decided: December 28, 1978.
LUCILLE P. KAHN, APPELLANT,
UNITED STATES OF AMERICA, APPELLEE .
Appeal from a judgment in the United States District Court for the Southern District of New York, Robert J. Ward, Judge, denying plaintiff a refund of income tax paid. The Court of Appeals affirmed, finding that the plaintiff's proceeding in the Tax Court for review of deficiency determination tolled the six-year statute of limitations for collection following assessment, even though assessment did not occur until after the proceeding was commenced.
Before Lumbard, Mansfield and Oakes, Circuit Judges.
Incredibly enough, this case involves an income tax deficiency assessed against appellant and her late husband for calendar year 1943. Not so surprisingly, however, the appeal involves the statute of limitations and more particularly the question whether the statute, in this instance on collection rather than on assessment, has been tolled.
The district court held that the statute of limitations had been tolled and consequently entered a judgment denying a refund sought under 28 U.S.C. § 1346(a)(1). We agree with the United States District Court for the Southern District of New York, Robert J. Ward, Judge, and we affirm the judgment below.
Appellant and her late husband, David E. Kahn, filed a joint return for calendar year 1943. Thereafter the Internal Revenue Service (IRS) determined that there was a deficiency of $33,096.08 due because of the disallowance of a claimed bad debt deduction. Thereafter appellant and her husband jointly petitioned the Tax Court to redetermine the alleged deficiency. On April 8, 1953, the Tax Court entered memorandum findings of fact and an opinion in favor of the IRS. 12 T.C.M. (CCH) 378 (1953). Appellant and her husband then filed a petition to review in the United States Court of Appeals for the Second Circuit. On September 22, 1953, the IRS assessed the disputed income tax deficiency, plus interest, against Mr. and Mrs. Kahn. It is not disputed that this assessment was proper under the applicable provision of the Internal Revenue Code of 1939; the IRS was authorized to make an assessment even pending appellate review when a taxpayer failed to file a bond securing the deficiency,*fn1 and no bond had been filed. On January 25, 1955, this court affirmed the Tax Court. Kahn v. Commissioner, 218 F.2d 822 (2d Cir. 1955).
Parenthetically it should be noted that two of the ways*fn2 in which the applicable six-year statute limiting the collection of an assessed deficiency*fn3 may be tolled are (1) by execution of a waiver*fn4 or (2) by the operation of § 277 of the Internal Revenue Code of 1939, now I.R.C. § 6503(a) (1), set out in the margin.*fn5 Although appellant, along with her husband, did sign waivers commencing on December 28, 1960, and extending the statute on collection until December 31, 1970, after her husband's death, only her husband signed the original waiver of September 14, 1959, which would have extended the statute until December 31, 1961. Thus, if the Government is to prevail, it must establish that the statute did not begin to run more than six years prior to December 28, 1960, I. e., before December 29, 1954. Appellant argues that the statute began to run as of the time the assessment was made on September 22, 1953. The IRS contends that the statute did not begin to run until after the decision of the Second Circuit Court of Appeals became final sometime after January 25, 1955. In the latter case the December 28, 1960, waiver would have been within the six-year period ending after January 24, 1961.
Appellant's principal contention is that the language in parentheses in old § 277, See note 5 Supra, about the tolling of the statute "(and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final)" may not be read to apply to this case, a case in which no proceeding was placed on the docket of the Tax Court After assessment. Put another way, appellant argues that her pre-assessment petition could not "suspend" the statute of limitations, which had not yet begun to run when she filed her proceeding in the Tax Court because an assessment had not yet been made. Thus appellant concludes that once the IRS made its assessment in September 1953 nothing further remained to be done in order to make the statute run, and nothing was done to toll it. She suggests that if Congress had intended the parenthetical clause in the tolling statute to apply to pre-assessment proceedings, it could easily have referred to a deficiency which "is Or has heretofore been placed" rather than, as it does, to one which "is placed" on the docket of the Tax Court. The district court, unable to accept an argument "based upon such semantic nuances in the face of the plain meaning of the (statute)," disagreed, as do we.
Almost from the beginning the Internal Revenue Code's treatment of statutes of limitation has been complex, with different statutes governing assessment and collection as well as penalties and the liability of transferees; with provisions for extending the limitations period as well as for shortening it; and with constant changes in the substantive provisions of the Code, not the statute of limitations, as errors of administration were uncovered or as Congress attempted to plug loopholes seemingly created by judicial decisions or to respond to different problems as they arose. See generally 10 J. Mertens, Law of Federal Income Taxation ch. 57 (1976). Nevertheless, under both the old Code and the current one there is a certain symmetry at least between the period of limitations and the assessment statute. Basically the IRS cannot assess a deficiency or begin any proceeding for its collection until it mails a notice of deficiency to the taxpayer and the deficiency period, now ninety days, formerly sixty, expires; or in the event that the taxpayer has within that ninety-day period filed a petition with the Tax Court, until the decision of the Tax Court becomes final. This was true under § 272(a)(1) of the 1939 Code; it is true today. I.R.C. § 6213(a).*fn6
There were, however, exceptions to this basic symmetry; and, as might be supposed, their effect has been asymmetrical. One exception we have already mentioned; it is described in the collection limitation statute itself, Int.Rev.Code of 1939, § 276(c), now I.R.C. § 6502(a), See note 3 Supra, in the case of written waiver executed within the six-year limitation period. See generally 9 Mertens, Supra, § 49.139. As previously stated, that exception is not involved in this case except after December 28, 1960; because neither appellant nor the Commissioner questions its applicability thereafter, we need discuss it no further.
