Opinion
[Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] Allen G. Gartner, of Washington, D. C., for plaintiff.
George H. Foster, of Washington, D. C., and Frank J. Wideman, Asst. Atty. Gen.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of facts:
1. Georges Klotz and Henri Klotz, plaintiffs, during the years involved herein were, and ever since have been, resident citizens of Paris, France. From 1916 until July 1, 1925, they were members of the partnership of H. & G. Klotz & Co. The partnership manufactured and sold hair tonics, perfumes, and other toilet articles in the United States.
On July 1, 1925, a corporation, Pinaud, Inc., was organized which thereafter carried on the busines of the said partnership of H. & G. Klotz & Co. Both the partnership and the corporation maintained their places of business in New York City.
The republic of France accords citizens of the United States the right to prosecute claims against the French government.
2. Emile Utard, the general manager of the partnership in the United States, prepared and filed the federal income tax returns of the partnership for the following four periods: The calendar year of 1917; the six months' period ending June 30, 1918; the fiscal year ending June 30, 1919; and the fiscal year ending June 30, 1920. These returns showed the net income of the partnership was equally distributed between the two plaintiffs, and taxable to them each to the extent of 50 per cent. of the net income of the partnership.
Individual federal income tax returns of both plaintiffs were also prepared and filed by the general manager of said partnership for each of the plaintiffs for the four periods, as hereinbefore set forth in this finding. Said individual returns reported a 50 per cent. portion to each of said plaintiffs.
3. As a result of an investigation by revenue agents in 1921, certain changes were recommended in the net income as reported in the returns referred to in finding 2. Early in 1922 certain representatives were employed in connection with the tax liability arising from the income from the partnership; such individuals representing not only plaintiffs, but also their mother, Victorine Klotz, another member of the partnership. November 20, 1923, which was prior to the time when the Commissioner of Internal Revenue had made a final determination of the tax liability in connection with the returns of plaintiffs for the years 1917 to 1920, inclusive, the foregoing representatives filed on behalf of plaintiffs an appeal from the tax liability as recommended by the Commissioner's revenue agents.
Plaintiffs, in that appeal, contended that the American business under the name of H. & G. Klotz & Co. was composed of four partners, while the Paris business conducted under the same name was composed of but three partners. Plaintiffs' appeal contended that the Paris firm had as its partners Victorine Klotz, Henri Klotz, and Georges Klotz, while the profits and losses of the American business were shared, as follows: Victorine Klotz, 44 per cent.; Henri Klotz, 22 per cent.; Georges Klotz, 22 per cent.; and Emile Utard, 12 per cent. Victorine Klotz was the mother of Henri Klotz and Georges Klotz. Emile Utard was the manager of the New York firm of H. & G. Klotz & Co.
During the early part of 1924 conferences were had at Washington, D. C. Said conferences disclosed that Victorine Klotz was a resident of France and owned no property in the United States. An agreement was reached to the effect that the Commissioner of Internal Revenue would treat the American concern as owned by said four partners, and that plaintiffs would see that returns were filed for Victorine Klotz and that her tax would be paid by the New York firm of H. & G. Klotz & Co. for the years 1917, 1918, 1919, and 1920. It was further agreed that Victorine Klotz had no interest in the New York firm after June 1, 1921.
4. The said Emile Utard prepared, executed, and on March 26, 1924, filed returns for Victorine Klotz for the four periods set forth in finding 2, covering the years 1917-1920. These returns gave '84 Fifth Avenue, New York City' as the home address of Victorine Klotz, although the heading of the returns carried immediately following her name '(Paris, France).' On May 27, 1924, the Commissioner of Internal Revenue assessed taxes against Victorine Klotz, as follows: 1917, $2,335.05; 1918, $4,267.60; 1919, $42,429.05; and 1920, $114,206.97.
5. On May 1, 1924, plaintiffs were advised of the determination of the Commissioner of Internal Revenue, which resulted in the signing by said Commissioner on June 6, 1924, of a schedule of overassessments which listed against Henri Klotz the following amounts: 1917, $7,921.09; 1918, $14,642.19; 1919, $44,698.18; and 1920, $49.691.35.
