The United States of America v. The Russell Manufacturing Company

LUMBARD, Judge, Chief and Before MARSHALL, FRIENDLY and Circuit Judges. Judge: FRIENDLY, Circuit appeal chapter This in a is the latest controversy tax between the Government Manufacturing Company dragging nearly which twenty years. been think, as We did Con- Timbers the District Court for necticut, it is time down curtain. During through 1948, agree- entered sixteen trust Russell ments, into through P, by known as A each agreed deposit with a

which company trust specified proportion earnings year. for a Each fiscal trust key was for the benefit officers and management personnel whose names participating percentages were set forth in a schedule. invest The trustee payments in bonds and United States currently to distribute the interest among appears participants. trusts, beginning for ten years of the year from the end of the fiscal respect earnings pay- of whose made, principal ments were to be was to accrue to the at the beneficiaries month; per thereof rate %e principal made of the were to be % year end of and of the the third succeeding six For two trusts, ones. immediately upon began accrual year the end the fiscal which earn- ings over, paid the accrual were per month rate Vm % principal paid first was to be after this accrual and for four suc- ended years. beneficiary A who cessive volun- Shillingburg, Washington, tarily employ J. Edward left Russell’s (Louis Oberdorfer, Atty. began rights, D. C. F. Asst. accrual unless he lost all Gen., Jackson, Baum, Harry engage Lee A. left ill did health Attys., Dept, Justice, Washington, activity. any manufacturing D. business C., Newman, Atty., Jon began, beneficiary O. U. S. Howard After accrual Owens, Jr., Atty., T. U. employ Asst. S. of coun- Russell’s otherwise than left sel), plaintiff-appellant. discharge resignation requested would introductory compensation” under any share unaccrued forfeit likewise language (p) activity. and met the test of 23 All engaged such he (D) permitting deduc- of subsection added to be forfeited amounts so paid” year when tion “in the taxable other bene- pro shares rata to the interest be- since the beneficiaries’ ficiaries. at that time.1 come nonforfeitable began Payments the trusts an- consequences The Internal Revenue Controversy tax over their follow the nounced that it would not the fiscal for with the tax commenced favorable insofar was as this year as a deduction took 1945. Russell 59-383, taxpayer. P paid Rev.Rul. year $47,200 trusts in that Assistant —2 Later the Cum.Bull. 456. disallowed Commissioner and G. The charge Attorney ground payments of Tax General in that on plan “qualified” Counsel of pursuant Division advised the Chief ato were not Service, (C) (A), (B) (1) the Internal Revenue attor- 23(p) and under conceded, ney Russell, Code, and for and the Clerk Russell the 1939 Department requirement Court of Claims that the not meet the did that against petitioning permits 23(p) (1) (D) de- Justice had decided of § non-quali- payments for certiorari. ductions under rights plan employees’ to or “if the fied years for the refund claims Meanwhile employer’s contribu- from derived such accumulating 1946-54 had been and the compensation nonfor- tion such District Director Internal Revenue contribution feitable at the time the sought the National Officeas advice from Payment compensation paid.” of the January, In to what to do about them. claim, deficiency, refund denial Counsel of the Internal ensued. in the Court Claims suit instructed, in a letter Revenue Service States, that, assuming Mfg. hereafter, In of which more Russell Co. v. United changes (1959), F.Supp. the Court there had been “no fundamental posi- years the Government’s the factual situation re Claims sustained (D) your memorandum, (1) §23(p) an satis- ferred to in ad tion that rights merely should be made to because the ministrative refund fied taxpayer, as a of course to the were nonforfeitable limited beneficiaries group. held, consequence, that issue lost the Government” Accordingly, Dis paid trustee Russell Court of Claims. amounts year. refunds, in that first in 1945 were not deductible trict Director made February, payments under for But it construed § during Treasury Regulation, B, C, D, F, G, E, L applicable I and Trusts November, 1961, Treas.Reg. Ill, 29.23(p)-ll, 1946-49, amend- and then payments D-P six inclu T.D. 1948-2 Cum.Bull. for under Trusts ed 1, 1963, years after, of the relevant November enactment for 1950-54. On sive brought statute, permitting action deduction of the United States payments paid by to the bene- to recover the refunds amounts the trustee 1950-54 H-P in 1945 on the basis under Trusts inclusive ficiaries * * * erroneously made, paid “compensation Revenue Internal constituted * * * Earlier, 