BABCOCK & WILCOX CO. v. PEDRICK; BABCOCK & WILCOX TUBE CO. et al. v. PEDRICK.
Nos. 107, 108, Dockets 22864, 22865.
United States Court of Appeals, Second Circuit.
Decided April 7, 1954.
212 F.2d 645
Before CLARK, FRANK, and HINCKS, Circuit Judges.
Argued Feb. 1, 1954.
There is one further point. Rutkin has petitioned this Court for leave to amend his original motion. He wishes tо incorporate allegations from the complaint in the suit instituted by him against Reinfeld in the Southern District of New York. These allegations, substantially identical to the ones in his original motion here, are to the effect that his indictment and conviction were the result of a conspiracy, which is asserted to be the same one involved in this case. Rutkin has secured a verdict in the New York action against Reinfeld and others. He seeks also to incorporate into his motion that verdict and the findings of the jury that Rutkin had a bona fide claim against Reinfeld and others with respect to the Browne Vintners transaction. That a New York jury may have decided factual issues contrary to the findings of the jury in this case does not seem to us to prove anything here. Accordingly, the petition to amend will be denied.
The judgment of the district court is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.
Thomas C. Burke, Asst. U. S. Atty., New York City (J. Edward Lumbard, U. S. Atty., New York City, on the brief), for defendant-appellee-appellant and defendant-appellee.
CLARK, Circuit Judge.
These appeals bring up questions concerning the prоper method of computing corporate excess profits taxes for the years 1942 and 1943 and of interest upon asserted deficiencies in their payment. The taxpayers’ appeals in both the actions before us present the interesting contention that a corporation may accept a higher tax than the commissioner allows in order thus to take advantage of a higher refund under the statutory postwar refund of 10 per cent herein applicable. And the government‘s appeal in the first action, taken for the administratrix of the estate of a deceased colleсtor who is the defendant of record in both actions, asserts that interest must be separately assessed in favor of the taxpayer and the government upon offsetting excesses and deficiencies in income and excess profits taxes.
The Internal Revenue Code,
Taxpayers The Babcock & Wilcox Company and The Babcock & Wilcox Tube Company, plaintiff and plaintiffs below in these actions for tax refund, found themselves in a position where under either calculation the 80 per cent ceiling of
The plaintiffs’ quite ingenious argument on the issue of tax computation, an argument which Judge Holtzoff rejected below in granting defendant‘s motions for summary judgments, presents with some elaboration the contention that Congress, since it was granting these alternative methods of tax computation as a measure of relief to hard pressed taxpayers, must have desired such choice to extend to—and to be operable in reverse, so to speak, in—the application of the tax refund later to be made, in order that full measure of relief be accorded. But we agree with Judge Holtzoff that this hardly rises above the level of supposition, however shrewd, and cannot vary the plain language of the statute. We see little, if anything, to be added to his reasoning and, so far as concerns this issue, accordingly affirm on his opinion, D.C.S.D.N.Y., 98 F.Supp. 548-551.
The question of interest requires more extensive consideration. This is presented only in the first action brought by plaintiff, The Babcock & Wilcox Company, and comes before us upon the defendant‘s appeal from the grant of plaintiff‘s motion for summary judgment for the refund. It arises as follows: When the collector recalculated the excess profits tax liability of this plaintiff to find an “overpayment” upon its chosen method of computation, he necessarily found a corresponding “deficiency” of like amount in its ordinary income tax. In accordance with the interest provisions of
It is plaintiff‘s position that the government had in its possession at all times all the funds to whiсh it was entitled. Accordingly the overpayment and deficiency were fictitious bookkeeping transactions and the government was in no way injured. Since interest is designed to compensate for lost use of funds, it cannot here apply. This argument found favor in the district court. D.C.S.D.N.Y., 98 F.Supp. 548, 551.
Against this contention based upon equities, the government vigorously urges the specific mandates of the cited statutes.
