from them as a necessary inference and
may be held to result as a conclusion of law.
Under section 12(a) of the Revenue Act of 1916
amounts paid by a corporation to its officers as
compensation for their services can be allowed
as deductions only if a part of its
"ordinary and necessary expenses," so
when such amounts are extraordinary, unusual and
extravagant, have no substantial relation to the
measure of the services rendered but are utterly
disproportionate to their value, such amounts
are not in reality payment for services and
cannot be regarded as "ordinary and
necessary expenses." Where pursuant to the
custom of the business and the practice of the
company for nearly thirty years, directors were
paid a bonus based on a percentage of profits,
in addition to a salary as executive officers or
managers, which was greatly in excess of the
compensation which, as a matter of common
knowledge, is usually paid directors for
customary services and was greater than that
paid in prior years, the inference, in the
absence of findings of fact as to the nature,
extent or value of their services and as to the
amount received by each, must be that the
unusual and extraordinary amount paid the
directors was not in fact compensation for their
services but merely a distribution of a fixed
percentage of profits that had no relation to
the services rendered. Reversing and affirming
in part Court of Claims decision, 63 Ct. Cls.
405.
The
Botany Worsted Mills, a New Jersey corporation
engaged in the manufacture of woolen and worsted
fabrics, made a return of its net income for the
taxable year 1917 under the Revenue Act of 1916 1
and the War Revenue Act of 1917. 2
By §12(a) of the Revenue Act it was provided
that in ascertaining the net income of a
corporation organized in the United States there
should be deducted from its gross income all
"the ordinary and necessary expenses paid
within the year in the maintenance and operation
of its business and properties." Under this
provision the Mills deducted amounts aggregating
$1,565,739.39 paid as compensation to the
members of its board of directors, in addition
to salaries of $9,000 each. It paid an income
tax computed in accordance with this return.
Thereafter, in 1920, the Commissioner of
Internal Revenue assessed an additional income
tax against it. Of this, $450,994.06 was
attributable to his disallowance of $783,656.06
of the deduction claimed as compensation paid to
the directors, on the ground that the total
amount paid as compensation was unreasonable and
the remainder of the deduction as allowed
represented fair and reasonable compensation.
The Mills after paying the additional tax filed
a claim for refund of this $450,994.06. The
claim was disallowed; and the Mills thereafter,
in September, 1924, by a petition in the Court
of Claims sought to recover this sum from the
United States
, with interest--alleging that the disallowance
of part of the compensation paid the directors
was illegal. 3
After a hearing on the merits the court, upon
its findings of fact, dismissed the petition
upon the ground that the additional tax was
imposed under an agreement of settlement which
prevented a recovery. 63 C. Cls. 405. And this
writ of certiorari was granted.
The
first question presented is whether the Mills is
precluded from recovering the amount claimed by
reason of a settlement.
Sec.
3229 of the Revised Statutes, 4
provides that:
"The Commissioner of Internal Revenue, with the advice
and consent of the Secretary of the Treasury,
may compromise any civil or criminal case
arising under the internal-revenue laws instead
of commencing suit thereon; and, with the advice
and consent of the said Secretary and the
recommendation of the Attorney-General, he may
compromise any such case after a suit thereon
has been commenced. Whenever a compromise is
made in any case there shall be placed on file
in the office of the Commissioner the opinion of
the Solicitor of Internal Revenue, * * * with
his reasons therefor, with a statement of the
amount of tax assessed, * * * and the amount
actually paid in accordance with the terms of
the compromise." 5
The
Government did not claim that there had been a
compromise under this statute, but contended in
the Court of Claims, that, irrespective thereof,
an agreement of settlement had been entered into
between the Mills and the Commissioner under
which the Mills had accepted the partial
disallowance as to the compensation paid the
directors, and had also received concessions as
to other disputed items the benefit of which it
still enjoyed, and was therefore estopped from
seeking a recovery.
As
to this matter the findings of fact show that
after the Mills had paid the amount of the tax
shown by its original return, an investigation
of its books disclosed to the Commissioner the
necessity of making an additional assessment, to
be determined by the settlement of questions
relating to the compensation (or, as it was
termed, bonus) paid to the directors,
depreciation charged off on its books, and
reserves charged to expenses. After much
correspondence and numerous conferences
extending over several months between the
attorney and assistant treasurer of the Mills
and the chief of the special audit section of
the Bureau of Internal Revenue and others of his
official associates, a compromise was agreed to
as to all the differences, by which the amount
to be allowed as reasonable compensation to the
directors and as depreciation were agreed upon,
and the claim as to reserves was allowed.