In a letter addressed to Henri Klotz, advising him of said overassessments, the concluding paragraph embodied the following language:
'The overassessments shown herein will be made the subject of certificates of overassessments which will reach you in due course through the office of the collector of internal revenue for your district. If the tax in question has not been paid, the amount will be abated by the collector. If the tax has been paid, the amount of overpayment will first be credited against unpaid income tax for another year or years and the balance, if any, will be refunded to you by check of the Treasury Department. It will thus be seen that the overassessment does not indicate the amount which will be credited or refunded since a portion may be an assessment which has been entered but not paid.'
On June 16, 1924, the collector of internal revenue at New York completed the schedule of overassessments and prepared a schedule of refunds and credits in which the overassessments of Henri Klotz were listed for disposal, as follows:
----------------------------------------------------
Year
Abatement
Overpayment
Credit
Refund
--------
----------
-----------
------
---------
1917....
..........
$7,921.09
$26.41
$7,894.68
1918....
$14,642.19
...........
......
.........
1919....
5,046.56
39,651.62
......
39,651.62
1920....
..........
49,691.35
......
49,691.35
----------------------------------------------------
The credit of $26.41 was made to another tax liability of Henri klotz.
6. On May 1, 1924, plaintiffs were advised of a determination of the Commissioner of Internal Revenue, which resulted in the signing by said Commissioner on June 6, 1924, of a schedule of overassessments which listed against Georges Klotz the following amounts: 1917, $7,921.09; 1918, $14,606.19; 1919, $46,769.80; and 1920, $49,690.35.
Georges Klotz received a letter advising him of said overassessments, the concluding paragraph of which embodied the same language as set forth as a quotation in finding 5.
On June 16, 1924, the collector of internal revenue at New York completed the schedule of overassessments and prepared a schedule of refunds and credits in which the overassessments of Georges Klotz were listed for disposal, as follows:
----------------------------------------------------------------
Year
Abatement
Overpayment
Credit
Refund
-----------------
-------------
-----------
------
---------
1917 .............
.............
7,921.09
......
$7,921.09
1918 .............
$3,622.42
10,983.77
......
10,983.77
1919 .............
4,998.58
41,771.22
......
41,771.22
1920 .............
.............
49,690.35
......
49,690.35
----------------------------------------------------------------
On June 21, 1924, the New York collector advised plaintiffs that said refundable overpayments had been certified to the Commissioner of Internal Revenue as being refundable in full.
7. The collector, on June 4, 1924, mailed to the address 84 Fifth avenue, New York City, a demand for the payment of the taxes assessed against Victorine Klotz, covering the four periods set forth in finding 2 hereof, being for the years 1917-1920. Shortly thereafter, and during June, 1924, representatives of plaintiffs and Victorine Klotz called on the New York collector and discussed the said tax of Victorine Klotz and the overpayments of plaintiffs. June 25, 1924, the collector advised the Commissioner of the outcome of the foregoing conference as resulting in an understanding that a portion of the refunds due plaintiffs should be applied in satisfaction of the foregoing tax liability of Victorine Klotz. July 1, 1924, the Commissioner informed the collector that the credits should be made in conformity with that understanding and that any excess should be refunded to plaintiffs. Appropriate corrections were accordingly made in the necessary accounts and schedules pertaining to the parties concerned, and at or about that time certificates of overassessments were mailed to plaintiffs.
8. The records in the files of defendant were thereupon changed in order to apply against the assessments of Victorine Klotz the following overpayments which had theretofore been held as refundable to said plaintiffs:
Henri Klotz:
1917 .........
$ 7,894.68
1918 .........
..........
1919 ..........
39,651.62
1920 ..........
49,691.35
---------
$ 97,237.65
Georges Klotz:
1917 ...........
7,921.09
1918 ..........
10,983.77
1919 ..........
41,771.22
1920 ..........
49,690.35
---------
110,366.43
-----------
$207,604.08
The foregoing total exceeded by $44,365.41 the assessments which had been made against Victorine Klotz for the four periods from 1917 to 1920, inclusive, and that excess was later applied to a tax liability of Victorine Klotz for 1921, as shown in finding 11.