The district judge did not meet this argument by specific rationale or precedent, but relied generally upon the equities, saying: “No money changed hands. The Government was not deprived of the use of any money. To charge the taxpayer with additional interest under the circumstances is obviously unfair and inequitable.” D.C.S.D.N.Y., 98 F.Supp. at page 551. But, however appealing, this is somewhat dangerous ground for the testing of taxes. To many persons various parts of the taxing policy seem unfair, e. g., the taxation of capital gains or the entire scheme of progressive taxation. Compare discussion by Randolph Paul in Book Review of Blum & Kalven, The Uneasy Case for Progressive Taxation, in 67 Harv.L.Rev. 725-731. “The Internal Revenue Code, not general equitable principles, is the mainspring of the Board‘s jurisdiction.” C. I. R. v. Gooch Milling & Elevator Co., 320 U.S. 418, 422, 64 S.Ct. 184, 186, 88 L.Ed. 139. And so we must turn to the statutes.
To meet the question of statutory authority plaintiff relies on the broad provisions for statutory setoff and credit
Returning therefore to the statutes, we perceive that the issue comes down in essence to the question whether the excess profits tax under the Code may properly be considered as a part of the corporate income tax or whether it is essentially a separate tax. For, once it is determined that the tax is separate, the statutory mandate is clear. The tax each year was due, at least in pаrt, and the deficiency arose on March 15.
But the point of substantial identity of the two taxes (except of course as to rates) appears to be settled against the contention both by the statutes themselves and by the precedents. The excess profits tax and the ordinary income tax are not one, but are made and levied in separate and distinct manner. They are imposed by separate legislation separately enacted. Thus Subchapter E—Excess Profits Tax,
The same reasoning has also been applied in the single other case, where the exact issue before us appears to have been presented. In W. G. Duncan Coal Co. v. Glenn, D.C.W.D.Ky., 120 F.Supp. 948, before Circuit Judge Martin, the issue was, as here, a question of discrepancy amounting to $4,366.29 for 1943 and $8,507.31 for 1944 between the commissioner‘s separate computation of interest on excess profits tax deficiencies and income tax overpayments as against the taxpayer‘s treatment of both taxes as one and computation of interest only on the net deficiencies due the government. In upholding the commissioner‘s position and dismissing the taxpayer‘s suit for refund, Judge Martin said: “An analysis of the plaintiff‘s cоmputation appears to show that income taxes imposed in Chapter 1 and excess-profits taxes imposed by Chapter 2 have been treated as one type of tax. Since the income taxes and the excess-profits taxes are separate and distinct types of taxes there appear to be no provisions of the Internal Revenue Code to warrant the plaintiff‘s treat-
This decision, squarely contrary to the position taken below, seems to us persuasive in its reasoning. The concept of separate taxable units is of course a fairly usual one in the revenue law, as we have had occasion to hold only recently with reference to different taxable years. Rosenthal v. C. I. R., 2 Cir., 205 F.2d 505, 511; and see also Helvering v. Pfeiffer, 302 U.S. 247, 58 S.Ct. 159, 82 L.Ed. 231; Arrowsmith v. C. I. R., 344 U.S. 6, 73 S.Ct. 71, 97 L.Ed. 6. So on a taxpayer‘s appeal from the commissioner‘s determination of a deficiency in tax for 1936, the Board was held without jurisdiction to determine the amount of a 1935 overpayment. C. I. R. v. Gooch Milling & Elevator Co., supra, 320 U.S. 418, 64 S.Ct. 184, 88 L.Ed. 139. In Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346, a taxpayer was held not entitled to a refund of the interest assessed on a tax deficiency which was later abated under the carry-back provisions of the Code by a net operating loss for a later year. Standard Roofing & Material Co. v. United States, 10 Cir., 199 F.2d 607, is to similar purport. In cases such as these the equities appear as strong as in the present case; but in them—as here in our view—the provisions of positive law prevented the abatement. This plaintiff, obviously thoroughly advised, took a calculated risk or tax gamble; having failed, it must pay the collector. Its claim for interest refund must therefore be denied.
