Philadelphia Rapid Transit Co. v. United States, (1935)

Full title: PHILADELPHIA RAPID TRANSIT CO. v. UNITED STATES

Court: United States Court of Federal Claims

Date published: Apr 8, 1935

10 F. Supp. 591 (Fed. Cl. 1935)

Opinion

No. 41905.

April 8, 1935.

Hugh Satterlee, of Washington, D.C. (Weill, Satterlee, Spence Blakely, of Washington, D.C., and Ballard, Spahr, Andrews Ingersoll, of Philadelphia, Pa., on the brief), for plaintiff.

John T. Koehler and John A. Rees, both of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.

Before BOOTH, Chief Justice, and LITTLETON, WILLIAMS, and WHALEY, Judges.

Action by the Philadelphia Rapid Transit Company against the United States.

Judgment for plaintiff.

This case having been heard by the Court of Claims, the court, upon the report of a commissioner and the evidence, makes the following special findings of fact:

1. Plaintiff is, and at all times hereinafter mentioned was, a Pennsylvania corporation with its principal office and place of business in Philadelphia.

2. April 15, 1920, an extension of time for the filing thereof having been granted and a tentative return having been theretofore filed on or before March 15, 1920, plaintiff duly filed its consolidated income and profits tax return for the calendar year 1919. The return showed plaintiff to be the parent corporation and the following named corporations to be the subsidiary corporations included therein: Chester Philadelphia Street Railway Company; Broad Street Rapid Transit Street Railway Company; Broad Street Boulevard Street Railway Company; Bustleton Byberry Rapid Transit Street Railway Company; Cayuga Torresdale Street Railway Company; Glenwood Rapid Transit Street Railway Company; Moyamensing Southwark Rapid Transit Street Railway Company; Mt. Vernon Shawmont Rox Street Railway Company; Parkside Rapid Transit Company; Park Avenue Carlisle Street Passenger Railway Company; Fairmont Park Railway Company; Tioga Venango Streets Passenger Railway Company; L.A. Thompson Mountain Scenic Railway Company; Willow Grove Park Company; and Motor Real Estate Company.

The return showed a total income tax liability of $161,297.62, which was assessed against plaintiff and paid by it as follows:

April 15, 1920 ..................... $ 40,324.41 June 16, 1920 ...................... 40,324.40 September 15, 1920 ................. 40,324.41 December 15, 1920 .................. 40,324.40 ----------- Total ............................ $161,297.62

The aforesaid amount was received by the defendant from the collector in the due course of his official business.

None of the corporations referred to in these findings as "Lessor Corporations" was included in the return.

3. March 15, 1921, plaintiff duly filed its consolidated income and profits tax return for the calendar year 1920. The return showed plaintiff to be the parent corporation and those corporations referred to in these findings as "Lessor Corporations," as well as certain other corporations, the names of which are not material, to be the subsidiary corporations included therein. The "Lessor Corporations" had been ruled affiliated with the plaintiff in a letter to it from the Commissioner of Internal Revenue dated May 22, 1920. The return showed a total income and profits tax liability of $838,583.63, which was assessed against plaintiff and paid by it as follows:

March 15, 1921 ..................... $209,645.91 June 15, 1921 ...................... 209,645.90 September 16, 1921 ................. 209,645.90 December 15, 1921 .................. 209,475.82 ----------- Total ............................ $838,413.53

leaving an unpaid balance of $170.10, which was covered by plaintiff's claim duly filed for credit of overpayment for other years and which claim was approved and allowed by the Commissioner May 11, 1922. The amount of $838,583.63 was received by defendant from the collector in the due course of his official business.

4. March 15, 1925, and March 15, 1927, plaintiff duly filed claims for the refund of the taxes paid for 1919, as set out in finding 2, and March 12, 1925, and March 15, 1927, likewise filed claims for the refund of the taxes paid for 1920, as set out in finding 3.

5. Prior to April 20, 1929, and after a ruling by the Commissioner (subsequent to the filing of the 1920 and 1921 returns) that the Lessor Corporations were not affiliated with plaintiff for 1919, 1920, and 1921, the Commissioner determined deficiencies against the Lessor Corporations as follows:

