Opinion
[Copyrighted Material Omitted] Action by the Pacific Coast Biscuit Company against the United States.
Judgment for plaintiff in accordance with opinion.
In this case plaintiff seeks to recover $34,762.44 as interest which it is alleged the defendant erroneously and illegally refused to pay on $73,504.60, a portion of an overpayment for 1919. The Commissioner of Internal Revenue refused to pay interest on that portion of the 1919 overpayment mentioned on the ground that it was a proper credit against additional taxes for 1917, 1918, and 1923. Plaintiff here sues for interest on the ground that the additional taxes for 1917 and 1918 had been paid to the collector of internal revenue January 7, 1929, pursuant to a regular assessment made by the Commissioner upon which notice and demand had been made by the collector prior to the Commissioner's formal allowance January 25, 1929, of an overassessment and overpayment of $106,996.33 for 1919.
Special Findings of Fact.
1. Plaintiff, a New Jersey corporation with its principal place of business at Seattle, Wash., filed its income tax return for 1917 on April 30, 1918, showing a tax of $8,437.42 which was paid June 15, 1918. It filed its return for 1918 on June 16, 1919, showing a total tax of $358,205.23, all of which, except $15,750, was paid during 1919. A claim for abatement of the last-mentioned amount was filed and that amount was subsequently abated. March 15, 1920, plaintiff field its return for 1919 showing a tax of $188,363.44. This tax, with the exception of $521.60, was paid in the amounts of $47,090.86 on March 15, 1920, $46,218.78 on June 15, 1920, $47,090.86 on September 15, 1920, $46,569.26 on December 16, 1920, and $872.08 on August 26, 1926. A claim for abatement of $521.60 was filed and that amount was subsequently abated. The returns for 1918 and 1919 were consolidated returns and included the income and invested capital of a number of other affiliated corporations.
2. March 26, 1923, the Commissioner made a jeopardy assessment of an additional tax of $20,786.69 for 1917. Upon receipt of this assessment, the collector at Tacoma, Wash., on march 31, 1923, noticed plaintiff of such assessment and demanded payment. April 3, 1923, plaintiff filed a claim for abatement of the full amount of the additional assessment, which claim stated in part as follows:
"The Pacific Coast Biscuit Company, which is the parent company, filed a consolidated income and excess profits tax return for the years 1918 and 1919, and paid for the year 1918 fifty percent of its net income in taxes, awaiting the final determination of its tax under sections 327 and 328 of the 1918 revenue law for the reason that it was impossible to determine its invested capital. For the year 1919 the maximum amount of taxes was paid under the limitation section, namely section 302(b). In view of the aforestated facts, it is apparent there is a substantial refund due as for these years. "The fact that we were given no opportunity to appeal the 1917 assessment, together with having paid the maximum amount of taxes for the years 1918 and 1919, is ample reason for the filing of this abatement claim."
Upon receipt of this claim the collector advised plaintiff that it could not be accepted as a stay of collection unless a surety bond was furnished or Liberty bonds were deposited to protect the collector and the government. The president of the Pacific Coast Biscuit Company gave the collector his personal guaranty of the account which the collector accepted, reserving at the same time the right to require plaintiff at any time to furnish a surety bond. At various times thereafter the collector required plaintiff to execute waivers extending the plaintiff to execute waivers extending the statutory period of limitation for collecting the additional tax assessed for 1917.
3. March 10, 1924, the Commissioner determined and made a jeopardy assessment of an additional tax of $59,890.34 for 1918. Upon receipt of this assessment the collector on March 20, 1924, notified plaintiff thereof and demanded payment. March 22, 1924, plaintiff filed a claim for abatement of the full amount of the additional assessment. Thereafter the collector from time to time required plaintiff to execute waivers extending the period of limitation for collecting the additional tax for 1918. No surety bond or personal guaranty having been furnished, the collector on December 9, 1925, wrote plaintiff as follows:
"In April of 1924, additional 1918 income tax was assessed against your company in the amount of $58,890.334. A claim for abatement was duly filed and accepted by this office. At the time the claim for abatement was filed, it was accepted without bond or deposit of securities guaranteeing the payment of the amount finally found to be due. The waiving of the requirement that a bond be filed, or the accounting guaranteed, was based on the assumption that the case would be satisfactorily adjusted between your company and the department within a reasonable length of time. "Over eighteen months have now elapsed since this claim was filed, but, insofar as we have been advised, no satisfactory agreement has as yet been reached. "Will you kindly advise us as to the present situation of this case, and inform us as to whether or not a settlement has been agreed upon, if so, the amount and the nature of the settlement. "If no settlement has been reached, then it will be necessary for your company either to arrange to pay the tax due, or, in lieu thereof, guarantee payment either by the filing of a surety bond or by the deposit of securities in the Federal Reserve Bank subject to the order of this office."
In reply to this letter the plaintiff wrote the collector on December 12, 1925, as follows:
"Responding to yours of December 9th, regarding additional 1918 income tax assessed our company: Beg to say that Agent Densmore for the Internal Revenue Department turned in a report to Washington last month, showing a net overassessment of $126,569.76 covering the years 1919 to 1921, both inclusive. We asked Mr. Holt, the local agent in charge for the Internal Revenue Department, to advise you likewise, so you might have it officially as to the correctness of this general statement. "Under the circumstances, we trust you will not feel it necessary to insist on a surety bond or a deposit of securities, for the Department owes us considerably more than that which is coming to them."
