American Light & Traction Co. v. Harrison , 142 F.2d 639 ( 1944 )

KERNER, Circuit Judge.

Plaintiff brought this action to recover $251,053.55 in income taxes admittedly overpaid for 1933. Although he admitted every allegation of fact contained in plaintiff’s complaint, defendant endeavored to defeat recovery by affirmatively pleading that plaintiff had underpaid its taxes for 1928 by $342,180.50, the collection of which was barred by the statute of limitations. On being submitted to the court on a stipulation of facts, judgment was rendered for plaintiff. To reverse this judgment, defendant appeals.

The only issue here is whether plaintiff is entitled to recover the admitted overpayment of income taxes for 1933, even though the amount thereof is exceeded by a tax which should have been paid for 1928, the assessment of which is barred by the statute of limitations.

On July 6, 1928, Waverly Company, a wholly-owned subsidiary of plaintiff, acquired 50,000 shares of common stock of the Brooklyn Union Gas Company at a cost of $3,898,495.86. July 27, 1928, Waverly Company exchanged the stock for $6,750,000 face amount of 20-year debentures of Gregory Company, the stock of which was owned by outside interests. On that date the Brooklyn Union Gas Company stock had a fair market value equal to the face amount of the debentures received in exchange therefor, and the debentures had a fair market value equal to the face amount thereof.

As provided in § 112 of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Acts, page 377 et seq., this exchange was a taxable transaction, so Waverly Company made a profit thereon of $2,851,504 constituting taxable income for the year 1928. But in the consolidated income tax return filed by plaintiff in 1928 (which included Waverly Company as well as other affiliated corporations), the profit of $2,851,504 was not reported because it was believed that the transaction was a tax-free reorganization. The Government’s failure to collect the tax for 1928 was not caused by any misrepresentation or misleading silence on plaintiff’s part, but resulted from an opinion of the General Counsel for the. Bureau which, in 1940, turned out to be erroneous under LeTulle v. Scofield, 308 U.S. 415, 60 S.Ct. 313, 84 L.Ed. 355.

It appears that prior to the expiration of the statute of limitations for 1928, plaintiff furnished the Commissioner of Internal Revenue with all relevant facts with respect to the exchange. The commissioner regarded it as a non-taxable reorganization so no taxable gain was recognized. The period prescribed by the statute of limitations, as extended by waivers, for the assessment and collection of income taxes due from plaintiff and its affiliated corporations for 1928 expired on December 31, 1932.

During the years 1930 and 1931, Waverly Company sold $2,651,470 face amount of debenture bonds of Gregory Company, receiving therefor $2,651,470 in cash. These 1930 and 1931 sales were among the transactions involved in American Light & Traction Co. v. Commissioner, 42 B.T.A. 1121, affirmed, 7 Cir., 125 F.2d 365, in which it was held that the July 27, 1928, exchange was a taxable transaction; that for the purpose of determining gain or loss on subsequent disposition, the basis of Gregory Company bonds in the hands of Waverly Company was the cost, and that since the cost of the bonds was equal to the face thereof, no gain was realized from the sale of the bonds in 1930 and 1931.

During 1933 Waverly Company sold the rest of the debenture bonds of Gregory Company, receiving therefor $4,098,530 in cash. In its consolidated income tax return for 1933, plaintiff erroneously included in taxable income on account of said transaction the sum of $1,731,403.76 and thereby overpaid its income taxes for that year by $251,053.55. After timely filing of a proper claim for refund and the rejection thereof by the commissioner, plaintiff brought this action against the Collector.

Defendant concedes that our previous decision has settled the question of estoppel against him, for we held there that this taxpayer was not estopped from urging that the 1928 transaction was taxable, 125 F.2d 365. But he now contends that the question here is not estoppel but recoupment (the word recoup is used in defendant’s answer), i.e., that the Collector is entitled in equity to recoup against plaintiff’s present claim, the taxes of $342,-180.50 for 1928, which should have been paid on Waverly’s profits on the exchange of stock for the debentures.

Since an action to recover a federal tax erroneously paid is in the nature of a common law action for money had and received and is governed by equitable principles, United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 402, 403, 54 S.Ct. 443, 78 L.Ed. 859, and since equitable principles would preclude a recovery in the instant situation, plaintiff could not recover if there were no statutory provisions involved. Here, however, there are such provisions which cannot be ignored.