7405(b).2 any employee un- Code of account deferring receipt April plan of such of Claims der a February, Apparently made in 2. Action to such recover two-year C, year Trust under refunds was then barred the fiscal 6532(b). payment earnings covering with first of limitations of § statute why delay. prior the com- not inform us one record does after a (1943) plaint for 1950- B did not include refunds trusts —A —made G; E, F, D, payment ex three Trusts after 54 under first during payable nothing pired, in the Court of these trusts volvement supply litigation may an an- of Claims swer, infra. see an legal principle underlying declined them, invitation the Govern- decision, may overrule hurt the Government rather than Fuel help. v. United An action to tax recover a refund restitution, Ct.Cl. is an action for and the plaintiff Solicitor General had decided not to prevail in such an action can apply showing only by certiorari. an affirmative that will move the conscience parties Both to this action hav Judge many court. As Hutcheson said summary judgment, moved years ago, the Government must show granted Timbers Russell’s motion on the money which, “has ex grounds three the suit was not one aequo ought bono, et retain.” “erroneously recover tax refunded” Houston Prod. Co. meaning 7405(b), within the of § F.Supp. 715, (S.D.Tex.1933). the Court of Claims’ should decisions principle be followed on the of stare Lumley, The rule of Bilbie decisis, independently and that he would Eng.Rep. (K.B.1802), East have reached the same conclusion. We adopted in a more limited form in Re reason, although, affirm for the first statement, Restitution 45§ show, our discussion two solely will person who, that “a induced thereto considerations are not by unrelated. law, a of has a mistake conferred ben upon satisfy efit in whole or in another to candidly The Government tells us part an honest claim the other to the of in “corrective efforts the instant case performance given, is not entitled to by are animated far a more than contest general rule, how restitution.” That over the stakes in involved this lawsuit.” ever, subject exceptions, one to of Its aim is to obtain a decision this person which is that “a con has conflicting court with that of the Court upon because ferred a benefit another Claims, might of as to which Russell of an belief a mis erroneous induced well obtain certiorari under duty he is take of law that under 1(b), Court Rule subd. and thus to though do, is entitled restitution procure construction, an authoritative fact,” of when the mistake were one hopefully in the Government’s favor. by a Restate benefit is conferred state. commendable this However determined supra, ment, 46(a); Wisconsin Cent. § protect may be, effort to the revenue it States, 190, 210, R. United R. v. why is not hard to understand United 17 S.Ct. L.Ed. does not share the Government’s zest (C.C.D. Dempsey, 104 F. 197 litigation further matter Mont.1900). not Yet this still does settle every reason to in consider ended favor; the issue the Government’s question points we are left with the The Government out that 7405(b), ancestor, the refunds to Russell were'made under like its “mistake” sort. Revenue Act 45 Stat. “does right” not the Government a new reading Simple the tax statute does but, by two-year period virtue of the payments not demonstrate that suit, prescribed now “is a limi deductible; the beneficiaries were not long-estab tation of the Government’s indeed, percep- said Davis’ right money wrongfully lished sue Mississippi tive concurrence in erroneously paid public from the 958, “By design case, 314 F.2d at or in- treasury.” Wurts, United States v. advertence, language the bare Section L.Ed. snugly” seems to fit with the view is, True as it does this judicial were. No problem; taking fact, by solve the us statutory words, now extant holds or even indicates that behind the could covering case, literally proper be read as were not deduc- be on which Service directed them to made “mistake” enue tions.3 before; every known principally relief fact to it relies for Government earlier, departure known from the statute then was save thus is not Mississippi lawyer from the River decision which cuts which a could discern it; against construing re- it. mine run Unlike the cases text or decisions by allowing recovery refunds, prove been made to have funds will history payment legislative instance Government’s if the “mistake” and other belief that has made the mistaken assembled Government largely it; required merits the claim considerations it advanced— contrary, argued indicated that the and all available against persuade a court of this court issue decided Claims—should high authority relitigated in disagree judicial would be with the inter- Here, pretation future. no clerical misun no means an un- —and derstanding, Distilling Co. v. Woolner reasonable one—that now exists. 