9 Plaintiffs filed their returns for 1921 and 1922 on the same basis as the returns referred to above, and paid the tax shown due on such returns. Victorine Klotz had likewise failed to file a return for 1921, but at or shortly after the adjustments were made in connection with her returns for 1917 to 1920, inclusive, and those of plaintiffs for the same years, as shown in the previous findings, a return was filed on her behalf for 1921. In January, 1925, representatives of the plaintiffs conferred with representatives of the Commissioner in Washington relative to the allowance of refunds to plaintiffs for the years 1921 and 1922 which were being adjusted on the same basis as the returns for 1917 to 1920, inclusive. During that conference the question arose as to how the tax liability of $127,478.92 which had been determined against Victorine Klotz for 1921 should be satisfied. During the conference plaintiffs' representatives offered to deposit a check in escrow covering that assessment against Victorine Klotz, but the representatives of the Commissioner declined to accept such method of settlement, and stated that settlement should be made in the same manner as for the prior years.
March 30, 1925, the Solicitor of Internal Revenue approved certificates of overassessments in favor of plaintiffs for 1921, but called attention to a letter from plaintiffs' representatives to the effect that in the event the refunds were allowed they might be applied to the extent necessary in satisfaction of the tax liability of Victorine Klotz for 1921.
10. April 1, 1925, the Commissioner advised the plaintiffs by letters of his determination of overassessments in their favor for 1921 and 1922. The concluding paragraph of each letter contained the same language as that quoted in the letter referred to in finding 5. April 13, 1925, the Commissioner signed the schedule showing overassessments in favor of plaintiffs as follows:
Henri Klotz:
1921 .........
$80,507.54
1922 ..........
31,043.24
Georges Klotz:
1921 ..........
80,507.54
1922 ..........
31,043.24
On April 30, 1925, the New York collector completed the schedule and returned it to the Commissioner together with the schedule of credits and refunds, which disclosed the following disposition of said overassessments:
Henri Klotz:
------------------------------------------------------
Year
Overpayment
Credit
Refund
-----------------
-----------
----------
----------
1921 ..............
$80,507.54
$36,602.23
$43,905.31
1922 ...............
31,043.24
31,043.24
..........
------------------------------------------------------
Said credits were made against the tax liability of Henri Klotz for the year 1923.
Georges Klotz:
------------------------------------------------------
Year
Overpayment
Credit
Refund
-----------------
-----------
----------
----------
1921 ...............
80,507.54
$36,602.23
$43,905.31
1922 ...............
31,043.24
31,043.24
..........
------------------------------------------------------
Said credits were made against the tax liability of Georges Klotz for the year 1923.
On June 1, 1925, the Commissioner authorized these refunds, and under date of June 18, 1925, checks were drawn to each of said plaintiffs in the sum of $55,801.57. The following three items were covered by each of said checks: Refund, $43,905.31; interest on refund, $10,644.33; and interest on credited amount, $1,251.93.
The original certificates of overassessments for 1921 and 1922 in favor of plaintiffs were delivered to plaintiffs' representatives June 24, 1925.
11. On May 1, 1925, the New York collector advised the Commissioner:
'As no record of the additional assessment of $127,478.92 on the fiscal return ended June 30, 1921, of Mrs. Victorine Klotz could be found, it was agreed by the representatives of Messrs. George and Henry Klotz to pay the additional assessment levied against Mrs. Klotz immediately upon presentation of bill. Request is therefore made that this office be furnished the list, page, and line upon which this additional assessment appears.'
On June 1, 1925, plaintiffs' representative delivered a letter to the New York collector, as follows:
'June 1, 1925. 'Re: Victorine Klotz, Henri Klotz, 90 Fifth Avenue, New York, New York. 'Collector of Internal Revenue, Customhouse Building, New York, New York.
'Sir: Reference is made to the overassessments of $39,651.62, $4,713.79, and $43,905.31, certified for refund to Henri Klotz for 1919, 1920, and 1921, respectively.
