Opinion
No. 44026.
October 7, 1940.
Joseph D. Brady, of Los Angeles, Cal., for plaintiff.
Joseph H. Sheppard, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and GREEN, LITTLETON, and WHITAKER, Judges.
Action by Ina Claire, formerly Ina Claire Gilbert, against the United States to recover income taxes paid.
Judgment for plaintiff in accordance with opinion.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. During the years 1930 and 1931 the plaintiff was the wife of John Gilbert, from whom she was divorced by a final decree entered August 6, 1932. Each party was engaged in the motion picture or theatrical business, and was a resident of Los Angeles, California.
2. On May 31, 1930, the plaintiff and her husband entered into a written agreement concerning their property, which, in substance, provided in part as follows: That no community property had been accumulated or acquired, and that all property belonging to either party was the separate property of each, having been acquired by money earned or with proceeds of investments prior to the marriage of the parties; and that all earnings, commissions, bonuses, or remunerations of any kind which should thereafter be received or acquired by either party were to be the sole and separate property of the party so receiving or acquiring the same, free from the claim of the other party to any community rights therein.
3. On July 15, 1931, plaintiff and her husband executed a property settlement in contemplation of a divorce. This property settlement made no changes in the foregoing agreement set out in finding 2.
4. On March 14, 1931, plaintiff filed her Federal income tax return for the calendar year 1930, disclosing a net income of $55,922.24, and a resultant tax liability of $5,736.37, all of which was paid more than two years prior to the filing of the claim for refund hereafter mentioned.
Plaintiff's husband, John Gilbert, filed his Federal income tax return for the calendar year 1930 on March 14, 1931, disclosing a net income of $410,153.72 and a tax liability of $93,204.05, all of which has been paid.
5. On March 15, 1932, plaintiff filed her Federal income tax return for the calendar year 1931, reporting a net income of $56,703.33 and a tax liability of $5,874.82, all of which was paid more than two years prior to the filing of the claim for refund.
Plaintiff's husband, John Gilbert, filed his Federal income tax return for the calendar year 1931 on March 15, 1932, and reported therein a net income of $470,952.52 and a tax liability of $108,280.79, all of which has been paid.
6. After an audit the Commissioner of Internal Revenue determined that the income of the plaintiff and of John Gilbert for the calendar years 1930 and 1931 should, for Federal income tax purposes, be allocated according to the community property laws of the State of California; that is, one-half of the income of each should be attributed to the other. As a result of this ruling and certain other noncontested adjustments the Commissioner made the following determination:
(a) Deficiencies in tax were asserted against plaintiff in amounts of $49,130.71 and $52,802.51 for the years 1930 and 1931, respectively;
(b) Overassessments and overpayments were determined in favor of plaintiff's husband, John Gilbert, in amounts of $40,393.88 and $49,413.79 for the years 1930 and 1931, respectively.
7. The aforesaid deficiencies were duly assessed against the plaintiff with interest thereon on assessment lists approved by the Commissioner of Internal Revenue on March 11, 1933, as to the year 1930, and on September 16, 1933, as to the year 1931.
The aforesaid overassessments in favor of John Gilbert were made the subject of Certificates of Overassessment which were listed on Schedule of Overassessments No. 49399 approved by the Commissioner on March 16, 1933, as to the year 1930, and on Schedule No. 5116 approved by the Commissioner on November 16, 1933, as to the year 1931. The said Certificates of Overassessment were duly delivered to John Gilbert. These determinations were made with knowledge of the agreement of May 31, 1930, referred to in finding 2.
8. On December 1, 1932, the plaintiff and her husband executed a paper denominated a "Consent Providing for Crediting Overassessment against Deficiency" for the year 1930, which was duly filed with the Commissioner of Internal Revenue, and which reads as follows:
"Consent providing for crediting overassessment against deficiency
"We, the undersigned taxpayers, hereby request and agree to have any and all overassessments representing overpayments by either party of Federal Income Taxes, applied as credits against any additional Federal Income Taxes due from the other party: Provided further, That the amount, if any, of the overpayment which is in excess of the said deficiency is otherwise credited or refunded in accordance with Section 322 of the Revenue Act of 1928 [26 U.S.C.A.Int.Rev. Acts, page 436].
