Lewis v. United States

MADDEN, Judge.

The plaintiff sues to recover Federal income taxes paid by him on his income for the year 1944. He says that he paid more than he owed, and if he did he is entitled to recover the excess, since he filed a timely claim for refund which was disallowed. This is another case of a bonus paid to an officer of a corporation, a part of which bonus was, after the taxable year in question, repaid to the corporation because it was found that the bonus paid was larger than the. officer was entitled to.

Beginning January 1, 1939, the plaintiff was the general manager of the Accurate Spring Manufacturing Company. His agreed compensation was to be a salary plus ten percent of the profits of the' company before the deduction of taxes. He was so paid for the years 1939 and 1940. Late in 1941, the company’s business and profits having greatly increased, the president of the company raised with the plaintiff the question of whether his compensation was not too large. It was agreed, however, that no change would be made until after the profits for 1941 had been determined. After that was done, the plaintiff agreed that his bonus for 1941 should be computed on net profits after the deduction of taxes.

No further discussion or agreement having taken place, the plaintiff’s bonuses for the years 1942. and 1943 were computed on net profits after taxes. For the year 1944, however, the plaintiff, as the executive manager of the company, directed payment to himself of a bonus computed on profits before taxes. On this basis, he received a bonus of $21,924. The commissioner of this court found that the plaintiff at the time believed that he was entitled to, be paid on that basis. The Government took no exception to that finding,, and we have made a finding to the same effect.

The plaintiff .included the bonus of $21,-924 in his income tax return for 1944, and paid the tax on it. The company in its rectum deducted the $21,924 as a business expense. In 1945 the company discharged the plaintiff, and he sued the company in an Illinois court, alleging that he was entitled to a larger bonus than he had received for 1944, because the company had deducted improper items as expenses, thus reducing its net profits and the plaintiff’s bonus. The company 'filed a counterclaim in the plaintiff’s suit, asserting that the plaintiff had been overpaid, since his bonus should have been computed only upon profits after taxes. The Illinois court held for the company and required the plaintiff to repay to the company the amount by which the bonus received by him exceeded a bonus computed on profits after taxes. The excess was $10,856.06. The court found, as we have found, that the plaintiff mistakenly believed that the agreement between him and the company was that his bonus should be computed upon, profits before .taxes, but that in fact the agreement was that it should be computed on profits after taxes. .

The plaintiff repaid the $10,856.06 to the company. ■ The company filed an amended income tax return for 1944 in which it reduced its deduction and paid its tax on the amount repaid to it by the plaintiff. The plaintiff filed a1 claim for refund seeking the return of the tax paid by him on the $10,856.06 which he had been required to return to the company.

This court has held, in two recent cases, that when a taxpayer receives money which he supposes he is" entitled to keep, and pays income tax on it, but later learns that he was mistaken in thinking he was entitled to keep it, and pays it back, he is entitled to a refund from the Government of the tax paid on it. Greenwald v. United States, 57 F.Supp. 569, 102 Ct.Cl. 272; Gargaro v. United States, 73 F.Supp. 973, 109 Ct.CL 528. Our reasons for so holding were stated at length in our opinions in those cases, arid will not be repeated here. This case being in all essential respects like the two cases formerly decided, we decide it the same way.

The Government urges, as it did in the former cases, that the “claim of right” doctrine stated by the Supreme Court in North American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 615, 76 L.Ed. 1197, is a bar to recovery by the taxpayer in cases of this kind. We observe again that- the Supreme Court language relied on by the Government was obiter. The taxpayer in the American Oil case received the money in 1917, and never paid it back. There were five years of litigation during which its right to the money was disputed, but it won the litigation and kept'the money; The court’s statement as to what would have been the result if the taxpayer had lost the litigation was, therefore, unnecessary to its decision. We are impressed by the recent observation of the Supreme Court in the case of Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 408, 66 S.Ct. 546, 549, 90 L.Ed. 752, 166 A.L.R. 884, that—

“For present purposes, however, it is enough to note that a taxable gain is conditioned upon (1) the presence of a claim of right to the alleged gain and (2) the absence of a definite, unconditional obligation to repay or return that which would otherwise constitute a gain.”

The Wilcox case concerned the taxability of an embezzler upon the proceeds of his crime. His duty to repay would certainly not lose its quality of being “a definite, unconditional obligation” merely because at first he denied his crime and claimed that the money taken was his own, and persisted in that claim until he was convicted of the embezzlement. And the duty to repay of one civilly indebted because he had received money by mistake is no less “a definite, unconditional obligation” because he refuses to recognize the obligation until the contract in connection with which he mistakenly received the money has been interpreted and enforced by adjudication.

We think also that the Supreme Court’s decision in Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 309, 78 L.Ed. 634, also subsequent to the North American Oil case, supra, has a bearing upon our question. In that case the beneficiaries of a trust had been paid the entire income of the trust in the taxable year, but later the State court ■having jurisdiction over the trust determined that the trustee should not have distributed the entire income, but should have withheld and retained for remaindermen a certain amount for depreciation. The State court ordered the beneficiaries to repay the excess amounts to the trustee. They complied with this order, not by repaying the amounts, but by giving their non-interest bearing promissory notes to the presumptive" remaindermen, payable at the time the remainders should vest in possession. The Supreme Court held that the beneficiaries were not taxable upon the amounts paid them in excess of what should have been paid them in the proper administration of the trust.

In the Freuler case the applicable statute was Section 219 (d) of the Revenue Act of 1921, 42 Stat. 246, which said:

“(d). In cases under paragraph (4) of subdivision (a) * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not. * * * ”

The Supreme Court held that the State court’s decree, made many years subsequent to the taxable year and the actual distribution of the income, wás the “order governing the distribution” referred to in Section 219(d) and that therefore only so much of the income actually distributed as was lawfully “distributable” in view of that subsequent order, was taxable to the beneficiaries. We recognize, of course, that the Freuler case involved a special section of the Revenue Act, which had its own wording. The use in that section of the word “distributable” would seem to be accounted for by the fact that Congress intended to tax to beneficiaries money which was in fact available or owing to them by their trustees, even before it had actually been paid over to them. The fact that the court so interpreted the statute as to make taxa-bility depend upon the outcome of litigation as to whether the beneficiaries actually receiving the income were legally entitled to keep it or not seems to us to discount very heavily the idea that the finances of the nation would be thrown into disorder if the Government were allowed to tax as income only that which is, in fact, income to the taxpayer, and not that which only seems to be income because he is mistaken as to his right to keep it. We remind, however, that in the instant case, as also in the Greenwald and Gargaro cases, supra, the taxpayer, having received the income, paid his tax, and did not ask the Government to wait for its revenue until he had completed his litigation or resolved his question otherwise. In all these cases the naked question has been whether the Government should keep money paid to it upon the mistaken assumption that the citizen had taxable income, when in truth.he did not have the income, since he was under a legal obligation to return the money to his employer.

We are aware that the United States Court of Appeals for the Sixth Circuit has, upon similar facts, reached a contrary conclusion. Haberkorn v. United States, 173 F.2d 587. We adhere, however, to the view expressed in our former decisions.

The plaintiff is entitled to recover $7,-217.16 with interest according to law.

It is so ordered.

JONES, Chief Judge, and HOWELL and LITTLETON, Judges, concur.