The opinion of the court was delivered by: PALMIERI
This is a petition brought by the United States to review an order of a Referee in Bankruptcy reducing its claim for taxes. The Referee sustained the objections of the Trustee to portions of the proof of claim filed by the Government detailing deficiencies in income tax alleged to be due from Swiss Radium and Dial Painting Co. (Swiss Radium), a corporation which merged with the bankrupt. The portions of the claim to which the Trustee objected stem from the Internal Revenue Service disallowance of deductions for interest accruals
of $ 18,696.78 for 1946, $ 6,478.12 for 1947, and $ 5,552.68 for 1948, by reason of which deficiencies in income taxes of $ 11,847.29 for 1946, $ 3,946.78 for 1947, and $ 2,349.13 for 1948 were asserted.
In November, 1946, when the contested interest accruals were first made on the books of Swiss Radium, that corporation was under investigation for criminal fraud in connection with its income tax returns for the years 1935-1942. On November 14, 1946, the attorneys for Swiss Radium and three of its principals addressed a letter to the Attorney General
with respect to reports received 'from the Bureau of Internal Revenue on or about April 6, 1945 setting forth proposed tax deficiencies and penalties' and the protests of those reports at several conferences with the Bureau. Counsel enclosed in this letter a check to the order of the Commissioner of Internal Revenue for $ 111,241.47, the full amount of the additional taxes and penalties asserted in the reports of proposed deficiencies together with interest thereon. Counsel recited that the check was intended as an 'offer in full settlement of all liabilities, both civil and criminal,' and that the remittance was submitted 'without prejudice, and conditionally upon (the Attorney General's) agreeing to a final closing of all matters in controversy as to the respective tax years.' The remittance was not accepted by the Government and was returned to the taxpayer. Swiss Radium then posted to an accrued liability account the proposed deficiencies and penalties and the interest accruals which are the subject of this petition for review.
In his opinion, the Referee stated that 'one may not accrue an expense the amount of which is unsettled or the liability for which is contingent, and that applies to a tax which is denied and payment whereof is contested.' Neither side disputes the accuracy of the Referee's declaration of the controlling legal principle. See Dixie Pine Products Co. v. C.I.R., 1944, 320 U.S. 516, 64 S. Ct. 364, 88 L. Ed. 270; Security Flour Mills Co. v. C.I.R., 1944, 321 U.S. 281, 64 S. Ct. 596, 88 L. Ed. 725; National Biscuit Co. v. United States, 1957, 156 F.Supp. 916, 140 Ct.Cl. 443. The appropriate application of that principle to the agreed facts is the subject of the challenge now made by the Government.
On the basis of counsel's letter to the Attorney General, the Referee concluded that, in November 1946 and thereafter, Swiss Radium was no longer contesting either its liability for or the amount of the Government's tax claim and was therefore entitled to accrue interest and to deduct such accruals in computing its net taxable income. The Referee discounted the conditional language in which the 'offer of settlement' was phrased as a 'plaintive plea for avoidance of criminal action.' In its challenge to the Referee's conclusion, the Government maintains that the agreed facts demonstrate the absence of any final determination in 1946, 1947, or 1948 as to Swiss Radium's 1935-1942 tax indebtedness. As the Government views the facts, the interest accruals were without justification because there had been no termination of the taxpayer's contest by reason of the letter to the Attorney General either on the fact of liability or the amount thereof.
A taxpayer need not institute legal proceedings in order to 'contest' its liability for a tax. See Gunderson Bros. Engineering Corp., 1951, 16 T.C. 118. Protests to the Service, such as those made by Swiss Radium prior to the November 1946 letter, are sufficient. See Note, 'Accrual of Tax Deficiencies and Recoveries,' 58 ColumL.Rev. 372, 378 (1958). This much is conceded by the Trustee. The problem here, therefore, is whether resolution of an existing contest occurred when Swiss Radium, through counsel, directed a letter and remittance to the Attorney General and established an accrued liability on its books.
The accrual of interest on the company's books, as an internal and possibly self-serving act of the corporation, cannot be determinative. If a taxpayer wishes to terminate a contest by final acquiescence in the Government's demand for increased taxes, it is reasonable to require that he so notify the appropriate Government agency.
Whatever effect Swiss Radium's book entries may have had on its internal affairs, such entries did not amount to a manifestation of acquiescence communicated to the agency charged with collection of the tax. Therefore, the relevant inquiry should center on the question whether the November 1946 letter and remittance constituted adequate notice to the Government that the period of taxpayer protest was at an end. See 58 ColumL.Rev., supra at 380-81.
The Referee observed that the letter 'admitted liability and specified the amounts and years of unreported income.' But, in my view, there is a critical distinction between an acknowledgment of unreported income and an acknowledgment of liability for tax on such income. Throughout the letter, the attorneys for Swiss Radium made it perfectly plain that they and the taxpayer believed the 50% Fraud penalties to be unwarranted because of the absence of the requisite intent. For example, it was stated at the outset:
'Taxpayers contended and still maintain that the proposed additional taxes are arbitrary and excessive, and the penalties are not justifiable.' and, on the final page, this conclusion appeared:
'These facts indicated that Swiss did not intend to evade or defeat its true income tax liability * * *.'
Cf. Edwards v. United States, 5 Cir., 1961, 286 F.2d 681, 683 (distinction between admission of facts and admission of intent). The tenor of the letter, particularly the first two paragraphs, is that counsel were seeking to settle all of the taxpayer's liabilities without withdrawing pro tanto their protests and possible defenses thereto. Indeed, counsel adverted to the possibility of a claim with respect to business deductions that might have been taken as offsets had additional income been reported. Appendix, p. 3; cf. Bull v. United States, 1935, 295 U.S. 247, 261, 55 S. Ct. 695, 79 L. Ed. 1421. In short, the communication directed to the Government was entirely consistent with an intent on the part of the taxpayer not to terminate the contest unless it received the requested quid pro quo. However, even assuming that Swiss Radium in fact intended to concede liability for the amount sought by the Government whether or not the risk of prosecution could be avoided, the expressions contained in the November 14, 1946 letter were inadequate to put the Government on notice that a protesting taxpayer was relinquishing that role and was proposing a final and unconditional recognition of liability. See Lewyt Corp. v. C.I.R., 2 Cir., 1954, 215 F.2d 518, 522, reversed in part on other grounds, 1955, 349 U.S. 237, 75 S. Ct. 736, 99 L. Ed. 1029; cf. James F. Keith, 1961, 35 T.C. No. 117. But cf. Landers, Frary & Clark v. United States, 1957, 149 F.Supp. 202, 204-205, 37 Ct.Cl. 870.
Because I believe that the facts before me compel a distinction between what the taxpayer admitted without reservation and what it declined to concede to the Government without receiving in exchange assurances of a final settlement of all criminal and civil tax liabilities, I must reverse the Referee's determination and overrule the objections of the Trustee to the Government's proof of claim.