Section 607 of the Revenue Act of 1928, 45 Stat. 791, 874, 26 U.S.C.A. Int.Rev.Code, § 3770(a)(2), which is significantly entitled “Effect Of Expiration Of Period Of Limitation Against United States,” provides that any payment of a tax after the expiration of the applicable period of limitation shall be considered an overpayment and directs that it be “ * * * credited or refunded to the taxpayer if claim therefor is filed within the period of limitation for filing such claim.” Under this section, any payment of the barred deficiency for 1928 would constitute an overpayment, the refund of which would be mandatory. Section 609 (a) provides that “Any credit against a liability in respect of any taxable year shall be void if any payment in respect of such liability would be considered an overpayment under section 607.” 45 Stat. 875, 26 U.S.C.A. Int.Rev.Code, § 3775(a). Since the payment of the barred deficiency for 1928 would constitute an overpayment under § 607, it necessarily follows that any credit of the 1933 overpayment against that barred deficiency would be void under § 609(a). In the light of these provisions, the only possible conclusion is to affirm the District Court’s judgment for the plaintiff. Any other result would effect a judicial repeal of the Act of Congress.

Controlling authority is found in McEachern v. Rose, 302 U.S. 56, 58 S.Ct. 84, 85, 82 L.Ed. 46, for the principle enunciated therein is clearly applicable here. There, the taxpayer sold shares of corporate stock in 1924 at a profit of $295,-000, payable in ten equal annual installments. After his death in 1928, the administrator continued for the years 1929 to 1931, inclusive, to pay income tax on the installments, whereas under the pertinent statute he should have reported as income for the year 1928 the capital gain included in the value of the unpaid installments at the time of the decedent’s death. After the assessment of the tax for 1928 was barred by the same statute of limitations which is applicable here, the taxpayer sought to recover the over-payments for the years 1929 to 1931, inclusive. The Government contended that the taxpayer “ * * * was not entitled to recover the overpayments for those years, since they were less in amount than the tax which should have been assessed against him for 1928.” Except that the word recoupment was not used, the contention was precisely the same as that advanced here. In holding that the taxpayer was entitled to recover the admitted overpayments despite the barred deficiency for the earlier year, the Supreme Court stated that “ * * * in the circumstances, equitable principles would preclude recovery in the absence of any statutory provision requiring a different result. But Congress has set limits to the extent to which courts might otherwise go in curtailing a recovery of overpayments of taxes because of the taxpayer’s failure to pay other taxes which might have been but were not assessed against him. * * * ” [Sections 607 and 609(a)] “ * * * preclude the Government from taking any benefit from the taxpayer’s overpayment by crediting it against an unpaid tax whose collection has been barred by limitation.” 302 U.S. at pages 59, 60, 58 S.Ct. at page 86, 82 L.Ed. 46.

“The similar treatment accorded by the statutes to credit against an overdue tax, and to payment of it; the prohibition of credit of an overpayment of one year against a barred deficiency for another; and the requirement that payment of a barred deficiency shall be refunded, are controlling evidences of the congressional purpose by the enactment of §§ 607 and 609 to require refund to the taxpayer of an overpayment, even though he has failed to pay taxes for other periods, whenever their collection is barred by limitation.” 302 U.S. at page 62, 58 S.Ct. at page 87, 82 L.Ed. 46.

In the McEachern case, as here,_ the overassessments for subsequent years resulted from a mistaken treatment of a transaction in an earlier year. There, as here, the barred deficiency for the earlier year exceeded the admitted overpayments •for the later years. There, as here, whether it be called recoupment, offset, equitable credit, or some other term, the Government’s contention was the same, and it is clear that the difference between the defense urged there and that urged here is purely verbal.

In a footnote in its brief defendant points out that in the McEachern case recoupment was not pleaded as such, that the taxpayer urged in his brief that since recoupment was not pleaded or proved in the lower court it was not an issue, and that the Supreme Court did not use the word recoupment in its opinion. This does not alter the fact that the court did pass squarely upon the substance of the defense, regardless of the name by which it was called, and it is probable that the Court did not attach much importance to the label affixed to the Goverment’s defense. If the McEachern case had only the very narrow scope which the Government seeks to give it, so that the decision hinged purely on a narrow and technical point of pleading, it is certain that the opinion would have discussed it. When defendant speaks of recoupment, he means the credit of an overpayment for one year against a barred deficiency for another year. Section 609(a) of the statute expressly prohibits the credit of an overpayment for one year against a barred deficiency for another year. Since recoupment means credit, it is obvious that defendant is asking us to do that which is expressly prohibited by the statute. Other courts have interpreted the McEachern case in the same manner, holding that recoupment means credit or that the word credit as used in the statute includes recoupment, so that no recovery is possible. Thus in Grand Central Public Market v. United States, D. C., 22 F.Supp. 119, 130, appeal dismissed, 9 Cir., 98 F.2d 1023, the court said: “In this recent McEachern Case it was held that the equitable defense of set-off, unjust enrichment, or recoupment is not available to the government if the application of such a defense would result in crediting a later overpayment upon a barred tax liability.”