1919 1920 1921

Brown Parrish Sts. Rwy. ... $36.30 $107.75 $153.84 Catherine Bainbridge ...... 663.30 3,142.56 4,244.54 Centennial Pass. Rwy. ....... 36.30 107.75 153.84 Citizens Clearfield ......... 6.11 43.10 61.55 Citizens East End ........... 36.30 107.75 153.84 Citizens North End .......... 57.67 280.14 399.99 Citizens Pass. Rwy. ......... ........... 10,913.15 24,978.49 Electric Traction Co. ....... 16,861.85 75,551.88 106,489.53 Frankford Southwark ....... ........... 72,268.93 18,595.48 Germantown Pass. Rwy. ....... 4,532.42 20,301.56 ........... Girard Ave. Pass. Rwy. ...... ........... 21.55 ........... Hestonville Mantua .......... ........... 14,127.74 ........... Hillcrest Ave. Pass. Rwy. ... 24.20 86.20 ........... Huntington St. Connect. ..... 3.80 57.49 ........... Kessler St. Connect. ........ ........... 19.16 ........... Lehigh Ave. Rwy. ............ 1,746.86 7,800.85 ........... Northern Pass. Rwy. ......... 36.30 107.75 ........... Peoples Pass. Rwy. .......... 8,113.46 30,190.58 ........... Peoples Traction Co. ........ 14,781.80 54,799.90 ........... Phila. Cheltenham ........... 103.13 474.08 ........... Phila. City Pass. ........... ........... 13,849.72 ........... Phila. Gray's Ferry ......... 1,378.17 6,307.21 ........... Phila. Traction Co. ......... 15,350.75 179,126.06 ........... Phila. Willow Grove ....... 1,099.56 1,874.78 ........... Ridge Ave. Connect. ......... 3.80 57.49 ........... Ridge Ave. Pass. ............ ........... 16,756.02 ........... Second Third .............. 7,260.31 32,863.95 ........... Seventeenth Nineteenth .... 416.41 1,907.54 ........... 22nd Allegheny ............ 2,631.87 8,814.50 ........... Union Traction Co. .......... ........... 41,675.88 ........... Walnut St. Connect. ......... 89.87 402.40 ...........

The aforesaid deficiencies were agreed to by the Lessor Corporations and were duly assessed against them by the Commissioner April 20, 1929.

On or about April 26, 1929, notices and demands were issued to the Lessor Corporations referred to above for the amounts of the deficiencies, which notices and demands were duly received by the Lessor Corporations.

The Lessor Corporations were not affiliated with plaintiff within the meaning of section 240 of the Revenue Act of 1918 ( 40 Stat. 1081), or section 240 of the Revenue Act of 1921 ( 42 Stat. 260), for any of the years 1919, 1920, and 1921.

6. The corporations herein referred to as Lessor Corporations were, for the purposes of this case, corporations whose properties were during 1919, 1920, and 1921, as well as prior and subsequent thereto, leased by them severally as lessor, to plaintiff as lessee, under contracts which each contained a provision as follows: "Lessee shall and will, during the continuance of the term hereby created, assume the payment of, and will faithfully and punctually pay all taxes, charges, licenses, and assessments now or hereafter lawfully imposed upon Lessor or for which Lessor would otherwise in anywise be liable or chargeable on account of its corporate existence, or its franchises, property, real or personal, cars, business earnings, bonds, capital stock, dividends, or profits, and any sum which shall hereafter be levied or assessed upon any shareholder of Lessor or upon his shares, by way of direct tax upon said shares or the income thereof, which Lessor shall be required to pay on behalf of, or to retain from any such shareholder, so that Lessor shall be able to declare and pay to its shareholders, free of tax of any and every kind, levied by any authority, national, State, or local, the semiannual dividends per share, hereinbefore specified in paragraph one hereof, in gold coin during the continuance of this lease. All of said taxes, charges, licenses, and assessments shall be paid directly by Lessee to the proper authorities levying the same. Lessee shall also be liable for, and shall pay, all assessments, taxes, and charges of every kind whatsoever which Lessor has undertaken to pay or may be required to pay on behalf of each, every, and all of its leased lines, as aforesaid; and the same shall be paid directly by Lessee to the proper authorities."

7. Within ten days after notice and demand was issued to the Lessor Corporations, as shown in finding 5, namely, May 3, 1929, attorneys representing plaintiff held a conference with the Assistant Secretary of the Treasury (who, among his several duties, was charged with the supervision of the Internal Revenue Bureau) for the purpose of securing a delay in the collection of the taxes from the Lessor Corporations until final allowance of claims for refund which had been filed on behalf of plaintiff for 1919 and 1920 (as shown in finding 4) and which were then in process of adjustment by the Commissioner. In urging such a course of action plaintiff's counsel represented that under its lease agreements with the Lessor Corporations it was under obligation to pay the taxes of the Lessor Corporations and that it would be impractical, if not impossible, to raise the funds to meet the demands for the deficiencies against the aforementioned corporations until it received the refunds which were then in process of adjustment on account of its own returns for the same years. The Assistant Secretary inquired whether it was desired to have the overpayments of plaintiff, when finally allowed, applied as credits against the deficiencies of the Lessor Corporations, which the collector was then seeking to collect. The attorneys for plaintiff replied that what they desired was to have collection of the deficiencies from the Lessor Corporations withheld until plaintiff obtained funds through the payment of its refunds, but that they were unwilling to have the overpayments applied as credits against the deficiencies because the overpayments would bear interest from the date of payment of the tax, whereas the deficiencies would only bear interest from date of the passage of the Revenue Act of 1926 ( 44 Stat. 9), and that they did not desire to have the overpayments applied in any manner that would deprive them of any of their full amount of interest. The Assistant Secretary of the Treasury suggested that interest be computed on the overpayments and also on the deficiencies separate and distinct from each other and that the overpayments (including interest) when finally allowed be offset (in so far as the overpayment might be sufficient or necessary) against the deficiencies (including interest) when finally collected, and that the collection of the deficiencies be withheld until the overpayments were allowed. The attorneys for plaintiff assented to the arrangement suggested by the Assistant Secretary of the Treasury and the latter requested the Assistant to the Commissioner of Internal Revenue to take the necessary steps to have it carried out.