The internal revenue agent in charge also wrote the collector verifying the above statement of plaintiff.
The tax liability of plaintiff for the years 1917 to 1922, inclusive, was under consideration by the officials of the Bureau of Internal Revenue for several years prior to 1929. For the years and during the times herein mentioned, plaintiff and its affiliated corporations were represented before the Treasury Department by Peat-Marwick, Mitchell & Co., a firm of certified public accountants. At some time not disclosed by the record the Commissioner determined an overpayment in respect of plaintiff's tax for 1913 and drew a check for such overpayment, which, together with interest, amounted to $1,381.61. This check was sent to the collector for delivery, and on April 9, 1927, the collector advised plaintiff by letter that this check which he held represented a refund of 1913 tax and interest; that his records showed unpaid 1917 tax of $20,786.69, unpaid 1918 tax of $59,890.34, and unpaid 1919 tax of $521.60; and that "It will therefore be necessary for your office to forward us a certified check for $1,381.61, which is the exact amount of the refund check we hold payable to your order, upon receipt of which we will forward our refund check and apply your check on your account." Accordingly, plaintiff on April 13, 1927, paid to the collector $1,381.61, and that amount was entered by the collector upon his account against plaintiff in April, 1927, as a payment upon the outstanding additional tax assessed for 1918.
4. From the date of filing of the agent's report with the Commissioner in November, 1925, the matter of the tax liability of plaintiff and its affiliated corporations was under consideration and audit by the Commissioner's office. There were a great many questions involved concerning the tax liability of plaintiff and its affiliated corporations for the years 1917 and 1923, inclusive. Conferences were held between the Commissioner's office and the taxpayer's representatives subsequent to November, 1925, and briefs on behalf of the taxpayer and its affiliated corporations were filed with the Commissioner November 15, 1927. Further conferences were held, and at a conference on January 18, 1928, certain additional information and affidavits were filed on behalf of plaintiff and its affiliated corporations. As a result of these conferences and consideration of the information submitted, a plan of settlement of all matters in controversy was agreed upon which was satisfactory to both parties subject to preparation by the Income Tax Unit of a detailed audit letter and approval thereof by the General Counsel of the Bureau of Internal Revenue of certain overassessments which would be disclosed, subject also to approval by the Commissioner. A part of the plan of settlement was that plaintiff and its affiliated corporations would upon completion of the final audit execute a closing agreement as to the principal amount of the tax liability determined for each and all years 1917 to 1923, inclusive. The suggested plan of settlement of all the matters in controversy was worked out and agreed upon informally after several days of conference early in January, 1928. After the plan was agreed upon between plaintiff and the Audit Review Division of the Income Tax Unit and had been submitted to and approved by the General Counsel of the Bureau of Internal Revenue, the preparation of the final detailed audit was begun and plaintiff's authorized representative was advised at a conference at that time that the final audit would be prepared substantially on the basis agreed upon. The basis for the final audit indicated overassessments for years subsequent to 1918. The abatement claims which plaintiff had filed for 1917 and 1918, as hereinbefore mentioned, were being considered in connection with this audit. After the suggested basis of settlement of the items in controversy had been approved by the office of the General Counsel of the Bureau of Internal Revenue after conferences with plaintiff's authorized representative, this representative of plaintiff advised it that the final audit for all the years involved was being prepared on the basis theretofore informally agreed upon, subject, of course, to final approval by the Commissioner of Internal Revenue. The detailed final audit, consisting of 85 pages and 109 schedules, was completed on or shortly prior to December 8, 1928. This audit showed that the additional assessment of $20,786.69 for 1917 made in March, 1923, was excessive in the amount of $12,228.50 and that, in addition to the additional assessment of $59,890.34 for 1918 made March 10, 1924, there was a further additional tax due of $5,047.39; that plaintiff's refund claims for the years 1919 to 1922, inclusive, would be allowed in the amounts of $106,996.33, $80,685.66, $84,428.18, and $190.42, respectively, and that there was an additional tax of $6.85 due for 1923. On December 8, 1928, plaintiff, through Arnold C. Anderson, its authorized representative and attorney in fact, requested the Audit Review Division of the Income Tax Unit, Bureau of Internal Revenue, to deliver to him for transmittal to plaintiff a copy of the Bureau's final audit and computation of tax liability of plaintiff and computation of tax liability of plaintiff and its affiliated corporations for each of the years 1917 to 1923, inclusive. At that time this audit had been completed and approved. In accordance with the request mentioned, there was delivered to plaintiff's authorized representative and attorney in fact such final audit and determination which was by him mailed to plaintiff at Seattle, Wash. At the time plaintiff's representative personally requested that this final audit be delivered to him for transmittal to the taxpayer such audit had attached to it, as the first page thereof, the customary 60-day notice prepared in accordance with section 274(a) of the Revenue Act of 1926 (44 Stat. 55), which section authorized the taxpayer to take the case to the United States Board of Tax Appeals. Inasmuch as the parties were in substantial agreement as to all the items in controversy with respect to the tax liability for each and all the years involved, the formal 60-day letter was detached from the detailed final audit and was not mailed. No appeal to the Board of Tax Appeals was taken by plaintiff from this final determination by the Commissioner.
