The opinion of the court was delivered by: LEVET
In an action brought pursuant to 28 U.S.C.A. § 1346(a), plaintiffs-taxpayers, husband and wife, seek the following divers relief: An injunction restraining the defendant District Director Moe and his agents from collecting an alleged income tax deficiency of plaintiffs for the taxable year 1953; a writ of mandamus requiring said Director to issue a statutory deficiency notice for the plaintiffs' taxable year 1953; and judgment for plaintiffs in the total amount of $ 475.95, together with interest, costs and disbursements of this action.
By means of an order to show cause, plaintiffs presently move for a preliminary injunction, pursuant to Rule 65, Federal Rules of Civil Procedure, Title 28 U.S.C.A., restraining the collection of said alleged tax deficiency, and for a writ of mandamus compelling the issuance to plaintiffs of a deficiency notice covering their alleged tax deficiency for 1953. On May 26, 1961, Judge Metzner of this court issued a temporary order restraining further efforts to collect the alleged aforementioned deficiency pending a hearing on this motion.
Defendants, in turn, have moved to dismiss the instant complaint with prejudice under Rule 12(b)(1), (2) and (6) of the Federal Rules of Civil Procedure, Title 28 U.S.C.A.
herein appear to be substantially as follows:
On March 13, 1954, plaintiffs filed a so-called 'tentative' joint income tax return for the taxable year 1953 on Form 1040, which stated no tax was due, and requested 90 days to secure data for completion of the return. Having been granted the 90-day extension, plaintiffs filed a second Form 1040 return on June 14, 1954 which listed withheld income taxes in the amount of $ 404.91 and showed a tax balance due of $ 4,136.97. Attached thereto was the initial return previously filed on March 13, 1954, which the Internal Revenue Service had stamped and returned to plaintiffs.
In a notice of assessment dated August 5, 1954 (see Exhibit A attached to opposing affidavit of Michael Kearney, dated June 13, 1961), defendant A'Hearn, then District Director, informed plaintiffs that their 1953 return, received by the Service on June 15, 1954, disclosed a tax of $ 3,936.97 and payment of $ 62.06 (representing 6% Interest on $ 4,136.97 to cover the 90-day extension). It was noted that plaintiffs' return had not yet been audited, but a preliminary examination thereof revealed a mathematical error resulting in a tax decrease of $ 200. No deficiency notice was issued by the District Director.
On January 4, 1956, plaintiffs were notified that the Service had issued a warrant of distraint due to plaintiff's nonpayment of their 1953 tax obligation, consisting of $ 3,972.71 in tax and $ 317.77 in interest for a total indebtedness of $ 4,290.48. (See Exhibit A attached to supplemental affidavit of Michael Kearney, dated June 19, 1961.)
A 'Notice of Adjustment,' dated October 11, 1957, informed plaintiffs that the Service had credited a net overassessment of $ 71.04 on their 1956 tax liability to their 1953 tax period indebtedness. (See Exhibit C attached to opposing affidavit of Michael Kearney, dated June 13, 1961.)
On February 27, 1959, plaintiffs filed an amended return showing no tax due and a refund due them of $ 404.91 (amount paid as withholding tax). In a letter dated August 19, 1959, plaintiffs were notified by the Internal Revenue Service that their amended return was being examined by the Audit Division and were asked to sign tax collection waivers. (See Exhibit A attached to Plaintiffs' Supplemental Memorandum.) According to plaintiffs, the District Director formally rejected their refund claim of $ 404.91 on May 11, 1960 and made a demand for payment of $ 3,901.67 in tax. (See Amended Complaint, para. 10.)
Plaintiffs received a 'Final Notice Before Seizure' (see Exhibit C attached to Plaintiffs' Supplemental Memorandum), dated April 19, 1961, which referred to plaintiffs' indebtedness to the government for delinquent tax in the amount of $ 5,723.63 (tax balance: $ 3,901.67; interest: $ 1,821.96). Full payment within ten days was demanded in order for plaintiffs to avoid levy or seizure.
It is argued that the District Director should have issued a statutory notice of deficiency to plaintiffs upon receipt of their 1953 return before the assessment of August 5, 1954 was made. Plaintiffs contend that such an assessment without a deficiency notice, as required by Section 272(a)
of the 1939 Code, was illegal and void. By failing to issue this notice, the District Director is charged with having precluded plaintiffs from an appeal to the Tax Court for a redetermination of their tax obligation prior to payment thereof.
In Denton v. United States, 3 Cir., 1956, 235 F.2d 733, 734-735, the appellate court stated:
'The term deficiency is explicitly defined in Section 271(a) of the Code and exists where the proper amount of tax imposed exceeds the amount shown as due by the taxpayer on his return plus any amounts previously assessed (or collected without assessment) as a deficiency minus the amount of any rebates.'