Thereupon the Mills prepared and filed an
amended return based upon the figures agreed
upon in the conferences, with documentary
evidence which it had agreed to furnish; and the
additional assessment was made in accordance
with this return. 6
The
court, in sustaining the Government's
contention, said: "With the payment of the
tax under the circumstances surrounding this
case the agreement, which is mentioned in the
record as a 'gentleman's agreement,' became in
legal effect an executed contract of
settlement;" and that, as the Mills was
seeking to recover on account of the particular
item which it regarded as unfavorable to its
interests, and at the same time hold to the
advantage derived from the settlement of other
items in dispute involved in the same general
settlement, it should not be allowed a recovery.
The
Mills contends that the Commissioner had not
been given, at the time in question, any
authority, either in express terms or by
implication, to compromise tax cases except as
provided in §3229; that this statute in
granting such authority under specific
limitations as to the method to be pursued,
negatived his authority to effect a valid and
binding agreement in any other way; that as the
Government could not have been estopped by the
unauthorized transactions of its officials, the
Mills likewise could not be estopped thereby;
and further, that the findings are insufficient
to establish an estoppel.
The
Government does not here challenge any of these
contentions. In the brief for the United States
filed in this Court the Solicitor General states
that the question whether such an informal
adjustment of taxes as was made in this case is
binding on the taxpayer, is submitted for
decision in deference to the opinion of the
Courts of Claims and the importance of the
question--but no argument is made in support of
the Government's previous contention that the
Mills was estopped from questioning the
settlement. And, on the contrary, it is stated
that--
"Before and since the date of the alleged settlement in
this case Congress has evidently proceeded on
the theory that no adjustment of a tax
controversy between representatives of the
Bureau of Internal Revenue and a taxpayer is
binding unless made with the formalities and
with the approval of the officials prescribed by
statute. The authority of officers of the
United States
to compromise claims on behalf of or against the
United States
is strictly limited. * * * The statutes which
authorize conclusive agreements and settlements
to be made in particular ways and with the
approval of designated officers raise the
inference that adjustments or settlements made
in other ways are not binding."
And
further, that
"No ground for the
United States
to claim estoppel is disclosed in the
findings."
Independently
of these concessions, we are of the opinion that
the informal settlement made in this case did
not constitute a binding agreement. Sec. 3229
authorizes the Commissioner of Internal Revenue
to compromise tax claims before suit, with the
advice and consent of the Secretary of the
Treasury, and requires that an opinion of the
Solicitor of Internal Revenue setting forth the
compromise be filed in the Commissioner's
office. Here the attempted settlement was made
by subordinate officials in the Bureau of
Internal Revenue. And although it may have been
ratified by the Commissioner in making the
additional assessment based thereon, it does not
appear that it was assented to by the Secretary,
or that the opinion of the Solicitor was filed
in the Commissioner's office.
We
think that Congress intended by the statute to
prescribe the exclusive method by which tax
cases could be compromised, requiring therefor
the concurrence of the Commissioner and the
Secretary, and prescribing the formality with
which, as a matter of public concern, it should
be attested in the files of the Commissioner's
office; and did not intend to intrust the final
settlement of such matters to the informal
action of subordinate officials in the Bureau.
When a statute limits a thing to be done in a
particular mode, it includes the negative of any
other mode.
Raleigh
, etc. R. R. Co. v. Reid, 13 Wall. 269,
270; Scott v. Ford, 52 Or. 288, 296.
It
is plain that no compromise is authorized by
this statute which is not assented to by the
Secretary of the Treasury. Leach v. Nichols
(C. C. A.) 23 F. (2d) 275, 277 [1 USTC ¶269].
For this reason, if for no other, the informal
agreement made in this case did not constitute a
settlement which in itself was binding upon the
Government or the Mills. And, without
determining whether such an agreement, though
not binding in itself, may when executed become,
under some circumstances, binding on the parties
by estoppel, it suffices to say that here the
findings disclose no adequate ground for any
claim of estoppel by the United States.
