The opinion of the court was delivered by: BRENNAN
The trial of this non-jury tax refund case leaves two questions for decison. (1) The legality of the assessment and collection of interest upon the amount of a jeopardy tax assessment which included an item of interest computed to the date of such assessment. The collection of interest upon interest is the crux of this question. (2) The legal propriety of the assessment and collection of interest upon a part of the tax unpaid after the date when the taxpayers' claim that a partial payment of said tax was made available to the taxing authority.
No question is raised as to the court's jurisdiction or to the preliminary requirements therefor. The facts are not essentially disputed and are submitted in the form of a stipulation, exhibits and brief oral evidence which are summarized below.
In 1953 the Commissioner of Internal Revenue made jeopardy assessments against the plaintiff taxpayers on account of income tax deficiencies for the years 1944-1946 and 1948-1951 inclusive. Such assessments amounted in their total to about $ 173,000. and included items of interest computed upon the tax for the years involved from the due date of the tax to the date of the assessment. The required notices of the assessments were given to plaintiffs and they timely filed a petition for a redetermination of the deficiencies involved. The matter was submitted to the Tax Court in April 1956 and a decision was received in September 1957 which redetermined plaintiffs' tax liability in the amount of about $ 120,000. The amount due has been paid in full.
During the pertinent times involved, the taxpayers possessed a substantial financial investment in the Arizona Harness Racing Association. This investment was represented by stock and notes of the corporation. The assets of the Association were sold and payment therefor was made in installments to Louis Rosenzweig, an attorney of Rochester, who was acting as its secretary and principal disbursing officer. As such installment payments were received, they were credited upon the books of the Association in proportion to financial interest of the investors, including the taxpayers. The sums thus held were payable through the action of Mr. Rosenzweig upon the surrender to him of notes held by the investors in an amount equal to the payment to be made. The stock held by the investors was apparently considered as worthless.
Shortly after the making of the jeopardy assessment, above referred to and based thereon, notice of the lien and levy of the Bureau of Internal Revenue was served upon the Association which in effect prevented the payment to taxpayers of their share of the installment purchase payments. Such share was then set apart upon the books of the Association as a credit due them. As per a conference with the Director and the taxpayers, their stock and notes were held in escrow by their attorney to be surrendered to Rosenzweig as payment was made to the Bureau from the moneys held for their account. Pursuant to the above arrangement, notes were surrendered to Rosenzweig and payment made to the Director by the Association of $ 37,157.10 to apply upon taxpayers' indebtedness. This transaction occurred November 19, 1954 while the Tax Court action was pending and in accordance with an agreement with the Director. It is plain from the above and the subsequent action referred to below that the taxpayers disputed the amount of the jeopardy assessment but considered that a substantial amount thereof was due and owing which was the ultimate decision of the Tax Court. The above payment was of benefit to both the Government and the taxpayers in that the Government obtained the use of the money and interest ceased to accumulate against the taxpayers upon the amount paid.
On May 1, 1956 approximately $ 140,000. was held by the Association for the taxpayers, on account of payments made as outlined above. By letter to the District Director, dated May 1, 1956, plaintiffs' counsel wrote in part as follows:
'Mr. Silver has authorized me to request that you now request Mr. Rosenzweig to turn over to your office the sum of $ 50,000.00, to apply on account of this tax liability and interest. When you have received this money, we shall advise you concerning the manner in which we would prefer to have it allocated.
'Would you please make the necessary arrangements to permit Mr. Rosenzweig to turn these funds over to you, and advise me when this has been done.'
Receipt of the above letter was acknowledged under date of May 7, 1956 and counsel was advised that the request was receiving consideration. No further reply was received until July 24 when the Director wrote counsel in part as follows:
'We have just been notified that the criminal aspect of this case has been adjudicated and closed, and to proceed with the collection of the civil tax liability. Computation of said liability has been made and found to be the sum of $ 135,804.21 assessed balance, plus $ 28,974.14 accrued interest to July 31, 1956, totalling the sum of $ 164,778.35.
'All funds held by you and/or the Arizona Harness Racing Association, up to the above mentioned amount, should now be turned over to this office as provided by levies and copies of liens previously served upon you. Any remittance should be in the form of certified funds payable to 'Internal Revenue Service' and forwarded to the attention of the undersigned'.
Again no further action was taken either by the Director or plaintiffs' counsel until January 1957 when the Director at Syracuse requested an investigation to be made by an agent stationed at the Rochester office. The agent contacted plaintiffs' attorney but their conferences resulted in no conclusive action. The agent made no demand for payment of an amount less than the full amount claimed under the assessment as computed. Counsel made no direct offer of a partial payment.
It is evident however that the subject of the acceptance by the agent of less than the full amount was discussed because of January 21, 1957 counsel wrote the Director in substance requesting that the agent be authorized to 'accept $ 75,000. on account, or whatever amount my client tenders. * * *'. Receipt of that letter was acknowledged by the Director under date of January 23, 1957, advising that a collection officer would contact counsel with reference thereto. About two weeks later, under date of February 11, counsel advised the agent at Rochester that as a result of the conference, his client was investigating the feasibility of posting a bond instead of making payment. The letter concluded in the following language 'and the taxpayer has accordingly instructed me not to turn over the notes at this time'. The substance of the above communication was substantially restated in counsel's letter to the agent of March 19, 1957. The matter apparenty was allowed to remain in status quo until a 'final demand' for payment was served upon the taxpayers, the ultimate result of which was a conference held on June 20, 1957 when the Director agreed to the acceptance of $ 75,000. to be paid for the benefit of the taxpayers according to the procedure outlined above and further agreed to withhold further collection activity until the decision of the Tax Court which was received in September 1957. The sum of $ 75,000. was paid on June 27, 1957. Thereafter and on April 30, 1958, the balance remaining unpaid in accordance with the Tax Court decision was paid by the taxpayers.
Plaintiffs' first contention that the action of the authorities of the Bureau of Internal Revenue in computing interest upon the unpaid yearly tax deficiency and including same as an item making up the jeopardy assessment and thereafter computing interest upon the face amount ultimately found to be due under such assessment constitutes the imposition of interest upon interest may be quickly disposed of. The defendant does not dispute that such action results in the imposition and collection of interest ...