Opinion
Eugene Meachem, of Washington, D. C., for plaintiff.
Joseph H. Sheppard, of Washington, D. C., and Robert H. Jackson, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D. C., on the brief), for the United States.
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 and the report of a Commissioner, makes the following special findings of fact:
1. Plaintiff is a citizen of the United States and a resident of Detroit, Mich. In 1890 she was married to William N. Krug, hereinafter referred to, and since that time they have lived together as husband and wife in Detroit.
2. March 15, 1929, plaintiff filed her individual income tax return for the calendar year 1928 which disclosed a net income of $71,453.51 and a tax liability of $8,481.56. Shortly thereafter the tax liability so shown was increased by the Commissioner of Internal Revenue to $8,582.58, which was paid as follows:
March 15, 1929 ......
$2,120.39
April 23, 1929 .........
101.02
June 17, 1929 ........
2,120.39
September 16, 1929 ...
2,149.32
December 14, 1929 ....
2,091.46
3. Plaintiff's husband, William N. Krug, filed his individual income tax return for the calendar year 1928 March 15, 1929, disclosing a net income of $72,150.16 and a tax liability of $8,589.26. Shortly thereafter the tax liability so shown was increased by the Commissioner to $8,639.26.
4. The returns of plaintiff and her husband for 1928 were both prepared by the husband, and in arriving at the net income disclosed thereby, the husband allocated one-half of the profit derived from the sale of certain securities hereinafter referred to to plaintiff and one-half thereof to himself. The husband drew and signed the checks in payment of the plaintiff's tax for that year, the checks being drawn on a joint account with the National Bank of Commerce of Detroit.
5. February 2, 1931, the Commissioner addressed a communication to plaintiff advising her that, as a result of adjustments made in a report of a revenue agent, her tax for 1928 appeared to have been overassessed $8,399.61, and suggesting that she file a claim for refund therefor. A blank refund-claim form was inclosed for her use. A summary of the changes recommended by the revenue agent read as follows:
February 20, 1931, plaintiff filed a claim for refund of $8,399.61 for 1928 and assigned the following basis therefor:
Year 1928. Decrease in income, assessment, $8,339.61
$60,461.16.
Items changed
Additions:
Item 11:
Interest reported ....
$25,527.09
Interest corrected .....
1,432.90
---------
$24,094.19
Interest has been corrected to show only interest paidto brokers on the taxpayer's individual account.
Item 12:
Taxes reported .......
$ 397.41
Taxes corrected ...........
None.
---------
397.41
The taxpayer included under this item 1/2 of taxes paidon property held with her husband as tenants by theentirety. Has been transferred to the husband'sreturn.
Increase in income ...................
24,491.60
Reductions:
Item 3:
Interest reported ....
$ 5,070.18
Interest corrected ........
None.
---------
5,070.18
Interest received on property held with husband astenants by the entirety has been transferred to thehusband's return.
Item 6:
Profit reported ......
$72,457.20
Profit corrected ......
11,287.75
---------
61,179.45
Profit corrected includes only profit on thetaxpayer's individual transactions through Huttonand Co.
Item 7:
Dividends reported ...
$19,840.63
Dividends corrected ....
1,137.50
---------
18,702.13
Dividends received through Hutton and Co. were found tobe as follows:
Penn. R. R..............
$ 87.50
Rich .......................
500.00
Int. Comb. Eng..............
250.00
Hiram Walker ...............
300.00
---------
Total ..................
1,137.50
Decrease in income ...................
84,952.76
---------
Net decrease in income.................................................
$60,461.16
'Wm. N. Krug and Mrs. Hettie E. Krug filed separate income tax returns for the calendar year 1928, distributing equally their combined income. The Department has taken exception to the returns of Mr. and Mrs. Krug, as originally filed and have redistributed the income in such a manner that an additional assessment has been levied on Mr. Krug and a refund will be due Mrs. Krug.
'The Department claimed that joint returns should have been filed rather than separate returns.'
6. October 9, 1931, the Commissioner advised William N. Krug of his determination of a deficiency in income tax for 1928 of $13,373.29, which was arrived at by making adjustments in his return corresponding to those described in finding 5 for plaintiff's return. Prior to the issuance of the deficiency notice, Mr. Krug had protested to the internal revenue agent in charge at Detroit against a recommendation to a similar effect and plaintiff had filed a similar protest on the same day on account of corresponding adjustments in her tax liability for the same year. (See finding 5.) A further protest dated July 14, 1931, was filed with the Commissioner on behalf of william N. Krug and plaintiff. In these protests the position taken was similar to that set out in the petition to the Board of Tax Appeals, which is referred to below.
December 7, 1931, William N. Krug filed a petition with the United States Board of Tax Appeals for a redetermination of the deficiency for 1928, and in that petition assigned errors as follows:
'(a) The failure of the Commissioner to find that the interest on bank deposits and corporate bonds, which bank deposits and corporate bonds were owned by petitioner and his wife, Hettie E. Krug, as joint tenants for the year 1928, in the sum of $5,070.18, was properly returned as Item No. 3, in the income tax return of Hettie E. Krug, for the year 1928.