And in Lyeth v. Hoey, 2 Cir., 112 F.2d 4, 8, 130 A.L.R. 830, the court stated:; “The defendant’s right of recoupment or credit is precluded by statute and the plaintiff is entitled to recover the amount of his overpayment without abatement.”

Besides the two cases just citedj other opinions have taken the same view of this statute and the force of the McEachern case, for example, Hall v. United States, Ct.Cl., 43 F.Supp. 130, certiorari denied, 316 U.S. 664, 62 S.Ct. 1105, 86 L.Ed. 1776; Rotenberg v. Sheehan, D.C., 48 F.Supp. 584; and Crawford v. Heiner, D.C., 23 F.Supp. 240.

The two Supreme Court authorities cited by defendant were decided prior to the McEachern case. If there is a conflict, it is clearly our duty to follow the latest case. But the earlier cases are readily distinguishable from the instant case. In Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421, the instant limitations statute was not involved, and the estate tax and the income tax not only arose out of the same transaction but were imposed on the identical moneys, so that the same receipt was made the basis of both income and estate tax. In our case two entirely different taxable periods are involved, and the tax is not laid on the same fund. In Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L.Ed. 1265, different taxpayers were involved and the commissioner could not credit the overpayment of one against the deficiency due from the other, so §§ 607 and 609(a) did not apply. Moreover, the two taxes involved related to the same fund. The Stone case is distinguished in the McEachern case, 302 U.S. 56, 62, 63, 58 S.Ct. 84, 82 L.Ed. 46, and the distinctions there pointed out also distinguish it from our case.

Nor do the lower court decisions which defendant cites persuade us to reach a different result. Crossett Lumber Co. v. United States, 8 Cir., 87 F.2d 930, 109 A.L.R. 1348, was decided prior to the Mc-Eachern case. One of the cases relied upon therein was Rose v. McEachern, 5 Cir., 86 F.2d 231, which the Supreme Court reversed, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46. Gooch Milling & Elevator Co. v. Commissioner, 8 Cir., 133 F.2d 131, which relied strongly on the Crossett case, was also reversed, 320 U.S. 418, 64 S.Ct. 184. Furthermore, in that case the statutes involved were not the same as the instant statute, and the opinion is largely confined to the problem of the jurisdiction of the Board of Tax Appeals. As for Dixie Margarine Co. v. Commissioner, 6 Cir., 115 F.2d 445, we have the Solicitor General’s statement for the fact that “ * * * the rule of the McEachern case was not considered by the court nor was the decision even cited 'by the Government prior to the Government’s petition for rehearing in the Circuit Court of Appeals.” Dunigan v. United States, 87 Ct.Cl. 404, 23 F.Supp. 467, was factually more similar to the Bull case than to the McEachern case, and in the light of what the Court of Claims said in its later opinions in Hall v. United States, Ct.Cl., 43 F.Supp. 130, and Mohawk Rubber Co. v. United States, 25 F.Supp. 228, 232, 88 Ct.Cl. 50, there is some doubt as to whether that court would follow the Dunigan case. The Mc-Eachern case was not mentioned in Mills v. United States, D.C., 35 F.Supp. 738, and the factual situation in the Mills case was different from the instant case. Hence the Mills case is not persuasive here.

Because income taxes are levied on the basis of annual returns for fixed accounting periods defined in the statute as the “taxable year,” 26 U.S.C.A. Int.Rev.Code, §§ 41, 48, and the substantive and procedural provisions of the revenue laws, including statutes of limitation, are accommodated to this fundamental concept, there may be inconsistent results in some situations. Burnet v. Sanford & Brooks Co., 282 U.S. 359, 51 S.Ct. 150, 75 L.Ed. 383. Probably moved by the desire to stimulate voluntary payment of taxes by giving the taxpayer an immediate refund right free from the danger that it would be credited against any stale deficiency, Congress enacted the instant statutory provisions. At any rate, Congress did enact these provisions which we are not free to suspend or apply at will, nor to shape to our notion of the ends of justice. Although here a hardship on the Government results from the taxpayer’s inconsistency, the correlative provisions of this same statute will, in the converse of the instant situation, work an equal hardship on the taxpayer. Hall v. United States, Ct.Cl., 43 F.Supp. 130. Tn the instant case, our power to construe the statute is narrower than usual and closely circumscribed, because the Supreme Court has given an authoritative interpretation in the Mc-Eachern case.

The judgment is affirmed.