The amount assessed plaintiffs on August 5, 1954, namely, $ 3,936.97, was of course less than the tax balance of $ 4,136.97 shown as due on their completed return of June 14, 1954. It is evident, therefore, that since the District Director was not endeavoring at the time to assess or collect a deficiency, the notice provisions of Section 272(a) were inapplicable. Hastings & Co. v. Smith, 3 Cir., 1955, 224 F.2d 875, 879; Denton v. United States, D.C.D.N.J., 1955, 132 F.Supp. 741, 742, affirmed, 3 Cir., 1956, 235 F.2d 733. See also Standard Oil Co. v. McMahon, 2 Cir., 1957, 244 F.2d 11.
The cases cited in support of plaintiffs' contention that a deficiency notice should have been issued herein are essentially inapposite since they involved situations in which deficiencies actually did, or were conceded to, exist. See Repetti v. Jamison, D.C.N.D.Calif., S.D., 1955, 131 F.Supp. 626, affirmed, 9 Cir., 1956, 239 F.2d 901; Peerless Woolen Mills v. Rose, 5 Cir., 1928, 28 F.2d 661; Continental Accounting & Audit Co., 1925, 2 B.T.A. 761.
Plaintiffs contend, however, that the law is clear that where a taxpayer denies tax liability, despite the showing of a tax balance due on his return, 'zero' is the starting point in determining a deficiency under Section 271 of the 1939 Code.
In John Moir, 1925, 3 B.T.A. 21, 22, in denying the Commissioner's motion to dismiss a taxpayer's appeal for lack of jurisdiction on the ground that the requisite tax deficiency had not been determined, the Board of Tax Appeals (now the Tax Court) declared:
'* * * The Commissioner's position in this plea is that the taxpayers have been assessed on the basis of the tax shown upon the taxpayers' returns, and that a deficiency is only an amount of tax determined by him to be due in excess of that shown on the taxpayer's return. This is true in the ordinary case, but in cases in which the taxpayer shows an amount of tax upon his return but does not admit that that amount of tax is due and collectible, it is the amount which he admits to be due and not the amount which appears upon the face of his return which is deemed the starting point in the computation of a deficiency. Appeal of Continental Accounting & Audit Co., 2 B.T.A. 761.'
See also Fred Taylor, 1937, 36 B.T.A. 127, 429; Edward J. Lehmann, 1930, 21 B.T.A. 664, 671; Powell Coal Co., 1928, 12 B.T.A. 492, 497; U.S. Fidelity & Guaranty Co., 1926, 5 B.T.A. 23, 26.
Plaintiffs point out that attached to their tax return of June 14, 1954 was the stamped copy of their tentative 'no tax due' return which had been filed with the Internal Revenue Service on March 13, 1954 and then returned to plaintiffs. The argument here seems to be that the two returns, when read together as a whole, thus indicated to the District Director that plaintiffs did not admit that the amount of tax shown on their June 14th return was due and collectible. However, plaintiffs' action in attaching their tentative return of March 13th to the June 14th return cannot be regarded as bearing this significant import, and was certainly equivocal in view of the fact that, in so doing, plaintiffs were merely complying with instructions received from the District Director at the time the stamped March 13th return was returned to them. (See Affidavit of Michael Kearney, June 13, 1961, p. 1.)
The case at bar is thus readily distinguishable from Continental Accounting & Audit Co., 1925, 2 B.T.A. 761, wherein the corporate taxpayer had annexed to its return a statement or protest denying tax liability. Under these circumstances, the Board of Tax Appeals found that 'read as a whole the returns show no amount as the tax or show the tax to be zero.' 2 B.T.A. at 763. (Italics omitted.) The taxpayer was accordingly held entitled to an appeal to the Board from what was regarded as the determination of a deficiency by the Commissioner ('the difference between what he believes to be the correct tax' and 'the amount shown on the returns as the tax or zero'). 2 B.T.A., at 764. See also Penn Mutual Indemnity Co. v. Commissioner, 3 Cir., 1960, 277 F.2d 16.
Likewise, in Fred Taylor, 1937, 36 B.T.A. 427, where the Commissioner, in 1935, prepared and filed a 1917 income tax return for the taxpayer, since the latter had failed to do so, showing a tax due of $ 10,657.88 and a penalty of $ 5,328.94, the taxpayer was found to have protested the Commissioner's action 'long prior to the filing of the return.' (p. 429) The taxpayer's subsequent petition to the Board admitted that the tax due was only $ 250.90. The Board held that the Commissioner had determined a deficiency to the extent that the tax and penalty he had listed in the return exceeded $ 250.90 and claimed jurisdiction to redetermine the alleged deficiency.
Plaintiffs further argue that since the Commissioner made a mathematical correction on their June 14th return which decreased by $ 200 the tax assessment made on August 5, 1954, this decreased 'mathematical error assessment' was made under Section 272(f) of the 1939 Code and ...