Action by the Continental Illinois National Bank Trust Company of Chicago and another, surviving executors of the estate of Louis Eckstein, against the United States, for overpayment of income taxes.

Judgment for plaintiffs.

Plaintiffs sue to recover overpayment in 1935 of income tax and interest of $7,969.90 for 1932, with interest as provided by law. The overpayment is admitted and the sole question raised by the defendant is whether a formal and sufficient claim for refund relating specifically to the tax which became the overpayment, and which refund claim the Commissioner of Internal Revenue considered and decided on the merits after the amount of tax to which it related had been paid, is ineffectual to form a basis of a suit subsequently brought solely because the refund claim was prematurely filed insofar as this item of tax is concerned.

Special Findings of Fact.

1. Louis Eckstein (hereinafter sometimes referred to as the "taxpayer") was a citizen of the United States and a resident of Chicago, Illinois, during the taxable year 1932. He died November 21, 1935, at Chicago, leaving a last will and testament which was admitted to probate January 7, 1936. Letters testamentary thereunder were duly issued to Edward D'Ancona, Elsie S. Eckstein, and Continental Illinois National Bank and Trust Company of Chicago, as executors. Those persons duly qualified and acted as executors until the death of Edward D'Ancona on December 19, 1937, at which time the plaintiffs became the sole surviving executors under the taxpayer's last will and testament and are now acting as such.

2. Louis Eckstein filed his income-tax return for 1932 on March 14, 1933, which showed a tax of $13,132.11. He paid that tax in four approximately equal installments on the 14th day of March, June, September, and December 1933.

3. During 1932 the taxpayer made charitable contributions in the amount of $22,455.50 and in his income tax return for that year he claimed a deduction of $19,269.25 on account of such contributions. The amount so claimed was 15 percent of $128,461.67, the net income shown in the return without deduction for capital net loss and before deduction of charitable contributions.

4. February 12, 1935, the Commissioner of Internal Revenue issued a ninety-day letter to the taxpayer determining a deficiency in income tax for 1932 of $11,514.27. In addition to other adjustments not now material, the Commissioner in that letter determined that the taxpayer's net income without deduction of capital net loss and before deduction for charitable contributions was $130,257.29, and that his capital net loss of $83,854.81 should be deducted from the $130,257.29 to arrive at the basis for the 15 percent limitation for charitable contributions. Accordingly, in determining the deficiency, the Commissioner allowed the deduction for charitable contributions of only $6,960.39, such amount being 15 percent of $46,402.48 ($130,257.29 minus $83,854.81), thereby on account of this item determining the tax to be $7,043.79 more than if the deduction for charitable contributions had been computed in accordance with plaintiffs' contention.

In that letter it was stated that:

"The deduction for contributions has been limited to 15 percent of your net income from all sources in accordance with a decision of the United States Supreme Court in the case of Susan Dwight Bliss et al. v. Commissioner of Internal Revenue [ 293 U.S. 144, 55 S.Ct. 17, 79 L.Ed. 246, 95 A.L.R. 207], handed down November 5, 1934.

* * *

"Careful consideration has been accorded your protest dated July 9, 1934, in connection with the findings of the examining officer, and the information submitted at a conference held in the office of the internal revenue agent in charge."

5. February 14, 1935, the taxpayer filed a claim, on the standard Treasury Department Form 843, for the refund of income tax for 1932, such claim being in the amount of $13,132.11, and the dates of payment of such tax being shown as "Quarterly during 1933." The grounds assigned for the claim were as follows:

"In my original return for the calendar year 1932 there was erroneously and improperly included in gross income $6,561.90 on account of my interest in the leasehold estate in Lots 35, 36, 37 and 38 in Block 142 in School Section Addition to Chicago, commonly referred to as 36 South State Street, Chicago, Illinois. * * *

"In my original return for the calendar year 1932 there was also erroneously and improperly included in gross income $2,406.21 on account of my interest in the leasehold estate in Lots 4, 5 and 6 in Block 142 in School Section Addition to Chicago, sometimes referred to as 10-14 South State Street, Chicago, Illinois. * * *