'(b) The action of the Commissioner in transferring the interest on bank deposits and corporate bonds jointly held by petitioner and his wife, Hettie E. Krug, in the sum of $5,070.18, from the income of Hettie E. Krug, to the income of petitioner for the year 1928, and charging the same as income of William N. Krug, was erroneous and contrary to the statute in such case made and provided.
'(c) The action of the Commissioner in charging to the petitioner the major portion of the amount of profit on the sale of stocks and bonds owned by petitioner and his wife, Hettie E. Krug, as joint tenants for the year 1928, in the sum of $132,555.01, instead of permitting said profit to be divided equally between petitioner and his wife, Hettie E. Krug, and permitting your petitioner to account for said profit in the sum of $71,921.38 under Item No. 6 of petitioner's return, and permitting Hettie E. Krug to make return on said profit in the sum of $71,921.38 under Item No. 6 of her said return for the year 1928.
'(d) The action of the Commissioner in charging to petitioner an additional sum of $60,633.83 as profit on the sale of stocks and/or bonds for the year 1928, whereas such additional sum was properly chargeable to and properly returned by petitioner's wife, Hettie E. Krug, in her income tax return for the year 1928, under Item No. 6.
'(e) The failure of the Commissioner to permit petitioner to return as profit on the sale of stocks and/or bonds the sum of $71,921.38 only, the same being one-half of the entire profit made by petitioner and his wife, Hettie E. Krug, on the sale of stocks and/or bonds jointly owned by petitioner and his wife, Hettie E. Krug, under Item No. 6 of petitioner's return for said year 1928.
'(f) The action of the Commissioner in charging to petitioner the major portion of the amount of profit on the sale of stock in domestic corporations for the year 1928, in the sum of $38,828.75, instead of permitting said profit to be divided equally between petitioner and his wife, Hettie E. Krug, and return thereof made in their separate and individual returns for said year 1928 under Item No. 7.
'(g) The action of the Commissioner in charging to petitioner an additional sum of $18,845.62, as profit on the sale of stock in domestic corporations for the year 1928, whereas such additional sum was properly chargeable and properly returned by petitioner's wife, Hettie E. Krug, in her income tax return for the year 1928, under Item No. 7. '(h) The failure of the Commissioner to permit petitioner and his wife, Hettie E. Krug, to file separate income tax returns for the year 1928, each accounting for one-half of the interest on bank deposits and corporate bonds under Item No. 3, of their respective returns, and each accounting for one-half of the profit made on the sale of real estate and/or stocks or bonds under Item No. 6, and permitting each to account for one-half of the dividends on stocks of domestic corporations for the year 1928, under Item No. 7, which interest on real estate and stocks and bonds was jointly owned by petitioner and his wife, Hettie E. Krug.
'(i) The action of the Commissioner in charging to petitioner the major portion of the amount of deductions for the year 1928, in the sum of $49,620.44, under Item No. 11, of petitioner's return, instead of permitting said deductions to be divided equally between petitioner and his wife, Hettie E. Krug, and return thereof made in their separate and individual returns for the year 1928, under Item 11.
'(j) The action of the Commissioner in charging to petitioner an additional sum of $24,093.77, as deduction on interest paid for the year 1928, whereas such additional sum was properly chargeable to and properly returned by petitioner's wife, Hettie E. Krug, in her income tax return for the year 1928, under Item No. 11.
'(k) The failure of the Commissioner to permit petitioner to return, as deductions, one-half of the interest paid in the sum of $25,526.67, the same being one-half of the entire deduction made by petitioner and his wife, Hettie E. Krug, for interest paid on joint liabilities of petitioner and his wife, Hettie E. Krug, for the year 1928.
'(1) The action of the Commissioner in requiring petitioner to pay income tax, for the year 1928, in the sum of $22,012.55, instead of permitting petitioner to pay $8,639.26, the same being one-half of the net profit returned by petitioner and his wife, Hettie E. Krug, for the year 1928.'
In support of the errors assigned, William N. Krug alleged in substance that from and after his marriage to plaintiff in 1890 they (William N. Krug and plaintiff) had acquired and held real estate as tenants by the entireties and personal property as joint tenants; that their bank deposits were made in joint accounts; that certain stock was purchased by them from funds in a joint bank account and considered by them as their joint property; that in November, 1927, they began the purchase of stocks on margin, using jointly owned stock as margin collateral; that profits and dividends received from trading in the margin account were deposited in their joint bank accounts; that, while the stock transactions were handled through three accounts in their individual names (one in the name of plaintiff and two in the name of William N. Krug), they were at all times considered to be joint transactions, and the money necessary to purchase the stocks was taken from the joint bank accounts; and that it had always been understood and agreed between William N. Krug and plaintiff that the three margin accounts were joint property and that each owned one-half thereof, each being entitled to one-half of the profits and liable for one-half of the losses therein.