5. Soon after the receipt by plaintiff at its Seattle office of the Commissioner's final audit and determination for each of the years 1917 to 1923, inclusive, plaintiff, on January 5, 1929, wrote the collector at Tacoma inclosing its check for $75,105.71 in payment of the outstanding additional assessment made against it for 1918 on March 20, 1924, in the amount of $58,508.73 with interest to January 7, 1929, in the amount of $16,596.98. In the same letter plaintiff inclosed its check for $11,506.49 and stated that $8,558.19 was to be applied on account of the additional assessment made against it in 1923 (in the amount of $20,786.69) for 1917 and that $2,948.30 was to be applied in payment of interest thereon from April 10, 1923, to January 7, 1929. This letter of plaintiff, with which it inclosed checks as above mentioned, was as follows:
"There is an unpaid income tax additional assessment against the Pacific Coast Biscuit Company for the year 1918 carried at your office in the amount of $58,508.73 for which check is enclosed, together with interest up to January 7th, 1919, and amounting to $16,596.98, making the total therefore $75,105.71. "Now in addition thereto would advise that in the prosecution of our income tax problems at Washington, D.C., we are aware that your records show an additional assessment against us for 1917 amounting to $20,786.69 but this according to advice from our representative at Washington has been reduced to $8.558.19, and concerning which you will receive advice in due course. We realize that you would not feel authorized to accept in full payment anything less than what your records show listed against us, so in handing you check for $8.558.19 plus interest of $2,948.30 from April 10th, 1923 to January 7th, 1929, it is being done with the request that you please accept this as on account of principal and interest, it being understood, of course, that when you receive final advice from Washington that you will give us due credit accordingly against the balance that you would be carrying against us for that year. "Now in like manner we would say that we realize your records show $980.49 additional assessment for 1917 against the Connecticut Improvement Company of Seattle. In due course you will receive advice that such amount has been reduced to $27.76 and we are handing you check herewith for that amount, plus interest, of $9.61 covering period from March 31st, 1923 to January 7th, 1929. "You also have an item against the Tacoma Biscuit and Candy Company, Tacoma, additional assessment 1917, which according to your records is $973.96 and which we are advised by our Washington correspondent is to remain at that figure and so accordingly are handing you check herewith which takes care of it, plus $337.15 covering interest from March 31st, 1923 to January 7th, 1929. "Our object in making payment at this time is to do our part towards taking care of these various items in the manner indicated as it will stop further interest on what we know will have to be paid sooner or later and are pleased to be able to know that two of these items, the Pacific Coast Biscuit Company for 1918 and Tacoma Biscuit and Candy Company for 1917 are strictly in accord with your present records, and we are absolutely confident the other two will be found correct in due course when you eventually get proper advice from Washington and for those two can only expect a receipt to apply on account and which we will appreciate."
This letter, with the checks transmitted therewith, was received in the office of the collector on January 7, 1929. Upon receipt of these checks the office of the collector, not having been advised that the final determination of the Commissioner on December 8, 1928, had been delivered to the taxpayer showing the allowance of plaintiff's claims for refund in large amounts for the years 1919 to 1922, inclusive, applied the amount of the checks transmitted by plaintiff in the amounts requested by plaintiff against the outstanding additional assessments on his records for 1917 and 1918 and on the following day, January 8, 1929, the collector's office wrote to plaintiff as follows:
"Receipt is acknowledged of your letter of January 5, 1929, relating to certain income-tax accounts therein enumerated. "You state that 1918 outstanding tax due from the Pacific Coast Biscuit Company is $58,508.73. This is correct according to my records. You then compute the interest on this amount to be $16,596.98, making a total of $75,105.71, which you paid. "The interest due on account of this 1918 balance is $17,102.26, instead of $16,596.98. Your payment is therefore $505.28 short. "The error in your computation is apparently twofold. In the first place, you still owe interest on an item of $1,381.61, the amount was paid by you on April 13, 1927. Interest on this amount ran from March 20, 1924, to the date the payment was made. "In the second place, the interest on the present balance of $58,508.73 ran from March 20, 1924, to the date of payment. You apparently computed it from April 15, 1924, instead of from March 20th. In my letter of December 5, 1928, I told you that this interest ran from March 15, 1924. That letter should have read from March 20, 1924. "I will therefore appreciate your paying the balance of $505.28 which is left on the 1918 account. "You paid part of the 1917 balance, plus what you figured to be accrued interest on the amount which is being paid. Interest on $8.558.19, the amount you admit is due, runs from March 31, 1923, to January 7, 1929, and is in the amount of $2,962.42. You will therefore note that the interest payment on this 1917 account is $14.12 sort. Such amount also should be paid to enable me to close my record on this part of the tax."
On January 10 plaintiff, without further explanation of the matter, paid the additional amounts of $505.28 and $14.12 specified in the collector's letter of January 8 and thereupon the collector's office on the same day issued and sent to plaintiff receipts for the total of the payments made as follows:
"Receipt for Payment of Taxes Original (Additional 1917 income tax assessed by Commissioner of Internal Revenue) Collector's Office, District of Washington at Tacoma. Date January 7 & 10, 1929. (Name and address of taxpayer) Pacific Coast Biscuit Company, Central Building, Seattle, Washington.Burns Poe, Collector of Internal Revenue." "Receipt for Payment of Taxes Original (Additional 1918 income assessed by the Commissioner of Internal Revenue) Collector's Office, District of Washington at Tacoma. Date January 7 & 10, 1929. (Name and address of taxpayer) Pacific Coast Biscuit Company, Central Building, Seattle, Washington.
Tax ............................