228 Cir. United required The Government was not to Rushlight Sprinkler Co. v. Automatic swallow Claims’ decisions States, 294 F.2d 572 United sought certiorari; but could have controlling 1961), nor overruled decisions stead, in Russell both undermined, Talcott v. River, gambit.4 Although it declined the denied, (9 Cir.), cert. entirely permissible this was an choice 601, 1011 48 72 L.Ed. S.Ct. officers, for the Government’s law the Green, 28 F. v. States consequences should not fall this tax- (E.D.Pa.1939), Supp. nor even a 549 payer, good accepted who in faith the change by simple the Service mind proffered refunds which the Government law, United States v. on the substantive which, refused, had the Government (N.D. Co., Spring 415 Tuthill Ill.1931); readily it could have obtained suit in Heilbroner, United States the Court of Claims. the Government If aff’d, (S.D.N.Y.), F.Supp. had made the refunds with the deliberate (2 United States Cir. F.2d 379 purpose that, having thus barred the tax- (S.D.N.Y.1957), Ellis, F.Supp. 32 v. aff’d, payer’s Claims, to the recourse 1959). The Cir. it would initiate an action to recover the position when it merits on the Service’s erroneously made, refunds as we cannot precisely what it refund is today, made the propounds imagine equity court would find hardly pos and it Yet, although in its suit. do not call this a the sible for Government suggest there was such an intention mistake, responsible let alone one here, sustaining the effect of the action limit decision the the refund. We our would be the same. Government The presented, where the unusual facts here thinking pay- had no more reason for the deliberately it made what Government brought ments “erroneous” when this it refund an erroneous November, then considered suit in than when the highest legal prevailing court deci- in a officer of Internal Rev- a the Wesley Treating R., having sophisticated taxpayers similar Heat I. Co. v. C. 1959), problems fill will refund suits does role; the than resort the confusion caused Court of Claims rather taxpayer’s 23(a) in the dis- insistence Tax or sue for refunds § Supreme controlling section, However, 1939 Code was the trict courts. entirely able to the court never Court has shown itself considered tactic, (p) might allow a deduction in the as witness deal with kind rehearing employees payment. grant received of certiorari on Tri- Publix American Paramount Ergon Corp., 4. The Government that a contends impossible of certiorari would be unless L.Ed. 638 See Robertson & 79 Kirkham, decisions, a conflict can create Jurisdiction only by procedure at 1951). this can he done Court of the United employ, (2d such as it here seeks since & n. 16 ed. Wolfson & Kurland authority unim- whose are not convinced that sion remains We paragraph opinion paired. the Sunnen quoted appears would sentence argues alterna- Government limiting an eifect Govern might other- tive that the case however ques estoppel Collateral claims. stand, resulted wise the refunds here causes exists when the two tions lawof Counsel of from mistake the Chief subject “arose of action out the same the Internal Revenue Service injustice matter transaction” judgment col- eifect the Russell relitiga barring result from would not estoppel. saying that lateral After Judgments Restatement, tion. incor- Service considered the decision (1942). The be former issue is not to to other and would not rect follow it basis; simplistic resolved on a it would taxpayers, letter Counsel’s put say over that a form substance to quoted paragraph continued with a an ef decision like that here would be margin,5 and concluded with the estoppel for all and em fective already struction the District Director ployees if Russell into a had entered Counsel, mentioned. The Chief single agreement master trust with the contended, wrong in wrote what he supplemented company, fil the annual Sunnen, about C. I. R. v. 333 U.S. appropriate ter schedules since S.Ct. L.Ed. 898 years, will minable at as to future trusts at agree it executed identical trust litigation concerning of Claims in the great years.6 ments over series were, on the view favorable most merit of Sunnen was its taxpayer, part located in change clarification that “sufficient alphabet ending G, whereas legal climate,” 68 S. 333 U.S. at range way the refund claims all down 723, unjust apply Ct. at would make it to P, to and the said that estoppel legal in in collateral issues purposes, income tax “[f]or what is de- litigation. Here, previously come tax as to one cided is not conclu- contract “intervening shown, no there has been any as to sive contract which is legal development,” 603, 333 68 U.S. at issue, then in similar or however 