"In my original return for the calendar year 1932 there was also erroneously and improperly included in gross income $4,166.65 on account of my interest in the leasehold estate in Lots 31 and 32 in Block 142 in School Section Addition to Chicago, sometimes referred to as 28-30 S. State Street, Chicago, Illinois. * * *

"In sundry other particulars gross income shown on my 1932 return was erroneously and improperly overstated through the inclusion therein of items not a proper part of gross income, as defined by Section 22 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 487; deductions to which I was entitled, particularly the deductions allowed by Section 23 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 489, were not taken in determining taxable net income, resulting in an overpayment of my income taxes for said year, which said overpayment should now be refunded to me with interest at the rate of 6% per annum from the respective dates of payment of the taxes to the date of the refund.

"On July 9, 1934, I submitted verified protest to C.W. Herrick, Internal Revenue Agent in Charge at Chicago, relative to examination of my income tax return for 1932. To avoid needless repetition, that protest is, by this reference, incorporated in and made a part of this claim for refund."

6. The document of July 9, 1934, referred to in the above-mentioned claim for refund, and made a part thereof as to the facts and grounds set forth therein, was a protest against an additional tax determined, computed, and recommended for assessment and collection by a revenue agent in charge for 1932 in the amount of $14,576.64, and the document of July 9, 1934, and the refund claim prepared and submitted to the Commissioner February 14, 1935. referred to the following items:

(a) Dividend received in 1933, transferred by examining officer to income for 1932;

(b) Deductions for charitable contributions; and

(c) Loss sustained on sale of Continental Illinois National Bank Trust Company Stock.

With respect to the second item, it was stated that the additional tax was erroneous in that the deductions determined and recommended for allowance for 1932 on account of contributions were "limited to 15% of the ordinary net income reduced by the amount of the capital net loss computed without the benefit of this deduction."

The document of July 9, made a part of the refund claim as to all items therein mentioned with reference to the net income which should be used for the purpose of applying the 15% limitation, further stated with respect thereto as follows:

"It has been repeatedly held by the United States Board of Tax Appeals that the Commissioner of Internal Revenue is without warrant of law in limiting deductions for contributions to 15% of ordinary net income, as reduced by the amount of capital net losses.

"On the contrary, the statutes provide for deductions of contributions equal to 15% of the ordinary net income, after excluding capital net losses * * *."

7. The amount of the deficiency finally determined by the Commissioner in the letter of February 12, 1935, was assessed in May 1935, together with interest in the amount of $1,513.89. The total amount of the assessment, $13,028.16, was paid in the amounts of $9,897.26 in cash on June 6, 1935, and $3,130.90 by credit on June 28, 1935.

8. Prior to December 27, 1937, the Commissioner took the claim for refund under consideration as to all of the items and grounds set forth therein without objection as to the fact that in part it had been prematurely made. With knowledge of this fact, and also the fact that the entire tax to which the claim related had been paid, the Commissioner considered the claim in its entirety on the merits and considered anew all the facts and grounds therein set forth and, upon such consideration, decided that the claim should be rejected. Accordingly on December 27, 1937, he wrote a letter to plaintiffs notifying them that the claim for refund (referred to in findings 5 and 6) would be rejected, and, in that letter, assigned the following ground for his decision:

"The claim is based upon the contention that income from certain rental property was erroneously included in taxable income for the reason that the buildings were on land owned by the State of Illinois and leased to the decedent and others, the proceeds of the lease being used exclusively for school purposes by the State; also that gross income was overstated in sundry other particulars in the report of the internal revenue agent in charge at Chicago, Illinois, as set forth in detail in protest dated July 9, 1934.

"In view of the decision of United States Court of Claims, decided March 4, 1935, that the income from the operation of the rental buildings in question was taxable, the portion of the claim covering this issue must be denied.

"The position of this office with respect to the contentions outlined in protest dated July 9, 1934, was fully explained in office letter, form SN-A, dated February 12, 1935."

9. Neither the decedent Eckstein nor the plaintiffs at any time withdrew or abandoned the refund claim in whole or in part, and the Commissioner knew this when he considered and acted upon the claim in December 1937.