We
therefore conclude that the Mills was not
precluded by the settlement from recovering any
portion of the tax to which it may otherwise
have been entitled.
This
brings us to the question whether on the
findings of fact the Mills is entitled to
recover the portion of the additional tax
attributable to the disallowance of $783,656.06
of the amount paid to the directors which it had
claimed as a deduction. 7
Under
§12(a) of the Revenue Act of 1916 the Mills was
not entitled to this deduction unless the amount
paid constituted a part of its "ordinary
and necessary expenses" in the maintenance
and operation of its business and properties.
And in this suit the burden of establishing that
fact rested upon it, in order to show that it
was entitled to the deduction which the
Commissioner had disallowed, and that the
additional tax was to that extent illegally
assessed. The Court of Claims, however, made no
finding that the amount disallowed by the
Commissioner constituted a part of the ordinary
and necessary expenses of the Mills. The
findings are silent as to this ultimate
fact--essential to a recovery by the Mills--and
only show certain circumstantial facts relating
to the payment made to the board of directors.
Where
the Court of Claims does not make a finding upon
the ultimate question of fact upon which the
rights of the parties depend, but merely makes
findings as to subsidiary circumstantial facts
which bear upon it, such findings will not
support a judgment unless the circumstantial
facts as found are such that the ultimate fact
follows from them as a necessary inference and
may be held to result as a conclusion of law.
See
United States
v. Pugh, 99
U. S.
265, 269; Winton v. Amos, 255
U. S.
373, 395.
The
findings show that for many years it has been
the practice of many corporations engaged in the
woolen manufacturing business to base the
compensation of the directors and executive
officers upon a percentage of profits. Upon the
organization of the Mills in 1890 the
stockholders adopted a by-law providing that at
the close of the business year the net profits
should be distributed by paying a dividend of 6
per cent to stockholders and applying the
balance remaining as follows: (a) placing 5 per
cent in a reserve fund; (b) paying 25 per cent
"as a bonus to the board of
directors;" and (c) paying 70 per cent as
additional dividend to the stockholders. The
stockholders amended this by-law in 1903 by
increasing the bonus of the board of directors
to 40 per cent; in 1905, by providing, instead
of a "bonus," that
"compensation" equal to 40 per cent
should be "paid to the board of directors
for their services"; and in 1908, by
reducing such compensation to 32 per cent [that
is, 30.08 per cent of the net profits]. This
by-law remained in force until after the taxable
year 1917; and during the entire period
"compensation" was paid to the
directors in accordance therewith. From the
outset the determination of the total amount of
profits and of the aggregate amount payable to
the board of directors was made by the board
itself; and it likewise determined the basis of
the apportionment among the several directors of
the aggregate amount payable to the board as a
whole. No contract was made with any director as
to what his compensation should be other than
such as was implied from his election and
service as a member of the board in accordance
with the by-law and the customary practices of
the company, which each knew. At all times each
director also held a position as an executive
officer or manager of a department of the Mills.
The
gross assets of the Mills increased from
$1,114,149.63 in 1890 to $28,893,777.12 in 1917;
and its net assets, including reserves, from
$37,136.35 to $10,999,862.48. Its net income
increased from $784,334.44 in 1910 to
$7,953,512.80 in 1917; and the amount paid the
directors in pursuance of the by-law, increased,
with some fluctuations, from $268,444.19 in
1910, to $400,935.18 in 1915, $693,617.16 in
1916, and $1,565,739.39 in 1917. 8
In 1917 there were ten members of the board, so
that if the total amount had been apportioned
ratably, each would have received $156,573.93.
And in that year each member of the board, in
addition to the part of the aggregate in fact
apportioned to him individually, also received a
salary of $9,000.
The
findings do not show the nature or extent of the
services rendered by the board of directors or
its individual members, either as directors,
executive officers or department managers--the
amounts apportioned and paid to each
director--the basis of apportionment, whether
the nature and extent of their individual
services, the amount of their stockholdings, or
otherwise--the value of their services--or the
reasonableness of the purported compensation.