"Los Angeles, Calif. (Place) "12/1/32. (Date) "John Gilbert. (Husband) "Ina Claire Gilbert. (Wife)"
On June 1, 1933, plaintiff and her husband executed another paper denominated a "Consent Providing for Crediting Overassessment against Deficiency" for the year 1931, which was duly filed with the Commissioner of Internal Revenue, and which reads verbatim as the above consent, except for its date.
These consents were executed on forms which had been prepared and furnished by the Treasury Department for that purpose.
9. The deficiency assessed against the plaintiff for the year 1930 and interest was satisfied as follows:
------------------------------------------------------- Amount | Date | Source -----------|---------------|--------------------------- $40,393.88 | Mar. 16, 1933 | Credit from John | | Gilbert 1930 overpayment. 3,243.33 | Mar. 16, 1933 | Credit of interest on | | above overpayment. 9,686.05 | May 27, 1933 | Cash. 1,143.85 | Feb. 3, 1934 | Cash. 56.50 | Feb. 3, 1934 | Cash. -------------------------------------------------------
The deficiency assessed against the plaintiff for the year 1931 and interest was satisfied as follows:
-------------------------------------------------------- Amount | Date | Source -----------|----------------|--------------------------- $49,413.79 | Sept. 22, 1933 | Credit from John | | Gilbert 1931 overpayment. 111.72 | Nov. 16, 1933 | Credit of interest on | | above overpayment. 329.32 | May 27, 1933 | Cash. 23.71 | Oct. 17, 1933 | Cash. 3,059.40 | May 27, 1933 | Cash. 1,632.40 | Nov. 27, 1934 | Cash. 2,586.97 | Jan. 14, 1935 | Cash. ---------------------------------------------------------
10. On May 25, 1935, the plaintiff filed with the appropriate Collector of Internal Revenue claims for refund of taxes for the years 1930 and 1931 in the respective amounts of $44,111.01 and $52,473.19, plus interest paid thereon.
On July 21, 1936, the Bureau of Internal Revenue wrote plaintiff proposing to disallow said claims for the reason stated, in part, as follows:
"Relative to the first issue, your attention is invited to General Counsel Memorandum 14198 (Internal Revenue Cumulative Bulletin XIV-1,261) in which it was held that agreements between the spouses with reference to future earnings would not, in the State of California, affect the otherwise taxable status of such earnings, and that the decision in the case of Helvering v. Hickman ([9 Cir.] 70 F.2d 985, Court Decision 866, Internal Revenue Cumulative Bulletin XIII-2, 274) should not be considered as revoking General Counsel Memorandum 9938 (Internal Revenue Cumulative Bulletin X-2, 115) and General Counsel Memorandum 9953 (Internal Revenue Cumulative Bulletin XI-1, 13).
"In General Counsel Memorandum 9938, referred to above, it was held that under Section 161(a) of the Civil Code of California, which became effective July 29, 1927, a husband's earnings in California constitute community income; and that an agreement between husband and wife domiciled in California, which provides that the husband's personal earnings and salary are his separate property and income, is not effective to preclude the taxation of his salary as community income. To the same effect is General Counsel Memorandum 9953, where the salaries of both husband and wife were involved."
Plaintiff was finally notified of the rejection of the claims by letter dated March 5, 1937.
11. Prior to November 2, 1937, the Commissioner reversed his position as set out in the foregoing finding, and on that date plaintiff requested reconsideration of her claims for refund, but this was denied in a letter which reads, in part, as follows: "It is the position of the Bureau that inasmuch as your claims were filed after it was too late to make concurrent adjustment in the returns of your husband (now deceased) the overpayment made by you may not be refunded to the detriment of the Government. In support of this position, the Bureau relies on the doctrine of equitable estoppel, which doctrine is frequently applied to transactions in which it is found that it would be unconscionable to permit a person to maintain a position inconsistent with one in which he has acquiesced or from which he has received any benefit. (See 10 Ruling Case Law, page 694.) In Humes Construction Company v. Philadelphia Casualty Company, ( 32 R.I. 246, 79 A. 1 [Ann.Cas. 1912d 906]) it is said that courts of law will recognize the broad equitable principle that a person with full knowledge of facts shall not be permitted to act in a matter inconsistent with his former position or conduct to the injury of another."