While the foregoing conference was informal in character, and the understanding was not reduced to writing, and while the Assistant Secretary of the Treasury did not have before him the file of the Bureau of Internal Revenue in the case, nor did he have information in regard to the case other than that furnished by plaintiff's attorneys, both the Assistant Secretary and plaintiff's attorneys were well aware of the problem presented.

The collection of the deficiencies was withheld as requested by plaintiff's attorneys and as shown in finding 10, but the interest arrangement was not observed, as hereinafter shown.

8. Pursuant to the conference with plaintiff's attorneys (referred to in finding 7), May 4, 1929, the Assistant to the Commissioner sent the following letter to the collector at Philadelphia, Pa.:

"The attorney for the Philadelphia Rapid Transit Company advises me that you have issued warrants of distraint to collect assessments made against the associated companies.

"There is a large overassessment coming through in favor of the Philadelphia Rapid Transit Company and the Bureau has reached an agreement to offset the deficiencies assessed against the associated companies, with the result that there will be a substantial refund made to the Philadelphia Rapid Transit Company after the tax deficiencies of the associated companies have been liquidated.

"I wish you would withhold the service of warrants for distraint pending the settlement of the case.

"If you do not have a list of the associated companies, I will be glad to furnish the same, but as it is necessary that this letter go forward today, I haven't the time to obtain the desired information."

The collector accordingly withheld collection of the deficiencies from the Lessor Corporations in accordance with the suggestion contained in the foregoing letter.

9. On or before March 25, 1930, the Commissioner audited and examined plaintiff's returns and claims for refund for 1919 and 1920 and allocated $21,855.83 of the tax assessed and paid upon plaintiff's 1919 return, and $104,572.98 of the tax assessed and paid upon plaintiff's 1920 return, to certain subsidiary corporations included in the returns, leaving as the tax assessed against and paid by plaintiff the amounts of $139,441.79 for 1919 and $734,010.65 for 1920. Such adjustments were in accordance with agreements between plaintiff and the said companies to whom such amounts were allocated, and instructions accompanying the returns, and were in accordance with the provisions of section 240 of the Revenue Act of 1918. The corporations to whom the aforesaid amounts of $21,855.83 and $104,572.98 were allocated were not corporations referred to in these findings as Lessor Corporations.

10. After an examination and audit of plaintiff's returns and consideration of plaintiff's claims for refund for 1919 and 1920, the Commissioner, on March 25, 1930, signed schedules of overassessments, abatements, credits, and refunds on forms 7920, designated as schedules IT-38287 and IT-38285, showing determined overassessments in favor of plaintiff for the years 1919 and 1920 in the respective amounts of $90,636.41 and $734,010.65.

11. April 7, 1930, the attorneys for plaintiff held a conference with the General Counsel for the Bureau of Internal Revenue with respect to the matter of interest on plaintiff's overpayments of taxes for 1919, 1920, and 1921. The attorneys, April 11, 1930, filed with the General Counsel a memorandum brief, and April 23, 1930, filed with him a letter supplemental thereto. In the memorandum brief the attorneys for plaintiff submitted the argument, and authorities which they considered to be in support thereof, that the Commissioner was without legal authority to use plaintiff's overpayments for 1919, 1920, and 1921 as statutory credits against the deficiencies hereinbefore referred to of the Lessor Corporations in such a manner as to deprive plaintiff of interest on its overpayments. They further insisted that plaintiff's understanding had with the Assistant Secretary of the Treasury be followed as to the manner in which plaintiff's overpayments, with full interest thereon, should be used to discharge the deficiencies of the Lessor Corporations, with interest thereon.

12. September 17, 1930, the Commissioner transmitted to the collector at Philadelphia, Pa., the schedules of overassessments numbers IT-38287 and IT-38285, referred to in finding 10, accompanied by a letter, the material portions of which were as follows:

"Transmitted herewith are schedules #38285 and #38287 on which overassessments have been allowed to the Philadelphia. Rapid Transit Company as follows:

Year Schedule Overassessment

1919 ............... #38287 $90,636.41 1920 ............... #38285 734,010.65 1921 ............... #38287 896,487.34

The overassessments were in large measure due to the fact that the above-named taxpayer, which operates the street railway properties of 53 companies under 999-year leases, filed consolidated returns for itself and some of the lessor companies and paid the tax due from them. The unit has now eliminated the lessor companies from the consolidated returns on the ground that they were not affiliated under section 240 of the Revenue Acts of 1918 and 1921, and has allowed overassessments for the years 1919, 1920, and 1921 to the taxpayer, and has assessed deficiency taxes for the same years against the lessor companies.