$ 8,558.19
Interest .......................
2,962.42
---------------
Amount .....................
$11,520.61
Received payment.
Received payment. Burns Poe, Collector of Internal Revenue."
Tax ............................
$58,508.73
Interest .......................
17,102.26
---------------
Amount .....................
$75,610.99
At or soon after the dates when the aforementioned remittances were received from plaintiff and the receipts above set out were issued by the collector's office, the collector began consideration of the matter as to how these payments should be treated by his office and whether they had been properly treated and applied in view of the record of correspondence in his office and in view of Treasury Department A. & C. mimeograph, Coll. No. 3638, dated June 4, 1928, which circular is in evidence as Defendant's Exhibit C and is made a part hereof by reference. As a result of the information which the collector then had, as disclosed by the correspondence between his office, the plaintiff, and the internal revenue agent in charge, who had made the investigation of the tax liability of plaintiff for the years 1919 to 1923, inclusive, the collector was uncertain whether, in view of Treasury Department Circular A. & C. No. 3638, the remittances which had been made should be credited on the outstanding and unpaid assessments for 1917 and 1918 or whether they should be held in a suspense account to await further information and action by the Commissioner with respect to the tax liability for other years which the collector knew from his records had been under consideration by the Commissioner for several years. Accordingly, the collector on January 15, 1929, wrote the Commissioner of Internal Revenue as follows:
"In Re: Pacific Coast Biscuit Company. "It is requested that this office be advised as to whether or not the provisions of A. & C. Mim. Coll. No. 3638 applies to the following case: "An assessment of 1917 income tax was made against this company on my March 1923 List, page 14, line 8, which account is covered by an abatement claim. Part of the tax disclosed by the original 1918 return of the company and assessed on my 1919 annual list, serial No. 440261, remains unpaid and is also covered by an abatement claim. "A complete investigation of the tax liability of the company was made by an internal revenue agent for the years 1909 to 1920 inclusive and as a result thereof, overassessments were disclosed for the years 1909, 1910, 1911, 1913, 1916, 1917, 1919, and 1920. The investigation also showed additional tax assessable for the year 1918. The overpayments have never been scheduled to my office due to the fact that the whole matter was appealed to the Board of Tax Appeals. "On January 7, 1929 the company received advice from its attorneys in Washington to pay part of these assessments. The amount paid is what they consider the amount due as a result of a decision of the Board of Tax Appeals or of an agreement and is the amount payable for 1917 and 1918 after deducting the amounts which are presumably being abated for these two years. "The company, therefore, on January 7, 1929, paid $8,544.07 for the year 1917 and $58,257.60 for the year 1918, plus accrued collection interest on both accounts. "Am I precluded from crediting the payment to the respective accounts until such time as formal certificates of overassessment are received, if they are ever to be issued? "It appears to me that in a case of this kind, I am privileged to credit the payment to the account which it is intended to cover, but, before doing so, I am referring the matter to you for specific instructions. As these payments are not held in my suspense account, I will appreciate your early reply."
Upon receipt of this letter the Commissioner on January 22, 1929, advised the collector as follows:
"Receipt is acknowledged of your letter dated January 15, 1929, relative to outstanding taxes against the Pacific Coast Biscuit Company. You state that the taxpayer has made payment for what they consider the amount due, and request information as to the manner of closing the accounts for the years now before the Bureau. "You are advised that the assessment of $5,047.39 plus interest of $873.82 for the year 1918 and $6.85 plus interest of $1.83 for the year 1923 was made on the Commissioner's January No. 3 List, which should be in your office at this time. Overassessments indicated below are now ready for schedule and should be received in your office within a few days."In accordance with A. & C. Mim. Coll. # 3638, you should hold the amount advanced by the taxpayer in your unidentified collections account, pending adjustment of the overassessments to be scheduled. "You are advised that this taxpayer did not file an appeal with the Board of Tax Appeals relative to the deficiencies mentioned above, since the final agreement as to the liability for the years 1917 to 1923, inclusive, was signed by the taxpayer and, therefore, no sixty-day letter was ever mailed in respect to this deficiency."
1917 ..........
$ 12,228.50
1919 ..........
106,996.33
1920 ..........
80,685.66
1921 ..........
84,428.18
1922 ..........
190.42
Upon receipt of the above-mentioned letter from the Commissioner, the collector changed the entries which had been made upon the records of his office upon receipt of plaintiff's checks on January 7 and 10, 1929, as hereinbefore mentioned, and transferred the amounts which had been remitted by plaintiff on these dates, together with plaintiff's payment of $1,381.61 on April 13, 1927, to his "suspense account" to be there held until receipt from the Commissioner of the additional assessment list for 1918 and 1923 and a schedule of overassessments for 1917 and for 1919 to 1922, inclusive, in accordance with the Commissioner's final audit and determination of December 8, 1928. The additional assessment of $5,047.39 principal and $873.82 interest for 1918 and of $8.68 for 1923 was made January 19, 1929. The assessment list covering this additional assessment was received by the collector November 25, 1929. No notice and demand for payment was issued inasmuch as the assessment list bore a notation advising the collector to withhold demand pending comparison with overassessments for 1917 and 1919 to 1922, inclusive.