12. On August 14, 1939, the Bureau of Internal Revenue wrote the Collector of Internal Revenue at Los Angeles, California, authorizing him to reverse the credits to plaintiff's deficiency of the overassessments against John Gilbert. This letter reads, in part, as follows: "* * * The records of this office show that the overassessment listed on Schedule IT:51561 was adjusted as a credit in the amount of $111.72. The overassessment on Schedule IT:51156 was adjusted as a credit in the amount of $49,413.79. The overassessment on Schedule IT:49399 was adjusted as credits in the amounts of $40,393.88 and $3,243.33. You are hereby authorized to reverse these credits and to report the adjustment on your next Form 820. Your accounts should be adjusted by debiting account 6a and crediting account 18 in the total amount of $93,162.72. * * *"
On August 16, 1939, the Collector wrote the Bureau of Internal Revenue advising it that the credits had been reversed in accordance with instructions.
13. On August 19, 1939, the Bureau of Internal Revenue wrote plaintiff advising her of this action in a letter, which reads as follows:
"In view of the suit filed by you in the United States Court of Claims and in accordance with the decision of the Circuit Court of Appeals for the Ninth Circuit in the Helvering v. Hickman case, 70 F.2d 985, and the decision of the United States Court of Claims in Corinne Griffith Marshall v. United States [88 Ct.Cl. 393], 26 F. Supp. 474, the following adjustments have been made in your tax liability for the years 1930 and 1931: The credits of apparent overpayments of income taxes of John Gilbert for 1930 and 1931, which were erroneously applied against deficiencies of income tax assessed against you for those years, have been cancelled.
"Further action on your claims for refund will be held in abeyance pending final disposition of your suit in the United States Court of Claims."
14. If the overassessments against John Gilbert for the year 1930 be credited to plaintiff's alleged deficiency, she has overpaid her tax in the amount of $44,111.01, and has overpaid interest thereon in the amount of $4,891.18. If the overassessments against John Gilbert be not credited to plaintiff's alleged deficiency, she has overpaid her tax and interest in the amount of $5,264.98.
If the overassessments against John Gilbert for the year 1931 be credited to plaintiff's alleged deficiency for that year, she has overpaid her tax for that year in the amount of $52,473.19, and has overpaid interest thereon in the amount of $4,140.23. If the overassessments against John Gilbert be not credited to the alleged deficiencies against plaintiff, she has overpaid her tax for that year in the amount of $7,087.91.
15. The interest computed by the Commissioner of Internal Revenue on the overassessments against John Gilbert for the years 1930 and 1931 in the amounts of $3,243.33 and $2,586.97, respectively, were included by the Commissioner in the income of John Gilbert for the years 1933 and 1934, respectively, and taxes were assessed and collected thereon.
The plaintiff, Ina Claire, an actress, during the years 1930 and 1931, was the wife of John Gilbert, a motion picture actor. They were residents of the State of California, under whose law a spouse is entitled to one-half of the earnings of the other spouse. However, on May 31, 1930, the plaintiff and her then husband entered into a written agreement, under the terms of which all the income earned by each spouse was to be the sole and separate property of the party receiving it, free from the community rights of the other therein.
Each of the parties returned income on the basis of this agreement, and not on the basis of the community property law of California, and paid taxes accordingly. The Commissioner of Internal Revenue, however, in auditing the returns of the parties taxed the plaintiff and her husband each with one-half of the joint income of the two. This resulted in a deficiency in the tax liability of the plaintiff and in an overassessment against her husband. In this situation the defendant requested plaintiff and her husband to execute a paper prepared by it, denominated "Consent Providing for Crediting Overassessment against Deficiency." This consent reads: "We, the undersigned taxpayers, hereby request and agree to have any and all overassessments representing overpayments by either party of Federal Income Taxes, applied as credits against any additional Federal Income Taxes due from the other party: * * *" Under the terms of this agreement the overassessment against John Gilbert was applied toward the satisfaction of the deficiency of the plaintiff, and there was also applied against this deficiency interest due John Gilbert on the overassessment. The balance the plaintiff paid in cash.
On May 25, 1935, plaintiff filed claims for refund for the years 1930 and 1931 in the respective amounts of $44,111.01 and $52,473.19. These claims were rejected on March 5, 1937. In his letter the Commissioner refused to follow the decision of the Circuit Court of Appeals for the Ninth Circuit, in Helvering v. Hickman, 70 F.2d 985, holding that the income of a spouse should be taxed in accordance with the agreement between the parties rather than in accordance with the community property law. Subsequently, the commissioner decided that he would follow the Hickman case and, accordingly, plaintiff asked for reconsideration of her claim. This request was denied because — "It is the position of the Bureau that inasmuch as your claims were filed after it was too late to make concurrent adjustment in the returns of your husband (now deceased) the overpayment made by you may not be refunded to the detriment of the Government. In support of this position the Bureau relies on the doctrine of equitable estoppel * * *."
