UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
February 27, 1956
STANDARD OIL COMPANY (NEW JERSEY), Plaintiff,
Denis J. McMAHON, individually and as District Director of Internal Revenue, Lower Manhattan, Defendant
The opinion of the court was delivered by: HERLANDS
Plaintiff-taxpayer commenced this action
on March 21, 1955 to enjoin defendant-District Director of Internal Revenue from collecting or attempting to collect from plaintiff any part of two certain assessments of interest on deficiencies in plaintiff's consolidated excess profits tax returns for the calendar years 1943 and 1944.
The decisive question in this case is raised by defendant's motion to dismiss the complaint on the ground that there is 'lack of jurisdiction over the subject matter'. Rule 12(b)(1) F.R.C.P., 28 U.S.C.A. The answer to that question involves the interpretation and application of section 272(a)(1) of the Internal Revenue Code of 1939, 26 U.S.C.A. 272(a)(1); now, with changes, Internal Revenue Code of 1954, §§ 6212(a) and 6213(a).
Section 272(a)(1) is an express exception
to the general provision that 'no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.' Section 3653(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. 3653(a), now Internal Revenue Code of 1954, § 7421(a).
In the exceptional case provided for by section 272(a)(1), the taxpayer may maintain an injunction suit to restrain the collection of an assessment where the assessment is for a tax deficiency and the tax authorities have not complied with the procedure and timetable prescribed by section 272(a)(1).
Section 272(a)(1), so far as relevant, provides:
'If in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this chapter, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within ninety days after such notice is mailed * * * the taxpayer may file a petition with The Tax Court of the United States for a redetermination of the deficiency. No assessment of a deficiency in respect of the tax imposed by this chapter and no distraint or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such ninety-day period, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. Notwithstanding the provisions of section 3653(a) the making of such assessment or the beginning of such proceeding or distraint during the time such prohibition is in force may be enjoined by a proceeding in the proper court. * * *'
The core of this controversy can be excised from its factual and legal complexities by stating defendant's position syllogistically:
1. The procedure and timetable prescribed by section 272(a)(1) apply only to an assessment of a tax deficiency and not to an assessment of interest on a deficiency.
2. This case involves an assessment of interest on a deficiency as distinguished from an assessment of a deficiency.
3. Therefore, since section 272(a)(1) does not apply to this case, plaintiff's action for an injunction -- which is mistakenly based on that section -- must be dismissed for jurisdictional insufficiency.
Whether the above premises are valid must be determined in the light of the allegations contained in the complaint and as amplified by a 'Stipulation of Facts.'
The 1943 Tax Return:
On June 29, 1954, defendant mailed to plaintiff a notice that there had been assessed against plaintiff the sum of $ 6,334,565.70 (subsequently corrected and reduced to $ 1,682,410.45) representing interest on a deficiency in plaintiff's excess profits tax for the year 1943. Immediate payment was demanded.
At no time has plaintiff agreed to the determination or assessment of any deficiency in its excess profits tax for 1943.
Plaintiff's consolidated excess profits tax return for the calendar year 1943 had been filed on September 15, 1944.
In that tax return, plaintiff claimed an unused excess profits credit carry-over from the year 1941 as an unused excess profits credit adjustment on its 1943 return. As a result, plaintiff's 1943 return showed no excess profits tax due.
Defendant asserts that a substantial portion of the 1941 carry-over credit which plaintiff utilized on its 1943 return was improper and should be eliminated. On the other hand, plaintiff claims that the 1941 carry-over was proper; and it is plaintiff's position that there is an unresolved controversy between plaintiff and defendant with respect to the propriety of the 1941 carry-over and whether there ever was a deficiency in plaintiff's excess profits tax for 1943.
, defendant further contends that the elimination of the improper 1941 carry-over credit would result in a deficiency in plaintiff's excess profits tax for the year 1943, in the absence of other circumstances; that there were such other circumstances subsequently occurring that prevented a deficiency in 1943, namely, that plaintiff was entitled to the benefit of an unused excess profits credit carry-back from the year 1945;
and that, therefore, the deficiency in respect of plaintiff's excess profits tax for 1943 abated and was eliminated as and when the 1945 carry-back was applied to the 1943 tax.
The 1944 Tax Return:
On November 24, 1954, defendant mailed to plaintiff a notice that there had been assessed against plaintiff the sum of $ 209,332.48 (subsequently corrected and reduced to $ 172,394.18), representing interest on plaintiff's excess profits tax for 1944. Immediate payment was demanded.
At no time has plaintiff agreed to the determination or assessment of any deficiency in its excess profits tax for 1944.
Plaintiff's consolidated excess profits tax return for the calendar year 1944 had been filed on September 14, 1945.
In that tax return, plaintiff claimed an unused excess profits credit carry-over from the year 1942 as an unused excess profits credit adjustment on its 1944 return. After giving effect to this 1942 carry-over, plaintiff's 1944 return showed an excess profits tax in the amount of $ 947,510.41 to be due and owing, which amount was paid by plaintiff when due.