6. January 25, 1929, the Commissioner, in accordance with his final determination which had been delivered to plaintiff December 8, 1928, approved a schedule of overassessments, Form 7920, listing, among other assessments, an overassessment in favor of plaintiff in the amount of $106,996.33 for 1919 as well as the overassessments in favor of plaintiff hereinbefore mentioned for 1917 and the years 1920 to 1922, inclusive. This overassessment schedule was mailed to the collector for appropriate action in accordance with directions appearing thereon and was received by the collector January 21, 1929. Among the directions appearing on this schedule of overassessments there were the following:
"Authorization of Commissioner "This schedule must be adjusted and all required steps taken immediately. "The amounts listed in column 3 as overassessments (or reductions of tax liability) are hereby approved and allowed in the respective amounts indicated, if any. "The Collector will immediately check such items against the accounts of the taxpayers and determine whether the amounts in which the tax liabilities have been reduced should be respectively abated in whole or in part and make such abatements as may be warranted by the condition of the taxpayer's accounts for the years involved. If any part of any such item is found to be an overpayment, the Collector will examine all accounts of the taxpayer for other periods and apply the overpayment as a credit against income, war profits or excess profits taxes due, if any, making the appropriate entries in his accounts. The amounts credited will be entered by the Collector in column 6. The balance, if any, of the overpayment refundable will be entered in column 7 and an appropriate memorandum made upon the taxpayer's account showing the refund and the amount refunded. The Collector will thereupon complete and certify this schedule and return the same, with the necessary copies, to the Commissioner of Internal Revenue. "The Deputy Commissioner of Internal Revenue will compute the interest payable, list the same in column 8, and enter the respective total amounts payable in column 9 or 10, or both. "The Disbursing Clerk, Treasury Department, is authorized to pay the amounts specified in column 9 or 10, or both."
There was also transmitted to the collector with the schedule of overassessments the Commissioner's instructions to the collector on Form 368-M to the effect that "No part of this overassessment will be certified on form 7805-A for refund pending the receipt of the next assessment list for your district, which will carry additional taxes against this taxpayer as follows: 1918, $5,921.21; 1923, $8.68. Upon receipt of that assessment list, the amount of this certificate of overassessment must be offset against the additional tax shown thereon in accordance with section 284(a) of the Revenue Act of 1926 ."
Upon receipt of the above-mentioned schedule of overassessments, the collector made appropriate entries on his books of account crediting $73,504.60 of the assessment of $106,996.33 for 1919, which was found to be an overpayment, against the additional tax assessed and due for 1917, 1918, and 1923. He certified the schedule of overassessments to the Commissioner on February 2, 1929, after making appropriate entries thereon, reporting that the overassessment of $12,228.50 in respect of the additional assessment of $20,786.69 made for 1917 and March 1923 should be abated; that of the total assessment of $106,996.33 for 1919 the amount of $521.60 was abated, because not paid; that $73,504,60 had been credited in the amount of $8,558.19 to 1917, $58,890.34 and $5,047.39 to 1918, and $8.68 to 1923; and that the balance of $32,970.13 of the overpayment for 1919 and the overpayments scheduled for 1920, 1921, and 1922 were refundable.
7. Upon receipt of the schedule of overassessments for 1917 and 1919 to 1922, inclusive, and at the time the above-mentioned credits of portions of the 1919 overpayment were made to taxes due for 1917, 1918, and 1923, the collector prepared notices of refund on Form 844, hereinafter set forth in finding 8, for the refund to plaintiff, out of the collector's expense account, of amounts remitted to the collector on April 13, 1927, and on January 7 and 10, 1929, in the total amount of $11,520.61 on account of additional taxes and interest assessed for 1917 and $76,992.60 assessed for 1918, treating such remittances as excess payments of tax and interest for 1917 and 1918 in the amounts stated.
The schedule of overassessments of January 25, 1929, showing the credits of portions of the overpayment for 1919 to the tax for 1917, 1918, and 1923 and the amounts refundable for the years 1919 to 1922, inclusive, together with the notices of refund prepared by the collector on account of the payments theretofore made by plaintiff and held by the collector in his "suspense account," was forwarded to and received by the Commissioner on or prior to February 23, 1929. Inasmuch as the total of the amount shown as overpayments and refundable for the years 1919 to 1922, inclusive, was in excess of $75,000, no refund or credit thereof could be made until approved by, or until 30 days after a report of such allowed overpayments had been made to, the Joint Committee on Internal Revenue Taxation as required by section 710 of the Revenue Act of 1928 (26 U.S.C.A. § 1677). In order that the amounts reported by the collector as refundable and interest thereon might not be paid before approval by the Joint Committee on Internal Revenue Taxation, or until the expiration of 30 days after report of the allowed overpayments had been made to such committee, a line was drawn through the figure $73,504.60 appearing in the column headed "amount credited to other taxes due" and a line through the figure $32,970.13 appearing on the schedule in the column headed "net amount refundable"; both amounts relating to the overassessment for 1919 and the overpayments reported as refundable by the collector for the other years, 1920 to 1922, inclusive, in the amounts of $80,685.66, $84,428.18, and $190.42, were likewise eliminated and a notice was made opposite such eliminated figures reading "eliminated under section 710 of the Revenue Act of 1928." At the same time a supplemental schedule of allowed overassessments and credits shown by the collector on the original schedule was prepared, and the signatures of the Commissioner and the collector and the dates as shown on the original schedule as to issuance of the schedule by the Commissioner and its return by the collector were typewritten on this supplemental schedule. The overpayments shown by the collector as refundable for the years 1920 and 1922, inclusive, were also entered upon this supplemental schedule. The credits and overpayments theretofore allowed by the Commissioner having been approved by the Joint Committee on Internal Revenue Taxation, the Commissioner on March 19, 1929, approved the supplemental schedule, IT-33064, authorizing the disbursing clerk to make the overpayments specified in column 9 of that schedule, which was a duplicate of the original schedule prepared by the Commissioner and returned by the collector. On March 21, 1929, a check in the amount of $284,706.50 was mailed to plaintiff through the collector, together with certificates of overassessment for the years 1919 to 1922, inclusive. The overpayment for 1919 was disposed of by crediting $73,504.60 to the years 1917, 1918, and 1923, leaving a balance of $32,970.13 refundable as reported by the collector February 2, 1929. The total of $284,706.50 paid to plaintiff by the above-mentioned check consisted of amounts refunded and interest thereon as follows:
Year
Amount refundable
Interest
Total
-------------------------------------------------
(
$324.56
$49.48
)
1919 ......