"The unit proposes to apply the overpayments made by the lessee as credits to the taxes due from the lessors, and to allow interest as provided by law in the case of credits.

"The taxpayer seeks to invoke the principle of separate taxable entities and to secure interest on the apparent overpayments as provided by law in the case of refunds.

"A verbal understanding with the taxpayer's attorney has been reached, however, and it is agreed that the taxpayer will raise no obstacle at this time to the adjustment proposed by this office but will take the case to court for judicial review of its rights.

"The names of the lessor companies as of record in this office are as follows: [Here follows the names of the Lessor Corporations].

"The records of this office show assessments against certain of these companies on the April 1929 list no. 3. It is understood that with the exception of comparatively small amounts paid by credit from overpayments previously allowed, these taxes are outstanding.

"You are hereby authorized to apply the overpayments listed on schedules no. 38285 and no. 38287 in the name of the Philadelphia Rapid Transit Company as follows: The 1919 overpayment should be applied to the taxes for the same year assessed against the lessor companies; the 1920 overpayment should be applied against the balance of the 1919 taxes, if any, and to the 1920 taxes assessed against the lessor companies; the balance of the 1920 overpayment, if any, should be applied to the 1921 tax and interest assessed against the lessor companies; the 1921 overpayment should be applied to the 1921 taxes and interest assessed against the lessor companies, to any tax and interest outstanding against the Philadelphia Rapid Transit Company for any year, and to any deficiencies and interest outstanding against any of the lessor companies for any other year."

13. Thereafter, the collector, upon receipt of the schedules and letter referred to in finding 12, examined the accounts of plaintiff and the accounts of the Lessor Corporations appearing on the assessment lists in his office. He found the overassessments of $90,636.41 and $734,010.65 in favor of the plaintiff for the years 1919 and 1920, respectively, to be overpayments and applied the same as credits against the deficiencies due by Lessor Corporations; the application thereof being as follows: In respect to the overassessment and overpayment of $90,636.41 for 1919, in the amounts and against the deficiencies of the Lessor Corporations as shown in Exhibit A of the petition, as set out below, and in respect to the overassessment and overpayment of $734,010.65 for 1920, in the amounts and against the deficiencies of the Lessor Corporations as shown in Exhibit B of the petition, as set out below:

Exhibit A of Petition Philadelphia Rapid Transit Co., 810 Dauphin Street, Philadelphia, Penna. Overassessment for the year 1919 $90,636.41. Schedule IT:A:38287 dated 3/25/30 Credited to additional 1919 Brown Parrish Sts. Rwy. ....... April 01 C # 3-1929 L $36.30 " " " " Catherine Bainbridge .......... " 04 C # 3 " 663.30 " " " " Centennial Pass. Rwy. ........... " 07 C # 3 " 36.30 " " " " Citizens Clearfield ............. " 12 C # 3 " 6.11 " " " " Citizens East End ............... " 15 C # 3 " 36.30 " " " " Citizens North End .............. " 18 C # 3 " 57.67 " " " " Electric Traction Co. ........... " 27 C # 3 " 16,861.85 " " " " Germantown Pass. Rwy. ........... " 36 C # 3 " 4,532.42 " " " " Hillcrest Ave. Pass. Rwy. ....... " 45 C # 3 " 24.20 " " " " Huntingdon St. Connect. ......... " 52 C # 3 " 3.80 " " " " Lehigh Ave. Rwy. ................ " 58 C # 3 " 1,746.86 " " " " Northern Pass. Rwy. ............. " 62 C # 3 " 36.30 " " " " Peoples Pass. Rwy. .............. " 69 C # 3 " 8,113.46 " " " " Peoples Traction Co. ............ " 72 C # 3 " 14,781.80 " " " " Phila. Cheltenham ............... " 75 C # 3 " 103.13 " " " " Phila. Gray's Ferry ............. " 80 C # 3 " 1,378.17 " " " " Phila. Traction Co. ............. " 85 C # 3 " 15,350.75 " " " " Phila. Willow Grove ........... " 88 C # 3 " 1,099.56 " " " " Ridge Ave. Connect. ............. " 91 C # 3 " 3.80 " " " " Second Third .................. " 96 C # 3 " 7,260.31 " " " " Seventeenth Nineteenth ........ " 99 C # 3 " 416.41 " " " " 22nd Allegheny ................ " 103 C # 3 " 2,631.87 " " " " Walnut St. Connect. ............. " 109 C # 3 " 89.57 " " " 1920 Brown Parrish ................. " 02 C # 3 " 107.75 " " " " Catherine Bainbridge .......... " 05 C # 3 " 3,142.56 " " " " Centennial Pass. ................ " 08 C # 3 " 107.75 " " " " Citizens Clearfield ............. " 13 C # 3 " 43.10 " " " " Citizens East End ............... " 16 C # 3 " 107.75 " " " " Citizens North End .............. " 19 C # 3 " 280.14 " " " " Citizens Pass. Rwy. ............. " 21 C # 3 " 10,913.15 " " " " Girard Ave. Pass Rwy. ........... " 39 C # 3 " 21.55 " " " " Hillcrest Pass. ................. " 46 C # 3 " 86.20 " " " " Kessler St. Connect. ............ " 55 C # 3 " 19.16 " " " " Northern Pass. Rwy. ............. " 63 C # 3 " 76.87 " " " " Ridge Ave. Connect. ............. " 92 C # 3 " 57.49 " " " " Walnut St. Connect. ............. " 111 C # 3 " 402.40 ------- Total .................................... 90,636.41 Exhibit B of Petition Philadelphia Rapid Transit Co., 810 Dauphin Street, Philadelphia, Penna. Overassessment for year 1920 $734,010.65. Schedule IT:A:38285 dated 3/25/30 Credited to additional 1920 Electric Traction Co. ............ April 28 C # 3 1929 L. $75,551.88 " " " " Frankford Southwark ............ " 34 C # 3 " 72,268.93 " " " " Germantown Pass. Rwy. ............ " 37 C # 3 " 20,301.56 " " " " Hestonville Mantua ............... " 43 C # 3 " 14,127.74 " " " " Huntington St. Connect. .......... " 53 C # 3 " 57.49 " " " " Lehigh Ave. Rwy. Co. ............. " 59 C # 3 " 7,800.85 " " " " Northern Pass. Rwy. .............. " 63 C # 3 " 30.88 " " " " Peoples Pass. Rwy. ............... " 70 C # 3 " 30,190.58 " " " " Peoples Traction Co. ............. " 73 C # 3 " 54,799.90 " " " " Phila. Cheltenham ................ " 76 C # 3 " 474.08 " " " " Phila. City Pass. ................ " 78 C # 3 " 13,849.72 " " " " Phila. Gray's Ferry .............. " 81 C # 3 " 6,307.21 " " " " Phila. Traction Co. .............. " 86 C # 3 " 179,126.06 " " " " Phila. Willow Grove .............. " 89 C # 3 " 1,874.78 " " " " Ridge Ave. Pass. ................. " 94 C # 3 " 16,756.02 " " " " Second Third ................... " 97 C # 3 " 32,863.95 " " " " 17th 19th Sts. Pass. ........... " 100 C # 3 " 1,907.54 " " " " 22nd Allegheny ................. " 104 C # 3 " 8,814.50 " " " " Union Traction Co. ............... " 107 C # 3 " 41,675.88 " " " 1921 Brown Parrish .................. " 03 C # 3 " 153.84 " " " " Catherine Bainbridge ........... " 06 C # 3 " 4,244.54 " " " " Centennial Pass. Rwy. ............ " 09 C # 3 " 153.84 " " " " Citizens Clearfield .............. " 14 C # 3 " 61.55 " " " " Citizens East End ................ " 17 C # 3 " 153.84 " " " " Citizens North End ............... " 20 C # 3 " 399.99 " " " " Citizens Pass. Rwy. .............. " 22 C # 3 " 24,978.49 " " " " Electric Traction Co. ............ " 29 C # 3 " 106,489.53 " " " " Frandford Southwark ............ " 35 C # 3 " 18,595.48 ---------- Total ................................ 734,010.65 The amounts shown as deficiencies of the respective Lessor Corporations in Exhibits A and B of the petition herein, against which plaintiff's overpayments were applied, are amounts of taxes only, without inclusion of any interest thereon, except that those certain lessors' deficiencies shown next hereinafter and appearing on Exhibit B, include deficiencies in taxes for 1921 and interest thereon to April 1, 1929, as follows:

Interest to Tax April 1, 1929 Total

Brown Parrish ............. $109.83 $43.98 $153.84 Catherine Bainbridge ...... 3,031.18 1,213.36 4,244.54 Centennial Pass. Rwy. ....... 109.86 43.98 153.84 Citizens Clearfield ......... 43.95 17.60 61.55 Citizens East End ........... 109.86 43.98 153.84 Citizens North End .......... 285.65 114.34 399.99 Citizens Pass. Rwy. ......... 17,838.03 7,140.46 24,978.49 Electric Traction Co. ....... 76,047.95 30,441.58 106,489.53 Frankford Southwark¹ .. 18,595.48 ......... 18,595.48 ---------- ---------- ---------- 116,171.82 39,059.28 155,231.10

1 Interest to April 1, 1929, on this deficiency was collected by defendant otherwise than from the overassessments referred to in this proceeding.

14. On or after October 6, 1930, the collector returned the schedules of overassessments to the Commissioner, each bearing a certification showing the overpayments of $90,636.41 and $734.010.65 for 1919 and 1920, respectively, to have been applied as credits to deficiencies against the Lessor Corporations, as set out in finding 13.