About a year after this suit was instituted, on August 14, 1939, the Commissioner of Internal Revenue instructed the Collector to reverse the credit to Ina Claire's deficiency of the overassessment against John Gilbert. This was done by the Collector on August 16, 1939, of which plaintiff was duly notified.
If the Collector's action in reversing the credit of the overassessment against John Gilbert to the plaintiff's deficiency is void, there can be no doubt that the plaintiff is entitled to recover. Both the Circuit Court of Appeals for the Ninth Circuit in Hickman v. Helvering, supra, and this court in Marshall v. United States, 88 Ct.Cl. 393, 26 F. Supp. 474, have held that a taxpayer living in California must be assessed in accordance with any agreement between herself and her spouse for the division of their income, instead of in accordance with the community property law of that State. And the Commissioner of Internal Revenue today acquiesces in this view, as we think he must. This being true, the plaintiff has overpaid her tax, unless the Collector had the right to reverse the credit to her tax liability of the overassessment against John Gilbert.
It seems to us too clear to require extended discussion that the Collector was without such authority. The overassessment against John Gilbert could not be credited against the plaintiff's deficiency except by his consent. His consent thereto was tantamount to his giving to the plaintiff the amount of the refund to which he was entitled for the purpose of allowing her to apply it to her alleged deficiency in tax. Had the refund actually been made to John Gilbert, and had he handed the money to his wife, and had she then paid it in part satisfaction of her tax liability, the Collector could not now insist that she had not paid in full the deficiency assessed. What was done amounted to the same thing. Ford Motor Co. v. United States, 81 Ct.Cl. 30, 9 F. Supp. 590, certiorari denied 296 U.S. 636, 56 S.Ct. 170, 80 L.Ed. 452.
The consent executed by the plaintiff and John Gilbert was an agreement between them and the Commissioner as to the application of his overassessment. That agreement was consummated in accordance with its terms and, of course, is not now subject to revocation without the consent of all parties.
The position taken by the Bureau that the plaintiff is prevented from recovering by "the doctrine of equitable estoppel" is wholly without merit. It is not relied on by defendant's counsel. The Bureau's action in denying the refund was arbitrary; the excuse offered affords no justification therefor.
It also seems clear to us that the defendant's present position, that the consent filed by the taxpayer and her husband on December 1, 1932, and June 1, 1933, may now be availed of to credit the overpayment by the plaintiff against the present deficiency of John Gilbert, is also without merit. That consent was executed at the time there was a deficiency outstanding against the plaintiff and overassessments against her husband. It was a consent to the application of the then outstanding overassessment against John Gilbert to the then outstanding deficiency of the plaintiff. That agreement has been fully consummated, and when consummated, became functus officio. It cannot be availed of now to rescind the action previously taken under it. Compare Newport Industries, Inc., v. Commissioner, 40 B.T.A. 977.
Plaintiff's correct tax liability for the year 1930 was $10,756.07. She has paid a total tax for that year of $54,867.08, and interest of $5,336.40. Her claim for refund was filed on March 25, 1935. Payments made within two years prior thereto amount to a total of $10,886.40. This amount plaintiff is entitled to recover, with interest at 6 per cent on $1,200.35 thereof from February 3, 1934, and on $9,686.05 thereof from May 27, 1933. The application of John Gilbert's overassessment of tax and interest to the 1930 deficiency was made more than two years prior to the filing of the claim for refund, and for this reason plaintiff is not entitled to recover any amount on account of these applications.
For the year 1931 plaintiff's correct tax liability was $6,204.14. She has paid a total tax of $58,677.33, and interest of $4,166.21. The credit of John Gilbert's overassessments and the cash payments made on the deficiency were all made within two years prior to the filing of the claim for refund. Eliminating from these payments the additional payments admittedly due from the plaintiff and interest thereon, plaintiff is entitled to recover for this year the sum of $56,613.42, with interest as provided by law on $2,586.97 thereof from January 14, 1935; on $1,632.40 from November 27, 1934; on $111.72 from November 16, 1933; on $23.71 from October 17, 1933; on $49,413.79 from September 22, 1933; and on $2,844.83 from May 27, 1933. It is so ordered.