(
)
$49,341.29
(
32,970.13
15,997.12
)
1920 ......
80,685.66
37,229.82
117,915.48
1921 ......
84,428.18
32,791.29
117,219.47
1922 ......
190.42
39.84
230.26
-----------
284,706.50
The portion of the 1919 overpayment credited to other years was made up of the following items:
To the additional tax for the year 1917 .....
$ 8,558.19
To the additional tax for the year 1918 .....
59,890.34
To the additional tax for the year 1918 .....
5,047.39
To the additional tax for the year 1923 .....
8.68
----------
Total ....................................
$73,504.60
No interest was paid on the portion of the 1919 overpayment of $73,504.60 credited to taxes assessed for 1917, 1918, and 1923, as hereinbefore mentioned.
8. The Commissioner signed the notices of refund for 1917 and 1918 prepared by the collector, as hereinbefore mentioned, in the amounts of $11,520.61 and $76,992.60 on account of remittances by plaintiff to the collector on April 13, 1927, and January 7 and 10, 1929, after the Commissioner had made his final audit and determination which had been delivered to plaintiff, but before the collector had received advice from the Commissioner as to the overassessments allowed, and these notices of refund were delivered to plaintiff March 22, 1930. The notice of refund for 1917 was as follows:
"Refund is due for the following reason: A statement of your 1917 income tax accounts is given below:
"The payments noted below were intended by you to cover the reduced additional 1917 assessment of $8,558.19 with collection interest thereon. However, since this liability of $8.558.19 was satisfied in full by crediting thereto a 1919 overassessment in that amount, the following payments are excessive and are herewith refunded:
Original 1917 income tax assessed: paid 6/15/18..............................
$ 8,437.42
Additional 1917 income tax assessed ....
20,786.69
Abated as erroneous assessment, 1/31/29.
12,228.50
----------
Corrected additional 1917 assessment ...
8,558.19
1919 income tax overassessment credited, 1/25/29..............................
8,558.19
----------
.00
"A Treasury check for the amount refundable, as indicated by the foregoing, is transmitted herewith. "Refund is due for the following reasons: A complete statement of your 1918 income tax accounts (original and two additional assessments) is given on the sheet attached hereto. "The payments noted below were intended by you to cover the first additional 1918 income tax assessment of $59,890.34, together with collection interest thereon. However, as you will note from the attached statement, this liability of $59,890.34 was satisfied in full by crediting thereto a 1919 overassessment in that amount. Therefore the following payments are excessive and are refunded:
Paid 1/7/29 .........................
$ 8,544.07x
Paid 1/7/29 (intended as interest) ..
2,962.42
Paid 1/10/29 ........................
14.12x
-----------
Total overpayment ................
11,520.61
"A Treasury check for the amount refundable, as indicated by the foregoing, is transmitted herewith."
Paid 4/13/27 .........................
$ 1,381.61x
Paid 1/7/29 ..........................
58,257.60x
Paid 1/7/29 (intended as interest) ...
16,848.11
Paid 1/10/29 .........................
251.13x
Paid 1/10/29 (intended as interest) ..
254.15
-----------
Total overpayment .................
76,992.60
These notices of refund were accompanied by checks in favor of plaintiff in the total amount of $94,998.08 in payment of the amount shown by such certificates, together with interest of $6,484.84 computed upon the amounts remitted to the collector April 13, 1927, and January 7 and 10, 1929, on account of outstanding assessments of taxes for 1917 and 1918, to March 17, 1930.
9. Pursuant to the understanding between the plaintiff and the Commissioner early in 1928 when a basis of settlement of all the matters in controversy with respect to the tax liability of plaintiff and its affiliated corporations for the years 1917 to 1923, inclusive, was agreed upon, a settlement agreement, Form 866, dated April 8, 1929, as to the principal amount of the tax liability finally determined by the Commissioner for each of the taxable years in question, pursuant to section 606 of the Revenue Act of 1928 (26 U.S.C.A. § 1660), was signed by the plaintiff and its affiliated corporations. This closing agreement was approved by the Secretary of the Treasury May 11, 1929, and was as follows:
"Whereas, there has been a determination of the tax liability of said taxpayers in respect of income tax for the said periods listed above in the principal sum of six hundred eighty thousand, forty-seven dollars and nineteen cents ($680,047.19); and "Whereas said taxpayers hereby agree to this determination and consent to the assessment and collection of any deficiency in tax included in the amount of the principal tax liability so determined, together with any penalty or interest applicable thereto as provided by law, and/or to accept any abatement, credit, or refund made in accordance with such determination, together with any interest due thereon as provided by law. "Now, this agreement witnesseth, that said taxpayers and said Commissioner of Internal Revenue hereby mutually agree that the principal amount of such liability so determined shall be final and conclusive if and when this agreement is approved by the Secretary of the Treasury or the Under Secretary." James S.Y. Ivins, of Washington, D.C. (Ivins, Phillips, Graves & Barker, of Washington, D.C., on the brief), for plaintiff.
