Appeal from the District Court of the United States for the District of Connecticut.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
This appeal involves the right of the AEtna Life Insurance Company to recover from Eaton personally, who is collector of internal revenue, $376,340.37, corporation income taxes for the years 1923 and 1924, which he collected from it.
AEtna had filed its returns for income taxes for the years 1922, 1923, and 1924, paid the taxes thereunder, and filed claims for refunds, aggregating $102,532.86, on account of certain deductions which it claimed. None of the items sought to be refunded form any part of the $376,340.37, to recover which the present action was brought. Items other than this $376,340.37 were in dispute during the government audits and from time to time were allowed and disallowed. Finally a refund of $89,831.08, with interest amounting to $11,152.58, was allowed in 1927, and checks were sent to the taxpayer in repayment. Accompanying the checks was a letter inclosing a printed form 866A, suggesting to AEtna that it might "enter into a written agreement making the determination and assessment of * * * tax liability final and conclusive." The varying fortunes which the refunding claims of AEtna had already suffered very likely impressed it with the desirability of having the amount of its taxes no longer open to a reaudit. At all events, and whatever may have been the reason, a so-called "closing agreement" was signed by it on December 23, 1927, in which the Commissioner of Internal Revenue joined under date of January 14, 1928. The agreement recited that there had been a determination and assessment of a named sum as the amount of tax due on account of income for the years, 1922, 1923, and 1924, that the taxpayer had paid the tax so determined, had accepted any refund based on the assessment, and had "accepted the adjustment made with respect to any and all claims filed in connection therewith." The agreement provided that the "taxpayer and * * * Commissioner of Internal Revenue with the approval of the Secretary of the Treasury * * * mutually agree that such determination and assessment shall be final and conclusive."
In National Life Insurance Co. v. United States, 277 U.S. 508, 48 S. Ct. 591, 72 L. Ed. 968, the provisions of the Revenue Act of 1921, laying an income tax upon life insurance companies, were under consideration. The act taxed all interest and dividends less a deduction (1) of income derived from tax exempt securities; (2) of a further sum equal to 4 per centum of the company's legal reserve, diminished, however, by any interest which it might receive from tax-exempt securities. A majority of the Supreme Court held that this was an indirect way of taxing the income of United States, state, and municipal bonds, that, so far as it affected state and municipal bonds, it was unconstitutional, and, so far as it affected United States bonds, was contrary to the manifest purpose of the statute.
AEtna received its first notice of the foregoing decision in National Life Insurance Co. v. United States on June 6, 1928, and a week later filed with the defendant herein a claim for a refund of taxes for the years 1923-1926 founded upon that case. At the time AEtna executed the closing agreement it was not aware that any question had arisen between the government and any other party as to the right of the government to offset from the deduction of 4 per centum of the legal reserves of life insurance companies any interest which these companies might receive from tax-exempt securities. In other words, AEtna supposed section 245 (a) (2), 42 Stat. 261, under which the deductions were figured, was constitutional.
The refunding claim for the years 1925 and 1926 was granted for the reason that no closing agreement had been entered into for those years, but it was denied for the years 1923 and 1924 on the ground that the agreement was a bar.
The closing agreement signed by the Commissioner on January 14, 1928, was made under the authority of section 1106 (b) of the Revenue Act of 1926 (26 USCA § 1249 note), which read as follows:
"If after a determination and assessment in any case the taxpayer has paid in whole any tax or penalty, or accepted any abatement, credit, or refund based on such determination and assessment, and an agreement is made in writing between the taxpayer and the Commissioner * * * with the approval of the Secretary * * * that such determination and assessment shall be final and conclusive, then (except upon a showing of fraud or malfeasance or misrepresentation of fact materially affecting the determination or assessment thus made), (1) the case shall not be reopened or the determination and assessment modified by any officer, employee, or agent of the United States, and (2) no suit, action, or proceeding to annul, modify, or set aside such determination or assessment shall be entertained by any court of the United States."
If interest from tax-exempt securities had not been deducted from 4 per centum of the company's legal reserves in calculating the taxes for 1923 and 1924, the taxes actually paid for those years would have been reduced by $376,340.37, the sum sought to be recovered in this action. It was because of an erroneous assumption on the part of AEtna that section 245 (a) of the Revenue Act 1921 embodied a valid requirement as to the mode of calculating taxes on the income of life insurance companies that the overpayments of $376,340.37 were made. No fraud, malfeasance, or misrepresentation of fact affecting the assessment is claimed.
AEtna set up the foregoing matters in its complaint against the collector in an action of indebitatus assumpsit, to which the latter interposed a demurrer on the ground:
(1) That the complaint did not state facts sufficient to constitute a cause of action.
(2) That, under section 1106 (b) of the Revenue Act of 1926, the assessment of the Commissioner ...