'In view of the fact that there is an additional tax of $127.478.92 against Victorine Klotz for the year 1921, it is requested that the refund above referred to aggregrating $88,270.72, be applied against the additional tax of $127,478.92.
'It should be noted that the application of the refunds against the additional tax is agreeable to both the above-mentioned taxpayers, and is in accordance with the procedure followed in prior years.'
There was a credit balance of $44,365.41 after applying the 1917-1920 overpayments of plaintiffs to the 1917-1920 assessments against Victorine Klotz (finding 8). This left a balance of $83,113.51 which was to be taken from the overpayments of plaintiffs for the year 1921, in order to complete payment of the 1921 assessment of $127,478.92 (finding 9), against said Victorine Klotz. A check for $39,208.20 on the account of H. & G. Klotz & Co. was drawn on June 4, 1925, and paid to the New York collector. This left a balance of $43.905.31 due on the 1921 tax of Victorine Klotz.
The collector continued to hold the refund checks drawn to the order of the plaintiffs described in finding 10, and did not deliver them to the plaintiffs' representatives until they delivered to him a check drawn to the order of the collector in the amount of $43,905.31.
On June 24, 1925, a check was drawn on the account of H. & G. Klotz & Co., for the sum of $43,905.31, and delivered to the collector. On the same day each plaintiff received a check for $55,801.57 (finding 10), which checks were deposited in their bank accounts. On July 8, 1925, the Commissioner advised the collector that the scheduled refunds had been eliminated, and instructed him to apply that amount against the Victorine Klotz assessment.
12. The Bureau officials first held that no interest should be allowed plaintiffs on the several sums so used in settlement of the assessments against their mother, Victorine Klotz, for the years 1917-1920. Plaintiffs took this matter up with both the New York collector and the Commissioner; three separate briefs being filed by plaintiffs during 1926 in addition to personal interviews which were had. The treatment of the overpayments as statutory credits would have denied plaintiffs any right to interest on the overpayments. Their treatment as statutory refunds would entitle plaintiffs to receive interest on such overpayments. The Bureau officials finally ruled that such amounts which had been so applied against the Victorine Klotz tax were credits, and on June 19, 1926, wrote plaintiffs as follows:
'Receipt is acknowledged of your letter dated June 14, 1926, enclosing a brief, in triplicate, in which interest is requested under the decision of the Supreme Court in the case of the Girard Trust Company, on overassessments allowed to the above-named taxpayer for the year 1917, and the fiscal years ended June 30, 1919, and June 30, 1920. 'In reply, you are advised that this office holds that the decision of the Supreme Court in the case of the Girard Trust Company is not applicable to amounts credited by reason of the fact that it relates solely to the procedure involved in the allowance of a refund, which was first allowed by the Commissioner upon a schedule of overassessments and later listed upon a subsidiary schedule of refunds upon the latter of which the Commissioner indicated that the disbursing clerk should issue checks. 'In the case of a credit, the Commissioner's authorization on the subsidiary schedule that the refunds and interest may be paid is without effect, and the decision of the Supreme Court with respect to an amount refunded does not apply. 'Inasmuch as the entire amount of the overassessment under discussion was credited, interest is not allowable under the decision of the Supreme Court in the case of the Girard Trust Company.'
However, this subject of interest was later referred to the office of the General Counsel, Bureau of Internal Revenue. That office ruled that plaintiffs were entitled to full interest on such overpayments. On September 29, 1926, and in connection with their contention for interest, plaintiffs offered to then send a certified check for $155,317.58 in liquidation of the liability of Victorine Klotz, upon the receipt of the refund checks with proper interest due the plaintiffs for such overpayments so applied against their mother's assessments. This offer was renewed in a letter to the Commissioner on February 21, 1927. Thereafter plaintiffs' contention as to interest was granted, and plaintiffs were paid such interest from the dates paid to the date of the first signing of the schedule of allowance. Additional amounts were later allowed as interest on the same sums from the first signing of the schedule to the date of authorization for the refunds. On October 22, 1927, the last allowance of interest was paid. In the above interest adjustments, interest was computed and paid by the Commissioner on all overpayments determined in favor of plaintiffs for 1917 to 1922, inclusive, without regard to the fact that a portion of such overpayments was applied in satisfaction of the tax liability of Victorine Klotz for the periods 1917 to 1921, inclusive.