722, favoring 5.Ct. at the Commissioner. may 602, identical be.” 333 at “grow estoppel The law of collateral is 68 Singer Son, S.Ct. at 721. law,” & v. A. Hollander “However, respect 5. formity regulations with instant is in is- reflected the taxpayer estop- (D) respect (1) the doctrine of collateral sued in to section pel applicable. Code, 404(a) would be doc- Under of the 1939 and section judgment the (5) trine of Claims of the 1954 Code.” binding in Russell decision would be actually paragraph unnecessary in later as to liti- matters in The cited gated or determined. See Commission- that de- sense Court would have (1948) of Internal estoppel any er Revenue v. Sunnen in nied collateral event 715, [68 U.S. 591 L.Ed. developed very 898]. S.Ct. 92 the paragraph in next reason your appear From memorandum it would as to the ad- contract that taxpayer’s precise mittedly that raise the prior claims had been at issue in the decided litigation. 602-603, adverse to the Government 333 U.S. at 68 S.Ct. involving in the case fiscal If this in at Of the 721-722. cases cited earlier true, litigation proposition then further would serve for the Sunnen relied on now purpose useful Government, no Court of since the n. 333 U.S. at 601 necessity 7, 721, support would abide earlier deci- its 68 S.Ct. two do not sion, change absent a in the law facts. broad statement and the third pertinent provisions doubtfully. of the 1939 and comparable 1954 Codes are this con- 1953), see, restage Inc., to match with the ad- Cir. same regard versary g., Nat. in same forum with Bank of America e. Bernhard instruments; substantially Ass’n, 19 Cal.2d identical Trust & Sav. original margin victory,8 (1942); Bruszewski v. Russell’s P.2d 892 (3 Cir.), interval, cert. de and the lack brief F.2d nied, L.Ed. decisions would have made 71 S.Ct. elsewhere Kramer, defeat for the that United States v. second inevitable, of cer- Zdanok court almost (2 Cir.), Co., cert. tiorari case of the same Glidden likely denied, 12 L. would be no after the second 377 U.S. more note restrictions than the first. Contrast and while defeat Ed.2d every legal supra. application questions in thus had rea- on its The Service undoubtedly losing battle, required,7 spare while tax cases are son itself biding hope ought imposed on a mechan its time de- not be deficiency pay a sire not to have to ical basis. might taxpayer to lead some other however, required, to de- We are not question the Tax Court or the Chief Counsel termine legal “change climate” opin- familiar Sunnen fact misread the improve in the Court would chances whether, did, if that kind ion he Chief Counsel made a Claims. If the an action “mistake” would warrant Sunnen, thus incon- mistake as to it was convinced that restitution. For sequential, Restatement, Restitution § no causal such misconstruction (1937). comment a possible refunds. effect referring to Sunnen read the letter Affirmed. regard the trusts that were I of Claims Russell before the Court (concur- LUMBARD, Chief proceeding what we then make ring) : wholly ac- now know to been the agree given the reasons While prediction trusts to other curate affirming judg- by Judge Friendly for would follow its deci- Court of Claims court, place I wish to the district decisis. More- sion on basis of stare my concurrence on another alleged over, as to Sunnen error well, namely, interpretation of § Counsel’s had been called (p) (D) adopted give attention, had to he would have Mfg. Co. v. United Claims precisely to the District the same advice F.Supp. 159 As ob- attorney did. Russell’s Director that he Mississippi by Judge served Davis threatening National Of- both the Fuel v. United River suit Director fice and the District 161 Ct.Cl. Court of Claims unless refunds close, (concurring), issue Although administratively allowed. reasoning Court of Claims find prepared to resist the Government argu- persuasive more than the tax- as to other Russell decision government. by the payers, no sense ments advanced it would have made Law, See, Note, Estoppel id. Federal Administrative as to Collateral Branseomb, Estoppel Cases, 306-11; Collateral in Federal Tax of Law Questions Facts, Separable Develop- in Tax Cases: Static and 35 Iowa L.Rev. 700 Judicata, Texas L.Rev. 65 Harv. in the Law —Res ments (1952); Polasky, Col- L.Rev. 844-45 subsequent concur- Whitaker’s Litiga- Estoppel Prior lateral —Effects makes it rather rence 217, 235,240 (1954); tion, L.Rev. 39 Iowa in Russell his lone dissent evident Sternstein, case. Res Judicata related to another Groner &

Case Details

Case Name: The United States of America v. The Russell Manufacturing Company

Court Name: Court of Appeals for the Second Circuit

Date Published: Jul 7, 1965

Citation: 349 F.2d 13

Docket Number: 313, Docket 29116

Court Abbreviation: 2d Cir.