15. Upon receipt from the collector of the schedules of overassessments the Commissioner computed and allowed interest as follows:

Calendar year deficiencies of Lessor Interest on overpayment Overpayment Corporations computed — Amount to which of Portion overpayment interest For calendar year applied as applied as From — To — allowed credit credit 1919 ................. $75,270.54 1919 ............... None ........... ............... None. 15,365.87 1920 ............... 12/15/20 ....... 3/15/21 ....... $230.49 ----------- ------- 90,636.41 230.49 1920 ................. 578,779.55 1920 ............... None ........... ............... None. 155,061.00 1921 ............... 12/23/21 ....... 4/20/29 ...... 68,165.24 170.10 1921 ............... 5/11/22 ........ 4/20/29 ...... 70.84 ---------- --------- 734,010.65 68,236.08 16. Thereafter the Commissioner transmitted to the collector for delivery to plaintiff certificates of overassessment, together with schedules attached to said certificates and Treasury checks for $230.49 and $68,236.08 as payments for the amounts of interest allowed plaintiff as aforesaid. The certificates of overassessment and Treasury checks were duly delivered to plaintiff on or about November 6, 1930. The certificate of overassessment for 1919 showed the following summary computation of the overassessment:

Tax previously assessed: Consolidated return account no. 418304 $161,297.62 Less: Amount allocated to other companies in accordance with section 240 of the Revenue Act of 1918 ..... 21,855.83 ----------- Balance ................................ $139,441.79 Correct tax liability ......................... 48,805.38 ----------- Amount of overassessment ............... $ 90,636.41

The certificate of overassessment also showed the following disposition of the overassessment:

Abated: $ Credited: $75,270.53. To Tax. Year 1919 Def. Lessor Co. See attached list. Credited: $15,365.87. To Tax. Year 1920 Def. Lessor Co. See attached list. Refunded: $ Interest: $230.49.

(The attached lists referred to are those set out in finding 13.)

The certificate of overassessment for 1920 showed the following summary computation of the overassessment:

Tax previously assessed: Consolidated return #422683 ............... $838,583.63 Less: Amount allocated to other companies in accordance with section 240 of the Revenue Act of 1918 ..................... 104,572.98 ----------- Balance ................................. $734,010.65 Correct tax liability ......................... None ----------- Amount of overassessment $734,010.65

The certificate of overassessment also showed the following disposition of the overassessment:

Abated: $ Credited: $578,779.55. To tax. Year 1920 Def. Lessor Co. See attached list. Credited: $155,231.10. To tax. Year 1921 Def. Lessor Co. See attached list. Refund: $ Interest: $68,236.08.

(The attached lists referred to are those set out in finding 13.)

17. Subsequent to the delivery of the aforementioned certificates of overassessment and checks, plaintiff protested, at conferences and through briefs, the amount of interest allowed and contended that it was being denied its full amount of interest by crediting the overpayments for 1919 and 1920 against the deficiencies of the Lessor Corporations and computing interest on the overpayments as if the deficiencies were those of plaintiff. The Commissioner, however, refused and has continued to refuse to make any payment on account thereof other than set out in finding 15.

WILLIAMS, Judge.

The Commissioner of Internal Revenue, upon a final audit and adjustment of plaintiff's income and excess profits tax returns for the years 1919 and 1920, determined overassessments in favor of the plaintiff of $90,636.41 for 1919, and $734,010.65 for the year 1920. The amount of the overassessments, which were overpayments for the years involved, was applied by the Commissioner as statutory credits against deficiency assessments for the years 1919, 1920, and 1921, due from other corporations designated in the findings as the "Lessor Corporations."

The Lessor Corporations referred to are corporations whose properties were, during the years 1919, 1920, and 1921, as well as prior and subsequent thereto, leased by them severally as lessor, to the plaintiff as lessee. These properties were operated by the plaintiff as a part of its street railway system in Philadelphia. The terms of the written agreements under which they were leased to plaintiff provided, among other things, that the plaintiff should pay all taxes, charges, licenses, and assessments against the Lessors for which they would in any wise be liable or chargeable on account of their corporate existence, so that the lessors should be able to declare and pay dividends to their shareholders, free from tax of any and every kind. The separate and distinct corporate existence of the several Lessor Corporations remained intact and continued during the period involved, and each of such corporations had, and exercised complete control over its own corporate business and affairs during such time.

The Commissioner, in treating the application of plaintiff's overpayments for the years 1919 and 1920 as statutory credits against deficiencies due from the Lessor Corporations for the years 1919, 1920, and 1921, computed and allowed interest on the overpayments only from the dates of the payment of the tax to the due dates of the deficiencies against which they were applied. The plaintiff, at the time its overpayments were applied by the Commissioner as credits against the deficiencies of the Lessor Corporations, and at all times prior thereto, challenged the authority of the Commissioner to use the overpayments in such manner as to deprive it of the full amount of interest it was entitled to receive on the overpayments as provided by law in the case of refunds.