We
do not find it necessary to determine here
whether the amounts paid by a corporation to its
officers as compensation for their services
cannot be allowed as "ordinary and
necessary expenses" within the meaning of
§12(a), merely because, and to the extent that,
as compensation, they are unreasonable in
amount. 9
However this may be, it is clear that
extraordinary, unusual and extravagant amounts
paid by a corporation to its officers in the
guise and form of compensation for their
services, but having no substantial relation to
the measure of the services and being utterly
disproportioned to their value, are not in
reality payment for services, and cannot be
regarded as "ordinary and necessary
expenses" within the meaning of the
section; and that such amounts do not become
part of the "ordinary and necessary
expenses" merely because the payments are
made in accordance with an agreement between the
corporation and its officers. Even if binding
upon the parties, such an agreement does not
change the character of the purported
compensation or constitute it, as against the
Government, an ordinary and necessary expense.
Compare 20 Treas. Dec., Int. Rev., 330; Jacobs
& Davies v. Anderson (C. C. A.), 228
Fed. 505, 506; United States v. Philadelphia
Knitting Mills Co. (C. C. A.), 273 Fed. 657,
658; and Becker Bros. v.
United States
(C. C. A.), 7 F. (2d) 3, 6.
In
the light of this principle it is clear that the
findings do not show, as a matter of necessary
inference resulting as a conclusion of law, that
the amount paid the directors in excess of the
$782,083.33 allowed by the Commissioner, 10
constituted part of the ordinary and necessary
expenses of the Mills. On the contrary, as this
amount so greatly exceeded the amounts which, as
a matter of common knowledge, are usually paid
to directors for their attendance at meetings of
the board and the discharge of their customary
duties, and was much greater than the amounts
that had been paid in prior years, 11
and as there is no showing as to the amounts
paid the individual directors, in addition to
the salaries of $9,000 which each
received--presumably for his services as an
executive officer or department manager--or as
to the nature, extent or value of their
services, the findings raise a strong inference
that the unusual and extraordinary amount paid
to the directors was not in fact compensation
for their services, but merely a distribution of
a fixed percentage of the net profits that had
no relation to the services rendered.
Therefore,
as the Mills had not sustained the burden of
showing that the amount disallowed by the
Commissioner was in fact part of its ordinary
and necessary expenses, the judgment must, for
this reason, be
Affirmed.
Mr.
Justice HOLMES agrees with the result.
1 39 Stat. 756, c. 463.
2 40 Stat. 300, c. 63.
3 Sec. 3226 of the Revised Statutes had been previously
amended by §1318 of the Revenue Act of 1921, 42
Stat. 227, 314, c. 136, so as to provide that no
suit or proceeding should be maintained in any
court for the recovery of any internal-revenue
tax alleged to have been erroneously or
illegally assessed or collected until a claim
for refund or credit had been duly filed with
the Commissioner of Internal Revenue; and
further amended by §1014(a) of the Revenue Act
of 1924, 43 Stat. 253, 343, c. 234, so as to
provide that such suit or proceeding might be
maintained, whether or not such tax had been
paid under protest or duress. And the right of
the Mills to maintain this suit, although the
tax had not been paid under protest or duress,
is not questioned by the Government.
4
U. S.
C., Tit. 26, §158.
5 Since the date of the settlement here involved §§ 1312 and
1313 of the Revenue Act of 1921, §1006 of the
Revenue Act of 1924, and §1106(b) of the
Revenue Act of 1926 have dealt specifically with
agreements in writing made by a taxpayer and the
Commissioner, with the approval of the
Secretary, that the previous determination and
assessment of a tax shall be final and
conclusive.
6 The findings indicate inferentially that some tax claims of
the Mills for two other years were also included
in the settlement; but the precise facts do not
appear.
7 This is claimed in the brief filed for the Mills; and in the
oral argument its counsel specifically stated
that the Mills relied on the sufficiency of the
findings and made no request that the case be
remanded to the Court of Claims for additional
findings, as the Solicitor General had
suggested.
8 The figures for some other years are also given in tabulated
statements included in the findings.
9 Later, by §214(a) of the Revenue Act of 1918, 40 Stat.
1057, c. 18, it was specifically provided that
"the ordinary and necessary expenses"
should include "a reasonable allowance for
salaries or other compensation for personal
services actually rendered."
10 The amount allowed, it may be noted, was, in itself,
$481,934.02 more than the average of the amounts
that had been paid in the seven years
immediately preceding, and $88,466.17 more than
the greatest amount that had been paid in any
one year.
11 See note 10, supra.