10. February 17, 1938, the Commissioner issued his formal notice rejecting the claim for refund stating that no refund was allowable for the reasons set forth in his letter of December 27, 1937. February 18, 1939, plaintiffs requested the Commissioner to reopen, reconsider, and allow the claim for refund theretofore filed and heretofore referred to. In this letter of request it was contended that in determining the basis for the amount allowable on account of charitable contributions it was erroneous, for the reasons set forth in the claim, for the Commissioner to reduce the net income of $130,257.29 by the capital net loss of $83,854.81, and that a deduction for charitable contributions of $19,538.59 should have been allowed, such amount being 15 percent of $130,257.29.

11. January 26, 1940, the internal revenue agent in charge at Chicago issued a letter addressed to plaintiffs in answer to the application for reopening and reconsideration of the claim for refund, which letter read as follows:

"Reference is made to your letter dated February 8, 1939, applying for reconsideration of your claim for refund of $13,132.11 income tax paid for the taxable year ended December 31, 1932, which was disallowed by registered notice mailed to you on February 17, 1938, in accordance with provisions of the internal revenue laws.

"The basis of your application for reconsideration of the claim is the decision of the United States Supreme Court in U.S. v. Frederick Pleasants rendered on January 3, 1939, in which it was held that the 15 percent limitation on the deduction for charitable contributions under section 23(n) of the Revenue Act of 1932 is to be computed on the taxpayer's net income without respect to capital net loss.

"This contention is allowable on its merits.

"It is held, however, that inasmuch as there was no overpayment of tax on February 14, 1935, the date the claim was filed, the claim is invalid with respect to the tax assessed and paid subsequent to that date. See United States Supreme Court decision in the case of Blair, Commissioner v. U.S. ex rel Birkenstock, et al., Executors, T.D. 3886, C.B. V-1 (1936)

"Your application for reconsideration of the disallowed claim for refund will, accordingly, be denied."

LITTLETON, Judge.

Plaintiffs overpaid the tax in the amount of $7,043.79 plus interest of $926.11, totaling $7,969.90, for 1932 by reason of failure of the Commissioner of Internal Revenue properly to compute the allowable deduction for charitable contributions, as set forth in the findings. The overpayment was a part of the additional assessment made and paid in 1935. The overpayment of the total amount claimed in this suit by plaintiffs is conceded by the defendant. United States v. Pleasants, 305 U.S. 357, 59 S.Ct. 281, 83 L.Ed. 217.

The defendant contends that a claim for refund filed by plaintiffs on official Treasury Form 843, which was in all respects as to form and substance sufficient to form the basis of a suit to recover the overpayment of the tax and interest, was invalid because it was prematurely filed — that is, it was made and filed before the tax in question had been paid and that, for this reason, there was no claim for refund before the Commissioner within the meaning of section 322(a)(1) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 571, which provides that, where there has been an overpayment of tax the amount of such overpayment shall be credited or refunded immediately to the taxpayer, but that no such credit or refund shall be made or allowed after two years from the time the tax was paid, unless, before the expiration of such period, a claim therefor should be filed by the taxpayer.