Defendant asserts that the 1942 carry-over credit which plaintiff utilized on its 1944 return was improper and should be eliminated. This is disputed by plaintiff.
Defendant further contends that the elimination of the improper 1942 carry-over credit would result in a deficiency in plaintiff's excess profits tax for the year 1944, in the absence of other circumstances; that there were such other circumstances subsequently occurring which prevented the deficiency in 1944, namely, that plaintiff was entitled to the benefit of an unused excess profits credit carry-back from the year 1945;
and that, therefore, the deficiency in respect of plaintiff's excess profits tax for 1944 abated and was eliminated as and when the 1945 carry-back was applied to the 1944 tax.
The Gist of Plaintiff's Argument:
Plaintiff argues that it has been improperly foreclosed from exercising the right to petition the Tax Court for a re-determination of the alleged 1943 and 1944 deficiencies, because defendant did not mail the usual 90-day letter, the statutory notice of deficiency, and because defendant did not thereafter assess such 1943 and 1944 deficiencies.
This argument entails the contention that, by virtue of the provisions contained in section 292(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 292(a), interest on a deficiency must be assessed at the same time that the deficiency itself is assessed, and that in the absence of an assessment of the deficiency, there can be no independent or separate assessment of interest on such deficiency. Section 292(a) provides that 'interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency, * * * and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax * * * to the date the deficiency is assessed, * * *.' This language means, according to plaintiff, that interest may not be lawfully assessed unless defendant first has determined that there is a deficiency and the amount of the deficiency; and that interest may not be collected, at the statutory six per cent rate to the date the deficiency is assessed, unless defendant shall have first assessed the deficiency. Applying this line of reasoning to the facts herein, plaintiff points out that defendant did not assess a deficiency in respect of plaintiff's excess profits tax for either 1943 or 1944; that no notice of deficiency in respect of the alleged 1943 and 1944 deficiencies was ever sent to plaintiff; and that, therefore, the assessments of interest on such deficiencies are invalid and not enforceable by payment.
The Gist of Defendant's Argument:
In point of fact, defendant argues, the 1941 and 1942 carry-overs improperly reduced plaintiff's excess profits tax for 1943 and 1944. In the course of his audit examination, defendant determined (without assessment) that there were tax deficiencies for the years 1943 and 1944, and that plaintiff was entitled to certain carry-backs for the year 1945. When defendant applied the 1945 carry-backs to the 1943 and 1944 deficiencies, the 1943 and 1944 deficiencies were cleaned up and eliminated as of December 31, 1945, the date when plaintiff became entitled to the 1945 carry-backs. However, the 1943 and 1944 deficiencies, as determined by defendant, were a subsisting obligation or indebtedness of plaintiff to defendant until such time as the deficiencies abated by application of the 1945 carry-backs. From the time the full and proper amount of 1943 and 1944 taxes should have been paid to the date of the abatement of the deficiencies, interest on that obligation or indebtedness was payable to defendant. Inasmuch as the 1943 and 1944 deficiencies were extinguished, there was no reason for defendant to make an assessment of the abated deficiencies. Since defendant had no occasion to make an assessment of the abated deficiencies, there was no necessity under section 272(a)(1) for defendant to send plaintiff a notice of defendant's determination of such deficiencies. Section 292(a) should not be construed, in this case, as requiring the assessment of a deficiency as a simultaneous precedent condition to the assessment of interest on that deficiency.
This decision recognizes the distinction in section 272(a)(1) between a 'determination' of a deficiency and an 'assessment.'
That section authorizes, but does not require, the Commissioner to send a notice of deficiency when he determines that there is a deficiency. It is only when he assesses the deficiency that he must send a notice of deficiency to the taxpayer. An assessment is more than a determination. It is the first objective step in the process of actually collecting the tax from the taxpayer.
Where the Commissioner, in auditing several tax returns of the taxpayer for a number of tax years, computes various debits and credits -- such as carry-overs and carry-backs -- and the final figure or balance does not reflect a sum owing by the taxpayer to the Government, there is no deficiency to be assessed.
This is so notwithstanding the fact that some of the intermediate figures or interim calculations -- as distinguished from the final balance -- may have involved a determination that there were deficiencies. Where, as in this case, the final balance does not result in a deficiency, the tax authorities are not required to make an assessment of deficiencies because the only purpose of the assessment would be to collect such deficiencies, whereas that very purpose has become academic by virtue of the abatement and satisfaction of such deficiencies by the application (in this case) of the 1945 carry-back.