13. In January, 1930, plaintiffs filed their claims for refund of the sums of such overpayments so applied against the tax liability of Victorine Klotz, which claims for refunds were rejected on September 7, 1930.
14. The application of a portion of plaintiffs' refunds in satisfaction of tax due from Victorine Klotz as set out in the above findings was in accordance with an agreement reached between plaintiffs' representatives and the Bureau of Internal Revenue.
WHALEY, Judge.
This is a suit for the recovery of income taxes for the years 1917 to 1921 in the total amount of $154,271.74 in the case of Georges Klotz and of $97,237.65 in the case of Henri Klotz. The claims of both plaintiffs are embodied in one petition. The facts are somewhat complicated, due to the various adjustments which were made in the accounts of the several individuals involved, but facts necessary to an understanding of the issue presented are relatively simple, and may be stated as follows:
Plaintiffs are citizens and residents of France. During the period involved in this proceeding, they were members of a partnership which carried on business in the United States. The manager of the partnership filed federal income tax returns for the partnership and the plaintiffs, reporting therein one-half of the net income of the partnership as allocable to each of the plaintiffs. As a result of an investigation by revenue agents in 1921, certain changes were recommended in the amount of income reported. Early in 1922 certain certified public accountants in New York City were employed in connection with the tax liability of the partnership. In such capacity they represented not only plaintiffs, but also their mother, Victorine Klotz, who was also a member of the partnership. Before the Commissioner of Internal Revenue had made a final determination of plaintiffs' tax liability as a result of his agents' investigation, plaintiffs' representatives filed a protest or appeal in which they contended that the allocation of income of the partnership on a fifty-fifty basis between plaintiffs as shown in their returns was incorrect, that there were four partners in the partnership holding the following interests: Victorine Klotz, 44 per cent.; Georges Klotz (plaintiff), 22 per cent.; Henri Klotz (plaintiff), 22 per cent.; and Emile Utard (manager of the partnership), 12 per cent.--and that the income of the partnership should accordingly be allocated on that basis.
After various conferences, plaintiffs' contention with respect to the interests in the partnership was sustained by the Commissioner during the early part of 1924. As a result of that determination it was found that substantial refunds were due to plaintiffs and that additional tax was due from Victorine Klotz since plaintiffs had theretofore reported all of the partnership income, whereas 44 per cent. should have been reported by Victorine Klotz. At that time Victorine Klotz had no assets in the United States, and her interest in the partnership ceased June 1, 1921. The difficulties which might be encountered in collecting the additional tax from Victorine Klotz were thus apparent. Plaintiffs agreed, however, that they would see to it that appropriate returns were filed on behalf of their mother and her tax paid from the assets of the partnership in New York City.
Returns were accordingly filed on behalf of Victorine Klotz, additional taxes were assessed against her, and refunds were determined in favor of plaintiffs. Considerable discussion then arose as to how the additional tax was to be collected and the refunds paid; one suggestion being that a check would be given by plaintiffs for their mother's tax, and refunds to which plaintiffs were entitled would be made to them. The Commissioner, however, apparently preferred to have the matter handled through an offset of the refunds against the additional tax. Whether the motive which actuated the Commissioner in his desire to have the transaction settled in the foregoing manner was prompted by lack of faith in the security of the payment to be tendered, or whether it was in an effort to reduce the amount of interest to be paid on the refunds through the treatment by them, in so far as necessary to satisfy the additional tax, as credits rather than as refunds through direct payment to plaintiffs, or whether some other end to be served was the motivating cause, is not clear from the record, nor do we consider it material. Suffice it to say that we are satisfied from the record, and we have found as a fact, that plaintiffs' authorized representatives consented to the application of the plaintiffs' refunds, to the extent necessary, in satisfaction of their mother's tax liability. It would serve no useful purpose to go into details of the evidence supporting such a finding of fact or why the same conclusion applied in the settlement of the years 1917 to 1920 as the other years involved. We are satisfied it is abundantly established from the record that an agreement was reached that such an application should be made.