Immediately after the receipt of notices and demands by the Lessor Corporations of the deficiencies assessed against them for the years 1919, 1920, and 1921, attorneys for the plaintiff held a conference in Washington with the Assistant Secretary of the Treasury, who was charged, among other duties, with the supervision of the Internal Revenue Bureau. At this conference plaintiff's attorneys represented that it was under contractual obligation to pay the taxes of the Lessor Corporations and stated that it would be impractical, if not impossible, for plaintiff to raise the funds to meet the deficiency assessments until it received the refunds which were then in the process of adjustment on account of its own returns for the same years. The attorneys stated that they desired to have collection of the deficiencies from the Lessor Corporations withheld until plaintiff obtained payment of its refunds. It was then suggested by the Assistant Secretary, and agreed to by plaintiff's counsel, that interest be computed on the overpayments and also on the deficiencies separate and distinct from each other, and that the overpayments, including interest, when finally allowed, be offset in so far as sufficient and necessary against deficiencies, including interest, when collected, and that the collection of the deficiencies be withheld until the overpayments were allowed. The collection of the deficiencies was withheld until after the allowance of plaintiff's claims for refund, but the agreement was not otherwise carried out. The Commissioner in his letter to the collector transmitting the schedules of overassessments in plaintiff's favor stated: "The Unit proposes to apply the overpayments made by the Lessee as credits to the taxes due from the Lessors, and to allow interest as provided by law in the case of credits." This, as we have seen, was done.

It is not contended that the agreement between the Assistant Secretary of the Treasury and plaintiff's counsel is binding on the government and plaintiff's suit is in no way based upon it, but upon the statute. The importance of the agreement lies in the fact that the plaintiff, in the petition, and in its brief, waives a portion of the interest it would be entitled to receive as upon a refund of the overpayments and asks for judgment only to the extent that interest is due on the overpayments in excess of the interest heretofore allowed and paid, and the interest due from the Lessor Corporations on their deficiencies computed on the basis of their being separate and distinct taxpayers.

The sole issue in the case is whether the plaintiff is entitled to interest on the overpayments as in the case of a refund, or as in the case of a statutory credit.

Section 284(a) of the Revenue Act of 1926, 26 USCA § 1065(a), provides that where there has been an overpayment of any income, war profits, or excess profits tax the amount of such overpayment shall (1) be credited against any income, war profits, or excess profits tax or any installment thereof then due from the taxpayer, and (2) any balance of such excess shall be refunded immediately to the taxpayer. It is settled law so far as the decisions of this court are concerned that the credit contemplated and authorized in this section must be made against taxes due the government from the same taxpayer making the overpayment. The Commissioner is without legal authority, under this provision, to credit an overpayment made by one taxpayer against taxes due from another taxpayer. David Daube v. United States, 59 F.2d 842, 75 Ct. Cl. 633, 1 F. Supp. 771, affirmed 289 U.S. 367, 53 S.Ct. 597, 77 L.Ed. 1261; Ford Motor Company v. United States (Ct.Cl.) 9 F. Supp. 590, 602, decided January 14, 1935; Hart Glass Manufacturing Co. v. United States, 73 Ct. Cl. 32, 48 F.2d 435. These decisions are in harmony with G.C.M. 6343, C.B. VIII-2, page 220,¹ and other rulings of the Bureau of Internal Revenue.

1 Holding in substance that the overpayment by an individual taxpayer may not be lawfully credited against a liability of the same taxpayer as transferee, and when so applied by consent, interest must be computed as though a refund had been made. See also O.D. 180 (Cum. Bul. 1, P. 309), as amended by O.D. 1068 (Cum. Bul. 5, p. 247).

The controlling question, therefore, is whether the plaintiff was the taxpayer within the meaning of the statute with respect to the deficiencies of the Lessor Corporations against which its allowed and admitted overpayments were applied. The term "taxpayer" is defined in the various revenue acts to mean "any person subject to a tax imposed by the act." The taxpayer under this definition is undoubtedly the person against whom the Commissioner may legally assess a tax imposed by the statute. Could the Commissioner in this case have legally assessed the taxes due from the Lessor Corporations against the plaintiff? Unless this question can be answered in the affirmative, and we are clearly of the opinion it cannot be so answered, the plaintiff cannot be held to be the taxpayer in respect to such taxes. The deficiency assessments against the Lessor Corporations, as well as the overpayments allowed in favor of the plaintiff, resulted in a large measure from the Commissioner's ruling that they were not affiliated companies within the meaning of section 240 of the Revenue Acts of 1918 and 1921. As separate and distinct corporations they were separate and distinct taxpayers within the meaning of the statute. The Commissioner treated them as such in his determination of their tax liability and in the assessment of the tax. In doing so he merely followed the law. If they are separate and distinct taxpayers in the assessment of the taxes involved they must be given the same status in all matters relating to the collection of the taxes, including the crediting or refunding of overpayments. Ford Motor Company v. United States, supra. It is suggested, however, that the plaintiff was the taxpayer in this case with reference to the deficiencies against which its overpayments were applied by reason of the fact that it was under contractual obligations to pay any and all taxes that might be assessed against the Lessors. This contention, we think, is without merit. The obligation of plaintiff to pay taxes due from the Lessors to the government was in effect a part of the rental consideration for the properties leased and any payments so made constituted taxable income to the Lessors. United States v. Boston Maine Railroad Co., 279 U.S. 732, 49 S.Ct. 505, 73 L.Ed. 929. The contractual obligations of plaintiff to pay the Lessors' taxes did not make its liability in that respect a tax liability to the government, or make it the taxpayer with respect to such taxes — no more than if the contracts had merely required the plaintiff, as a part of the rental, to reimburse the Lessors the amount of any taxes paid by them.