In the routine case, the assessment of the deficiency follows the statutory notice of deficiency and initiates the process of collection whereby the tax authorities demand payment or reach out to protect the claim for such deficiency by lien or attachment. In such a case, the assessment must be preceded by the expressly required notice of deficiency, commonly called the '90-day letter.' But where, as here, the Government has been auditing a number of plaintiff's returns, the Government is not bound to isolate and treat the tax return for each year as a completely separate and independent account. The Code provisions for carry-overs and carry-backs, by their very nature, require that the same taxpayer's returns for the several years to which such provisions would be applicable, be correlated and treated as one account, although the statement of the taxpayer's ultimate liability must be broken down tax years.
When, in this case, the Government determined (1) that there were improper carry-overs from 1941 and 1942 into 1943 and 1944, resulting in deficiencies for 1943 and 1944; and (2) that such deficiencies were eliminated by the application of the 1945 carry-back, the Government was entitled to treat the 1943 and 1944 deficiencies as interim figures and was not required to make an assessment of such 1943 and 1944 deficiencies.
The abatement of such deficiencies for the purpose of assessment of such deficiencies did not eliminate the deficiencies for the purpose of assessment of interest on such deficiencies. According to the Government, there having been deficiencies for the years 1943 and 1944, the amounts of money representing such deficiencies remained in plaintiff's pocket instead of having been paid to the Government. Hence, interest on the amounts of such deficiencies ran in favor of the Government from the time such deficiencies should have been paid (i.e., the due dates of the respective returns) until such deficiencies were eliminated as of December 31, 1945, the effective date of the 1945 carry-back.
The deficiency for each of the years 1943 and 1944 was what has been called a 'potential deficiency.'
That the payment of interest on a deficiency remains an obligation
of the taxpayer and survives the abatement of the deficiency itself has become an accepted principle of tax law. Applications of that doctrine are to be found in such recent decisions as United States v. Koppers Company, Inc.,
1955, 348 U.S. 254 (2 cases), 75 S. Ct. 268, 99 L. Ed. 302, reversing 117 F.Supp. 181, 126 Ct.Cl. 847, and affirming United States v. Premier Oil Refining Company of Texas,
5 Cir., 209 F.2d 692; Hastings & Co., Inc., v. Smith,
3 Cir., 1955, 224 F.2d 875; and Rodgers v. United States,
1952, 108 F.Supp. 727, 123 Ct.Cl. 779.
These cases illustrate the following principle: although the deficiency itself has been abated or extinguished by a carry-back from a later year or by relief granted under section 722 of the Internal Revenue Code, the carry-back or relief -- in wiping out the debt of the tax deficiency -- does not wipe out the interest which has been assessed on that deficiency for a period of time from the date when the original tax should have been properly paid to the date when the deficiency abated in whole or in part. The authoritative exegesis of that doctrine was made by the Supreme Court in Manning v. Seeley Tube & Box Co.,
1950, 338 U.S. 561, 70 S. Ct. 386, 94 L. Ed. 346, reversing, 3 Cir., 172 F.2d 77.
In the case at bar, the last waiver executed by plaintiff with respect to the 1943 return expired on June 30, 1954, and the assessment of interest on the 1943 deficiency was made on June 29, 1954. That last waiver with respect to the 1944 return expired on December 31, 1954, and the assessment of interest on the 1944 deficiency was made on November 24, 1954.
At no time during the statutory period, as extended by the waivers, did defendant send to plaintiff a notice stating that he had determined that there were excess profits tax deficiencies for 1943 and 1944, and that such deficiencies were assessed. It follows that, by expiration of the statutory period, defendant is now barred from making any assessment for the alleged 1943 and 1944 deficiencies, were he otherwise required to do so.
The granting of this motion to dismiss the complaint accomplishes substantial justice, for it means that, after plaintiff pays the assessments for interest on the deficiencies, it can still have its day in court by bringing a refund action, in which it can litigate the correctness of the deficiency interest assessments and, also, as a necessary incident thereof, the correctness of defendant's determination of the amount of the 1943 and 1944 deficiencies upon which such interest was computed.
'In the absence of a clear legislative expression to the contrary,'
and under the circumstances of this case, I shall adopt such interpretation of the statute as will accomplish the two-fold objective of: (1) affording the taxpayer an opportunity to obtain a judicial determination of the merits of the interest assessments,
and (2) avoiding a nullification of the Government's claim for such interest on points that do not reach the underlying factual merits of such assessments.
The second prayer for relief of the complaint, as noted, asks for a declaratory judgment that plaintiff is not indebted in any amount for interest on the excess profits tax for the years 1943 and 1944, and that defendant's assessments of interest on alleged deficiencies for those years are invalid.
A declaratory judgment may not be had in a case of a controversy 'with respect to Federal taxes.' Title 28, U.S.C.A. § 2201. Upon the oral argument of this motion, plaintiff withdrew its prayer for a declaratory judgment. Plaintiff's memorandum states: 'If the merits of the alleged deficiencies are not to be determined in this proceeding, plaintiff has no objection to the dismissal of its second prayer for relief.'
Accordingly, the motion to dismiss the complaint is granted solely on the ground that there is lack of jurisdiction over the subject-matter.
Settle order on notice.