On the plaintiffs’ appeals in both actions the judgments must be affirmed; on the defendant‘s appeal in the first action the judgment must be reversed and the action remanded for the entry of judgment for the defendant.
FRANK, Circuit Judge (dissenting in part, i. e. as to the interest).
I agree with my colleagues to this extent: (a) The total tax due, on income and excess profits combined, was precisely, to the penny, what taxpayer reported and paid; (b) the taxpayer in its returns erroneously computed its excess profits, adding to it the precise amount by which it under-stated its income tax. But I disagree with my colleagues that, on account of this error—utterly harmless to the government—some $52,000 (of so-called interest) must be exacted from the taxpayer. My reasons follow:
1. To understand this case, it is essential never to forget that the taxpayer, in computing and reporting, as it did, the two items—income and excess profits—had this sole aim: to make its excess profits tax larger because the 10% post-war refund, under
To achieve this aim, taxpayer had available either one of two alternative paper plans. Under what I shall call paper Plan I, taxpayer would have computed and reported its income and its excess profits exactly as my colleagues and I hold it should have done (except that perhaps it would have stated in its returns that it believed its reported income was too large in a designated amount, and its reported excess profits too small, in the same amount). It would then have paid a total tax in the exact amount which it did pаy. It would then have sued for a refund of that part of its income tax which, according to its interpretation of the Code, it would have overpaid. Had taxpayer won that re-
Taxpayer, however, would have lost that refund suit (according tо the ruling on which my colleagues and I agree). In that event, it would not have achieved its aim. But—and this is crucial—no one would then with a straight face have asserted that, because taxpayer had “gambled,” and lost, it owed the government some $52,000 for attempting this unsuccessful “gamble.”
Instead of using paper Plan I, taxpayer used what I call paper Plan II—which consists of doing what it did: In its return, it augmented its excess profits and decreased its income in the same amount; then, when the Commissioner redetermined its income tax, it paid the consequent assessment and sued for a refund of this assessment. Had it won that refund suit, the effect wоuld have been the same as the effect of winning the refund suit under Plan I. In other words, either paper Plan, for taxpayer‘s purpose, was as good as the other if, under either Plan, taxpayer won its refund suit.
But my colleagues hold that losing the refund suit under Plan II costs taxpayer $52,000—although (as we have seen) losing such a suit under Plan I would have cost it zero. So, according to my colleagues, a $52,000 liability is imposed on taxpayer for but one reason, namely that, in trying to increase its 10% postwar refund, it resorted to one rather than another paper Plan. The $52,000 thus shows up as a penalty for a mere error in paper-work concerning a single taxable event, an error which in no wise deceived the government and deprived it of nothing whatever. I think that “tax law” deserves the characterization Dickens’ Mr. Bumble gave “the law” in general—i. e., “the law is a ass“—if the failure of paper Plan II costs taxpayer one nickel more than would the failure of Plan I.
2. I concede, of course, that, if the statutory language directed such a result, we could do nothing to avoid it. But we should not embrace that result unless explicit statutory provisions leave us no escape. I cannot agree that the Code contains such provisiоns.
My colleagues rest their conclusion on this thesis: For all purposes under the Code, the income tax and the excess profits tax, due on March 15 of any single year, represent two wholly independent and unrelated taxes, so that, if the income tax is underpaid, the government has been deprived of the use of the amount underpaid from March 15 until it is paid, and therefore has a right to interest on that amount for the intervening period. For only by treating the two taxes as wholly unrelated, can it be said that taxpayer owes such interest, since no one denies that, as the taxpayer paid the total amount оf tax when due, the government was not deprived of the use of any money for a split second.
Patently, no wall separates these two taxes. On the contrary, these taxes intertwine.