John A. Rees, of Washington, D.C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, Sp. Assts. to Atty. Gen.,on the brief), for defendant.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
LITTLETON, Judge.
In substance the facts in this case show that in March, 1923, the Commissioner of Internal Revenue made a jeopardy assessment of an additional tax of $20,786.69 for 1917 and on April 3 plaintiff filed a claim for abatement of the entire additional assessment on the grounds, first, that the taxpayer had not had an opportunity to appeal to the Commissioner under the provisions of the Revenue Act of 1921 (42 Stat. 227) from the determination of the Income Tax Unit, and, second, that the taxpayer was entitled to special assessment for 1918 and 1919 and that a substantial refund would be due the taxpayer for these years. The years 1918 and 1919 and plaintiff's claims for special assessment and for refund were then under consideration by the Commissioner.
Later, the Commissioner, on March 10, 1924, made a jeopardy assessment of an additional tax of $59,890.34 for 1918 before plaintiff's claims for special assessment and for refund had been finally decided and before a final audit and determination had been made for 1917 or any subsequent year. Plaintiff filed a claim for abatement of this additional assessment. At that time, or shortly thereafter, a reinvestigation of the tax liability of plaintiff and its several subsidiary corporations for the year 1917 to 1922, inclusive, was in progress by the internal revenue agent in charge at Seattle, Wash. The final investigation by the agent in charge was completed in November, 1925, and a full report thereof was made to the Commissioner which indicated an additional tax for 1918, recommended overassessments for subsequent years of $266,830.49, and showed a net overassessment for all the years involved of $126,569.76. Plaintiff on behalf of itself and affiliated corporations filed various waivers and claims for refund. The officials of the Bureau of Internal Revenue proceeded with consideration and audit of the tax liability of plaintiff and its affiliated corporations for the years 1917 to 1923, inclusive, in connection with the returns, revenue agent's reports, and claims for abatement and refund. Various conferences and hearings were held in the Bureau of Internal Revenue between the officials of the Commissioner's office and the authorized representatives and officers of plaintiff with the result that early in 1928, after such hearings and the submission of evidence and briefs by plaintiff, an informal agreement was arrived at between the officials of the Audit Review Division of the Income Tax Unit of the Bureau of Internal Revenue and plaintiff as a basis of settlement of all the items in controversy affecting the tax liability of the consolidated group for the years 1917 to 1923, inclusive, subject to approval of the General Counsel of the Bureau of Internal Revenue and the Commissioner. As a part of the suggested basis of settlement of the matters in controversy, plaintiff agreed to execute a closing agreement as to the principal amount of tax liability finally determined by the Commissioner. The suggested basis for final audit was approved by the General Counsel, Bureau of Internal Revenue, and officials of the Audit Review Division proceeded to prepare a final audit for each of the years involved for approval by the Commissioner as his final determination with respect thereto. This final determination by the Commissioner was completed and approved on or about December 8, 1928, and was ready for mailing to plaintiff in accordance with section 274 of the Revenue Act of 1926 (44 Stat. 55), when Arnold C. Anderson, one of the taxpayer's authorized representatives and attorney in fact, requested that the final audit be delivered to him for transmission to plaintiff. This was done and inasmuch as the parties were in agreement as to the matters affecting the tax liability for all the years involved, the customary 60-day deficiency notice under section 274 of the Revenue Act of 1926 was not formally mailed by the Commissioner to the taxpayer. The final audit and determination of the Commissioner was sent to plaintiff at its Seattle, Wash., office by its representative to whom such audit and determination had been delivered by the Commissioner's office. No advice was given to the collector at Tacoma with reference to the results of this final determination by the Commissioner. On or shortly after the receipt by plaintiff from its representative in Washington of the Commissioner's final determination showing additional taxes totaling $73,504.60 to be due for the years 1917, 1918, and 1923 and overpayments totaling $272,300.59 for the years 1919 to 1922, inclusive, plaintiff mailed to the collector its checks for the amount of the additional taxes found to be due for 1917 and 1918 with interest thereon as computed by plaintiff. These checks reached the collector's office before the collector had received advice from the Commissioner as to his final determination, to which plaintiff had agreed, for the years 1917 to 1923, inclusive; and inasmuch as the collector had standing on his books the assessments theretofore made by the Commissioner for 1917 and 1918, the plaintiff's checks were, as requested by it, applied as payments on account of the taxes assessed for those years. However, when the matter came to the attention of the collector's office, the collector concluded, in the light of previous correspondence between his office, the plaintiff, and the internal revenue agent in charge, that the amount of the checks remitted by plaintiff on January 7 and 10, 1929, should probably be entered and held in the collector's "suspense account" awaiting advice from the Commissioner as to his final determination as to the result of his decision with respect to the tax liability of plaintiff for 1919 and subsequent years. Accordingly, the collector changed the action taken by his office in applying the remittances by plaintiff to the outstanding assessments for 1917 and 1918 and entered such amounts in his suspense account to be there held until receipt of information from the Commissioner with references to the result of his decision for 1919 and