Upon the facts and circumstances disclosed by the record, we are of opinion that the contention on behalf of the defendant is not sufficient in substance to require the dismissal of the petition. The defense is wholly technical and, in view of the facts disclosed, is based on a matter of form rather than of substance. While it is true that the claim for refund, insofar as it related to the overpayment of tax here involved, was prematurely made because this part of the tax had not been paid, such tax had been finally determined and proposed to be assessed, and was assessed and collected before the claim was considered and acted upon. The refund claim was not in any respect a protest. The Commissioner had already made his final decision under the statute with respect to this very item. The facts were clearly set forth in the claim and the grounds specifically stated not only with reference to the pertinent items of income and contributions forming a basis of the tax in question but with respect to certain other items of income not now in question affecting the deduction for charitable contributions which was the ground upon which the claim was based. The claim was not void solely because it was prematurely filed. It was not withdrawn or abandoned by plaintiffs. Since the tax here involved to which it related had been paid, the claim was susceptible in several ways of becoming unobjectionable as the basis for appropriate action by suit: Refiling of the identical claim was one; specific request for consideration was another, and consideration thereof and action and decision thereon by the Commissioner without objection to the early filing was a third. After the tax had been paid, the Commissioner took the claim advanced under consideration, considered it on the merits and, after having so considered it, rejected it on the merits. The record as a whole shows that the plaintiffs did not at any time abandon or withdraw the claim or any ground thereof. The Commissioner's consideration thereof and action thereon December 27, 1937, and February 17, 1938, show that he understood that it had not been abandoned and that it was being relied upon. He knew when he considered and acted upon the claim that the tax had been paid and that the claim had been in part prematurely filed. We think this consideration and action cured any defect in form which may have existed in the claim and was as effectual in that regard as if the taxpayer had sent in a carbon copy of the claim or written a letter asking that the claim already on file be considered. In so considering and deciding the claim upon its merits without objection to the fact that it was premature when filed, the Commissioner effectively waived any objection which might have been made to premature filing. He was acting within the clear scope of his authority. No rights of the government were prejudiced by such waiver, Daily Pantagraph, Inc., v. United States, 37 F.2d 783, 789, 68 Ct.Cl. 251, 265. In that case the court pointed out that by reason of the pendency of a proceeding before the United States Board of Tax Appeals at the time suit was filed in this court the petition might have been subject to demurrer, and said: "It is sufficient to say that we think that, the proceedings before the Board having ended, the plaintiff is now in a position to maintain this suit, and should not be required to go through the useless proceedings of filing a new petition." The refund statute was intended for real and substantial purposes which was to give the Commissioner an opportunity to consider anew the correctness of the decision on the basis of which the tax had been first determined and assessed, so that the government would not be met in a suit with entirely new and unconsidered claims. For the purpose of validating the refund claim insofar as it was premature when filed, we think the Commissioner's consideration thereof and action thereon was as effective as anything which the decedent or plaintiffs might have done, and in the circumstances disclosed by this record the law ought not to be so construed as to require of a party a mere idle ceremony, Cox v. United States, 6 Pet. 172, 202, 8 L.Ed. 359. The reference by the Internal Revenue Agent in Charge, for the first time in his letter of January 26, 1940, refusing to reconsider the claim, to the fact that it had been prematurely made in part did not destroy the validating effect of the original consideration and decision of the Commissioner on December 27, 1937.

In Fidelity Trust Company, Executor, v. United States, 39 F.2d 451, decided November 30, the taxpayer filed a claim for refund after issuance of a deficiency letter, but before payment of the tax. The claim was subsequently allowed in part and rejected in part, and suit was brought thereon. The court refused in the circumstances to give weight to the contention of the defendant that the claim had been prematurely filed, stating that the Commissioner of Internal Revenue had received the claim and that pursuant thereto and after final payment of the tax he had considered and decided it, allowing an overpayment in part, and that, in such circumstances, the defendant could not afterward successfully urge that the claim was ineffective. In Marshall-Wells Company v. United States, 59 F.2d 106, 75 Ct.Cl. 26, we held that an abatement claim filed before the particular tax in question had been assessed was nevertheless effective as to such tax under section 611 of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 461. In Lehigh Portland Cement Co. v. United States, 30 F. Supp. 217, 90 Ct.Cl. 36, it was held that a premature assessment of a tax contrary to the provisions of the statute became a valid, unobjectionable assessment after the happening of the events which removed the defect before proper objection. See, also, Coates v. United States, 2 Cir., 111 F.2d 609.

The defendant relies upon Kings County Savings Institution v. Blair, 116 U.S. 200, 205, 6 S.Ct. 353, 29 L.Ed. 657; Rock Island, Arkansas Louisiana Railroad Company v. United States, 254 U.S. 141, 142, 41 S.Ct. 55, 65 L.Ed. 188; Blair v. United States ex rel. Birkenstock, 271 U.S. 348, 46 S.Ct. 506, 70 L.Ed. 983, but we think the specific question here presented upon the facts and circumstances disclosed was not presented or decided in any of these cases.

Under the particular facts in this case we are of opinion that plaintiffs are entitled to recover, and judgment will accordingly be entered in their favor for the admitted overpayment of $7,969.90 with interest as provided by law. It is so ordered.