During 1924 and 1925 a part of the refunds due plaintiffs, sufficient in amount to satisfy the tax liability of Victorine Klotz, was applied in full satisfaction of the latter's tax liability, and the balance of the refunds was duly paid to plaintiffs. A controversy then arose as to the interest to which plaintiffs were entitled on the portion of their refunds which was credited against the taxes of Victorine Klotz. The Commissioner at first took the position that such application of the refunds constituted a credit within the meaning of the applicable statute, and therefore no interest was allowable. After various briefs were filed, conferences held, and extended consideration of the question, interest was finally allowed on the refunds as if they had been paid directly to plaintiffs; the last payment having been made October 22, 1927. Some contention is advanced by plaintiffs to the effect that during the last-named controversy they were not only seeking to obtain the interest, but also the principal upon which the interest would be computed. We can find no support for such a position in the documents which were filed and in the record as presented. It may well be that plaintiffs would have preferred to have had the matter handled differently when the refunds were applied against the additional tax, but whatever suggestion was made in that connection was in the nature of a means to the end of securing the full interest allowance and not for the purpose of recovering the principal amount which had been credited. In other words, from the time such offset was made in 1924 and 1925, until 1930, no suggestion was made that they were questioning the validity of the application of portions of their refunds in satisfaction of their mother's tax or that they were seeking to have such principal sums refunded to them. It was not until January, 1930, that plaintiffs filed claims for refund of the foregoing principal sums which had been applied as credits or offsets against the tax of Victorine Klotz. The Commissioner rejected the claims August 27, 1930.
This suit, which was filed June 22, 1931, is not based on the rejection of the foregoing claims for refund, but it is predicated on an account stated theory for the recovery of the amounts set out in the claim for refund. In our opinion, however, the basis is immaterial; in no view of the case are plaintiffs entitled to recover. As far as tax liability is concerned, the correct tax liability of all parties concerned has been paid; that is, the tax liability of Victorine Klotz has been satisfied and the full overpayments of plaintiffs have been paid with interest. In substance, the only contention advanced by plaintiffs is that they are separate and distinct taxpayers from their mother and that therefore the application of a part of their overpayment in satisfaction of their mother's tax was illegal, and accordingly such amount should be returned to them.
It requires no citation of authority to support the proposition that the several individuals involved are separate and distinct taxpayers. It is likewise well settled, however, that one taxpayer may consent to have a refund due him used in satisfaction of a tax due from another taxpayer. David Daube v. United States, 59 F. (2d) 842, 1 F.Supp. 771, 75 Ct. Cl. 633, John Muir v. United States (Ct. Cl.) 3 F.Supp. 619, and Madiera Embroidery Co. v. United States (Ct. Cl.) 5 F.Supp. 420. And the latter is precisely the situation in the case at bar, and every consideration, both in law and in equity, warrants its application to the end that recovery may be denied. The overpayments arose by reason of the fact that plaintiffs erroneously reported their income in the first instance. When the Commissioner acquiesced in their contention that the error should be corrected, they agreed a portion of their refunds should be used to pay the tax of their mother, another partner, who had not reported any income from the partnership, and where plaintiffs were securing refunds on account of their error in including that income in their return. The same individuals represented all parties before the Commissioner, and apparently all funds of the plaintiffs and their mother, coming to them from the partnership, were handled at a common source. It is perfectly logical therefore why their representatives should agree and did agree that the transaction should be carried out in the manner it was carried out by the Commissioner. At that time the mother had no assets in this country from which collection could be had. The statute has now apparently run on the collection of the tax from the mother, even if assets could be found. The application of the refunds was not only legal under the agreement, but also it would be inequitable and unconscionable to permit recovery under such circumstances.
The petition must be dismissed. It is so ordered.
BOOTH, Chief Justice, and WILLIAMS, LITTLETON, and GREEN, Judges, concur.