subsequent years on plaintiff's claimed overpayments. A letter was written to the Commissioner asking for such information and the Commissioner replied that the remittances by plaintiff should be held by the collector in his suspense account and that the allowed overassessments for 1919 and subsequent years should reach the collector within a short time. The overassessments for 1919 to 1922, inclusive, as finally determined by the Commissioner and set forth in detail in his final audit theretofore delivered to plaintiff in December, 1928, were scheduled and allowed by the Commissioner in January, 1929, and upon receipt by the collector that official credited a portion of the overpayment allowed for 1919 to the unpaid additional tax finally determined by the Commissioner to be due for 1917 and 1918 and the small additional tax for 1923 and certified the balance of the overpayment for 1919 and the allowed overpayments shown on the schedule for 1920 to 1922, inclusive, as refundable with interest. At the same time the collector prepared and sent to the Commissioner notices of refund on Form 844 with respect to the amounts remitted by plaintiff on April 13, 1927, and January 7 and 10, 1929, as payments intended by plaintiff on account of the outstanding unpaid additional taxes and interest for 1917 and 1918, which amounts the collector continued to hold as excess payments in his suspense account. The action of the collector in satisfying the additional taxes due for 1917 and 1918 by credit from the overpayment allowed for 1919 and reporting as refundable the balance of such overpayment for 1919, together with the payments remitted by plaintiff with respect to the taxes for 1917 and 1918, before the collector received advice from the Commissioner as to overpayments for 1919, and approved by the Commissioner and the amounts remitted by plaintiff and held by the collector in his suspense account were refunded to plaintiff with interest. These actions of the collector and the Commissioner give rise to the controversy here.
Plaintiff contends that the collector had no right to hold in his suspense account the payments made by it in January, 1929, on account of the outstanding special assessments for 1917 and 1918 and subsequently refund the same as excess payments. In other words, plaintiff contends that the additional taxes finally determined by the Commissioner to be due for 1917 and 1918 having been paid before the collector received the schedule of overassessments and before the Commissioner approved such schedule, the entire overpayments for 1919 and subsequent years should have been refunded with interest from the dates on which such overpayments were made. On this basis plaintiff would have received interest of $34,762.44 in excess of the interest which was allowed and paid on the overpayment of $106,966.33 for 1919. If the credit complained of was in all respects proper and legal, no additional interest is due for the reason that the due date of the tax for 1917 and 1918 satisfied by credit was prior to the date of the overpayment determined for 1919.
In the circumstances of this case, we think the credit was legal and proper with the exception of $1,381.61 paid by the plaintiff April 13, 1927, on account of the 1918 additional assessment and the failure of the Commissioner to pay any interest on that portion of the 1919 overpayment credited to the additional tax due for 1923. With these exceptions, the question presented is controlled by decisions of this court in Standard Oil Co. (Indiana) v. United States, 5 F.Supp. 976, 7 F.Supp. 301, 78 Ct.Cl. 714; Eastman Kodak Co. v. United States, 13 F.Supp. 435, 82 Ct.Cl. 504; Harnischfeger Corporation v. United States, 17 F.Supp. 205, 84 Ct.Cl. 17.
With respect to the amount of $1,381.61 paid by plaintiff on account of the additional tax assessed for 1918 on April 13, 1927, on demand of the collector, it appears that at the time this amount was collected and duly applied by the collector against the outstanding assessment no conclusion, decision, or final determination had been reached or made by the Commissioner with respect to the tax liability of any year of which an overassessment was determined and no such decision was made for more than a year thereafter. Moreover, it was not a voluntary payment made of a deficiency after a determination of an overpayment for another year in order to avoid a credit, but this payment was made at the demand of the collector. In these circumstances, the collector was not authorized to change his books almost two years later and transfer the amount paid April 13, 1927, to his suspense account to be later refunded as an excess payment because of the determination by the Commissioner of an overassessment for a subsequent year. Libby, McNeil & Libby v. United States, 9 F.Supp. 673, 80 Ct.Cl. 579.
Plaintiff is therefore entitled to recover interest on $1,381.61 at 6 per cent per annum from December 16, 1920, the date of the overpayment for 1919, to April 13, 1927. Judgment will accordingly be entered in favor of plaintiff for $518.72 on this item. We allow interest on this erroneous credit of the 1919 overpayment only to April 13, 1927, for the reason that the Commissioner, when he returned to the taxpayer the amount of $1,381.61 paid on that date, allowed and paid interest thereon from April 13, 1927, to March 17, 1930.
With reference to the credit of $8.68 of the 1919 overpayment against an additional tax in that amount for 1923, it appears that the Commissioner paid no interest on that credit. This credit was proper and legal, but the statute provides that in such a case interest shall be paid on the amount credited from the date of overpayment to the due date of the tax against which credited. The 1919 tax which was credited to 1923 was overpaid December 16, 1920. The due date of the tax for 1923 against which the credit was made was, in the circumstances of this case, March 15, 1924. Plaintiff is therefore entitled to recover interest at 6 per cent, per annum on $8.68 of the overpayment for 1919 credited to 1923 from December 16, 1920, to March 15, 1924. Plaintiff is therefore entitled to recover $1.68 on this credit.
Judgment will accordingly be entered in favor of plaintiff for $520.40. It is so ordered.