Another exception is in the case of a jeopardy assessment. The Commissioner may make a jeopardy assessment (1) before the IRS mails a notice of deficiency if he sends the notice within sixty days after the assessment, Laing v. United States, 423 U.S. 161, 170-71, 96 S. Ct. 473, 46 L. Ed. 2d 416 (1976); Int.Rev.Code of 1939, § 273(b), now I.R.C. § 6861(b); (2) after the IRS mails a notice of deficiency, Int.Rev.Code of 1939, § 273(c), now I.R.C. § 6861(c); as well as (3) after the Tax Court renders its decision (although an assessment made at that time may be only for the amount of deficiency determined by the Tax Court and may not be made after the decision of the Tax Court has become final or after the taxpayer has filed a petition to review the decision of the Tax Court). Int.Rev.Code of 1939, § 273(e), now I.R.C. § 6861(e). See 9 Mertens, Supra, § 49.146-.148. It will be observed that under appellant's interpretation of the tolling statute, it would not toll a jeopardy assessment made after the taxpayer initiates a Tax Court action.
Our case involves a third exception, which applies when a taxpayer seeks appellate review of a Tax Court decision but does not file the appropriate bond. Int.Rev.Code of 1939, § 1145, now I.R.C. § 7485(a).*fn7 See generally 9 Mertens, Supra, §§ 49.159, 50.34(5). See Churchill Farms, Inc. v. Orr, 324 F. Supp. 713 (E.D.La.1971).
We believe that in these exceptional situations the IRS may make an assessment but that the Government may nevertheless have the benefit of the tolling statute. Although in the case of other statutes of limitation it may be argued that they should be construed liberally as statutes of repose, Guaranty Trust Co. v. United States, 304 U.S. 126, 136, 58 S. Ct. 785, 82 L. Ed. 1224 (1938); See also Rothensies v. Electric Storage Battery Co., 329 U.S. 296, 301, 67 S. Ct. 271, 91 L. Ed. 296 (1946), many courts have taken the view that limitations in the case of taxes will be strictly construed in favor of the Government. E. g., Pacific Coast Steel Co. v. McLaughlin, 61 F.2d 73 (9th Cir. 1932), Aff'd, 288 U.S. 426, 53 S. Ct. 422, 77 L. Ed. 873 (1933); See 10 Mertens, Supra, § 57.02. Whether this is a rule of construction that is entitled to general applicability may be questionable, but it has real merit when applied to an assessment statute. There is a good, practical reason for assessment as soon as legally permissible under the 1939 Code because such action permits the IRS to obtain a statutory lien on all property and rights to property of a taxpayer. Int.Rev.Code of 1939, §§ 3655, 3670, now I.R.C. §§ 6303(a), 6321. Thus we should not adopt a rule that will require the IRS to delay in making assessments in order to get the longest collection period possible in cases that look as though they might otherwise approach the untolled six-year period of limitations. Moreover, there are limits on the IRS's ability to delay assessment; the Code provides for a period of limitation on assessment as well as on collection. See generally 10 Mertens, Supra, § 57.04.
What little legislative history there is seems to bear out the Commissioner's interpretation of the tolling statute:
It is specifically provided in section 277 that the limitation period shall be suspended, if any proceeding is placed on the docket of the Board (now the Tax Court) until the decision of the Board in respect thereof becomes final and for 60 days thereafter.
This provision also takes care of any uncertainty as to the suspension of the statute where, after the decision of the Board, a petition for review is filed without the required bond.
H.Rep. No. 2, 70th Cong., 1st Sess. (1927), Reprinted in J. Seidman, Legislative History of Federal Income Tax Laws 551-52 (1938). Appellant argues that the "in any event" language of § 277 was intended to ensure only that the running of the statute would be tolled if there was a technical defect in the petition or proceeding that may have deprived the Tax Court of jurisdiction following docketing of the proceeding. See id. Although that may have been one purpose, it is not necessarily the only purpose as the language from the House Report above quoted indicates.
The chief problem that we see with appellant's position, however, is that under it if the IRS makes an assessment one day Before the taxpayer initiates proceedings in the Tax Court, the statute would be tolled, as appellant concedes, but if the IRS makes the assessment one day After (or, as here, when a taxpayer fails to file a bond pending appellate review of a Tax Court decision), the IRS would get no tolling benefit. This would seem to us inconsistent, nay, eccentric, a result which we are not lightly to assume Congress intended. See J. C. Penney Co. v. Commissioner, 312 F.2d 65, 68 (2d Cir. 1962) (Friendly, J.). Moreover, if as appellant asserts the pre-assessment proceeding did not toll the collection period of limitations, nothing would toll it; and the IRS would be forced, in every case where the Commissioner has made a jeopardy assessment after the taxpayer files in the Tax Court or where the taxpayer fails to file a bond pending review of the Tax Court decision, to institute collection proceedings while proceedings to review the deficiency determination were under way if these proceedings began to approach the end of the six-year collection period. We refuse to require a collection procedure so detrimental to the taxpayer and possibly so futile as well.
True, the IRS does make a choice when it makes an assessment, but why the IRS should be burdened because of such a choice is not clear. The tax collecting agency is not to be dealt with on the basis of its hidden choices or intentions.
Like many other tax statutes, the one here in question is slightly ambiguous, rather amazingly presenting a case of first impression after over forty years of administration. The plain language of the statute points against the taxpayer; and nothing to which she refers us in the legislative history, logic, or otherwise compels us to her result. The equities of the case are not before us; and even if they were, as might be suspected they would be somewhat conflicting. We can do little to improve upon Judge Ward's sensible opinion. We accordingly affirm the judgment below.