3. My colleagues cite decisions where the problem arose whether the statute of limitations barred the setting off of a claim, otherwise valid, made by either taxpayer or the government, against a valid, unbarred claim asserted by the opponent. I think the course of these decisions goes to show that even over the barrier of a limitations statute, the Supreme Court‘s doctrine calls for avoidance of injustice when (as in the instant case) a single taxable event is in issue:
In Rothensies v. Electric Storage Battery Co., 1946, 329 U.S. 296, 67 S.Ct. 271, 91 L.Ed. 296, the facts were these: The taxpayer, from 1919 to 1926, had mistakenly paid excise taxes. In 1926—when claims for refund of those taxes for 1919 to 1921 inclusive were barred by the statute of limitations—taxpayer filed suit for refund of the taxes paid between 1922 and 1925. It obtained a judgment, a part of which the government paid in 1935, through a settlement. The Commissioner treated this sum as part of taxpayer‘s income for 1935, and on this account assessed a deficiency. The taxpayer, having paid this deficiency, sued for a refund. It contended that it had a right to recoup the amount of the excise taxes it had paid in 1919 to 1921 inclusive. The Court, rejecting this contention, distinguished Bull v. United States, supra, and Stone v. White, supra, saying, 329 U.S. 299-300, 67 S.Ct. 272: The doctrine of recoupmеnt in tax cases “has never been thought to allow one transaction to be offset against another, but only to permit a transaction which is made subject of suit by a plaintiff to be examined in all its aspects, and judgment to be rendered that does justice in view of the one transaction as a whole. The application of this general principle to concrete cases in both of the cited decisions is instructive as to the limited scope given to recoupment in tax litigation. In both cases a single transaction constituted the taxable event claimed upon and the one considered in rеcoupment. In both, the single transaction or taxable event had been subjected to two taxes on inconsistent legal theories, and what was mistakenly paid was recouped against what was correctly due.”1
In the instant case, relating to a single year (and with no statute of limitations involved), the taxpayer‘s income and the excess profits constitute together a “single * * * taxable event“. This “transaction which is made the subject of suit” should therefore “be examined in all its aspects, and judgment * * * rendered that does justice in view of the one transaction as a whole.” As the Supreme Court has said, a suit like this is “equitable in its function.”2 It cannot be equitable to exact a $52,000 penalty based on what is only a bookkeeping rearrangement of figures.
5. Manning v. Seeley Tube & Box Co., 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346, and Standard Roofing & Material Co. v. United States, 10 Cir., 199 F.2d 607, were cases in which the taxpayer attempted to change the basis of the tax. In the case at bar, nothing similar exists: no question here arises as to the amount of taxpayer‘s income, the only question being the proportion of taxpayer‘s income allocable to excess profits tax and income, respectively.3
6. In Superheater Co. v. C. I. R., 2 Cir., 125 F.2d 514, 516, cited by my colleagues, the decision turned on peculiar provisions of the Code under which the Board of Tax Appeals lacked jurisdiction to re-determine excess profits tax of a taxpayer on a review of the Commissioner‘s determination of a deficiency in income tax. In the instant case, we face no such problem; for this is a suit, brought under
In Rosenthal v. Commissioner, 2 Cir., 205 F.2d 505, 512, the decision (so far as here pertinent) turned on the failure of the Commissioner to file a cross-appeal. Moreover, the court referred to “the settled rule that each taxable year is to be treated as a separate unit for, assessment and decisional purposes“, and that rule is irrelevant here.
7. For the foregoing reasons, I think that the income tax and the excess profits tax are not, in a case like this, to be considered wholly distinct from one another. If I am correct in this respect, then, the Code points the way to justice here.
UNITED STATES v. DUNBAR.
No. 218, Docket 22999.
United States Court of Appeals, Second Circuit.
Decided May 10, 1954.
Before CHASE, Chief Judge, and SWAN and FRANK, Circuit Judges.
Argued April 7, 1954.
Gilbert S. Rosenthal, New York City, for appellant.
Leonard P. Moore, U. S. Atty., Brooklyn, N. Y., Richard C. Packard, Asst. U. S. Atty., Brоoklyn, N. Y., of counsel, for appellee.
SWAN, Circuit Judge.
On July 27, 1936 the appellant, then 17 years of age, was convicted, upon plea of guilty, of possessing and passing counterfeit money in violation of