The Lessor Corporations were the taxpayers within the meaning of the statute with respect to the deficiencies against which the plaintiff's overpayments were applied. No income, war profits, or excess profits taxes, or any installment thereof, were due from the plaintiff to the United States at the time of the purported credit of its overpayments for the years 1919 and 1920. The entire amount of the overpayments was therefore refundable to plaintiff, with interest thereon as provided in section 614(a)(2) of the Revenue Act of 1928.² The arbitrary action of the Commissioner in using such refundable overpayments as statutory credits against taxes due the government from other taxpayers does not deprive plaintiff of the interest it was otherwise entitled to receive on the overpayments. The plaintiff agreed that the overpayments in its favor might be used in payment of the deficiencies of the Lessor Corporations, but as has been said it challenged the authority of the Commissioner to use such overpayments as statutory credits, thus depriving it of the interest it was entitled to receive on the overpayments, and served notice that it would take the case to court for a judicial review of its rights.

2 Section 614(a)(2) of the Revenue Act 1928, 26 USCA § 2614(a)(2): "In the case of a refund, from the date of the overpayment to a date preceding the date of the refund check by not more than 30 days, such date to be determined by the Commissioner."

In Ford Motor Company v. United States, supra, the court in discussing the legal effect of the action of the Commissioner in applying an overpayment in favor of one taxpayer as a statutory credit against taxes due from another and different taxpayer, said: "At the time the overpayment * * * in favor of Ford Motor Company (Delaware) was applied to the deficiency assessment of * * * against Ford Motor Company (Michigan), no taxes or any installment thereof was then due from Ford Motor Company (Delaware) to the United States. In this situation no legal credit of the overpayment could be made, and the entire amount was refundable to the plaintiff company as an overpayment, on which it was entitled to interest from the date of the payment of the tax to the date of the allowance of the refund. The consent of Ford Motor Company (Delaware) that the overpayment be applied to the part payment of the deficiency assessment against the Michigan company, and the application could not have been so made without its consent, Hart Glass Manufacturing Company v. United States, 48 F.2d 435, 73 Ct. Cl. 32, did not deprive it of interest on the overpayment which it was otherwise entitled to under the statute. What was done was for the mutual benefit of the government and the plaintiff company, and was a short-cut method of adjusting the tax accounts of the two companies. Hoyt et al. v. United States, 39 F.2d 739, 69 Ct. Cl. 604. This obviated resort to the more roundabout method of the government making a formal and technical refund of the overpayment to Ford Motor Company (Delaware) and that company in turn returning to the government the same amount in payment of the deficiency assessment against Ford Motor Company (Michigan). This was precisely the result attained by the short method used, and, while the transaction was characterized as a credit on the records of both the collector and the Commissioner, it was not such within the meaning of the statute, but was in substance a refund of the overpayment, as much so as if the usual procedure had been followed and a refund check had been issued for the amount."

What was said in the Ford Case is fully applicable to the instant case. It is therefore held that the plaintiff is entitled to interest on the overpayments of $90,636.41 for the year 1919 and $734,010.65 for the year 1920 as though refunds thereof had been made in the manner provided in the statutes.

Plaintiff in the petition asks for interest on the overpayments only to March 25, 1930. This was the date on which the Commissioner signed the schedules of overassessments and, under the provisions of section 1104 of the Revenue Act of 1932, 26 USCA § 4104, was the date of the allowance of refund or credit in respect to such taxes. There can be no question that plaintiff is entitled to interest to at least this date, and it is unnecessary to decide whether interest, if claimed, would, under the facts disclosed, be allowable to a later date, and we do not decide that question.

The plaintiff, however, in its petition does not seek recovery of the full amount of interest it is entitled to receive under this holding but consents that, in accordance with its verbal agreement with the Assistant Secretary of the Treasury, there be deducted from the interest legally due on its overpayments an amount equal to the interest due from the Lessors on the deficiencies assessed against them. Judgment will be awarded in accordance with the prayer of the petition. The formal entry of judgment, however, will be withheld pending a supplemental report by Commissioner Richard H. Akers, to whom the case is referred for the purpose of computing the exact amount due plaintiff under this opinion.

The Commissioner is directed to compute interest on the overpayments from the dates of payment to March 25, 1930, and to compute interest on the deficiencies from February 26, 1926 to March 25, 1930. It is so ordered.