The petition concluded with prayers to the Board to require the Commissioner to recognize the joint character of the holdings of William N. Krug and plaintiff, to the end that the deficiency for 1928 against William N. Krug might be determined on the basis that the dividends and profits on such holdings constituted the joint income of these two individuals.
7. The Commissioner duly filed an answer to William N. Krug's petition, which in substance denied the assignments of error and allegations of fact referred to above. Thereafter negotiations were undertaken between William N. Krug and a representative of the Commissioner with respect to an adjustment of Mr. Krug's deficiency for 1928. In connection with these negotiations counsel for Mr. Krug submitted various affidavits from himself and members of his family, which were in accordance with the allegations contained in the petition. Finally, however, after being shown various decisions by the Board of Tax Appeals, the representative of Mr. Krug became convinced that the position taken in the petition was erroneous and that any further attempt to defeat the claim of the Commissioner for the deficiency against Mr. Krug for 1928 would be unavailing. March 24, 1933, the following agreement to stipulate was accordingly signed by Mr. Krug's representative: 'The undersigned petitioner hereby agrees that he will stipulate with the General Counsel for the Bureau of Internal Revenue to the entry of an order by the United States Board of Tax Appeals redetermining his deficiency in the above-entitled case on the following basis of settlement:
'1. That the taxable net income for the year 1928 be determined upon the basis of deficiency notice dated October 9, 1931.
'2. That all other issues be conceded and no new issues raised.
'Subject to the approval of the Commissioner of Internal Revenue, the foregoing adjustments (together with such other adjustments as arise as a proper and necessary incident thereto) are agreed to as a basis for closing the case.'
A stipulation was accordingly filed with the Board, which read as follows:
'It is hereby stipulated and agreed by and between the petitioner and the respondent and their respective attorneys of record that there is a deficiency in the Federal income tax liability of the petitioner for the year 1928 of $13,373.29, and the Board may issue an order of redetermination accordingly.
'It is agreed that the said deficiency may be assessed and collected immediately after the issuance of the Board's order of redetermination without regard to the restrictions, if any, contained in the revenue acts of 1926, 1928, and 1932.'
April 21, 1933, a decision was entered by the Board, reading as follows:
'Under written stipulation signed by counsel for the parties in the above-entitled proceeding and filed with the Board on April 13, 1933, it is 'Ordered and Decided: That there is a deficiency in tax for the year 1928 in the amount of $13,373.29.'
8. While the petition of William N. Krug was pending before the Board of Tax Appeals, plaintiff likewise filed a petition with the Board asking for a redetermination of the overpayment for 1928 which had been determined by the Commissioner in her favor as shown in finding 5, and in substance making assignments of error and allegations of fact consistent with those contained in the aforesaid petition of her husband William N. Krug.
January 8, 1932, the Commissioner filed a motion to have the petition dismissed for the reason that a deficiency had not been determined against her, and January 30, 1932, the motion was sustained and the proceeding dismissed for lack of jurisdiction.
9. The additional tax found by the Board against William N. Krug as set out in finding 7 was duly assessed. Notice and demand was made by the collector for its payment, but at that time William N. Krug was in financial difficulties and did not pay the tax. Various efforts, including the placing of liens on property in the name of Mr. Krug, were made to collect the tax but they were unsuccessful and the tax has not been satisfied. While the collector was seeking to collect this tax from William N. Krug, the Commissioner, on May 16, 1933, wrote the following letter to plaintiff:
'Your attention is invited to the action of the Bureau in determining that income for the year 1928 originally taxed on your return is taxable to Wm. N. Krug, resulting in an overassessment in your favor and a deficiency against your husband.
'It is suggested that you authorize the credit of your overassessment to the abovementioned deficiency. Such action would relieve the deficiency taxpayer of the payment of the additional tax to the extent of the amount of the overassessment in your favor. In the event there is a refund due you after this adjustment has been effected, a Treasury check will be issued in settlement thereof together with allowable interest.
'In the event this adjustment will be satisfactory to you it is requested that you sign the enclosed consent to that action and return it to this office for the attention of IT:C:CC-3-MN.'
The inclosure referred to read as follows:
'We, William N. Krug, and Mrs. Hettie E. Krug, husband and wife, of Detroit, State of Michigan, for the year 1928, do hereby authorize the Commissioner of Internal Revenue to refund, abate, or credit to either of us any income taxes accruing to either or both by reason of any adjustment of income taxes.
________
(Husband)
________
(Wife)
'NOTE.--It is necessary that both husband and wife sign the above agreement in order that it be effective.' The foregoing consent was not executed or returned by plaintiff or her husband.
10. August 24, 1933, plaintiff filed a further claim for refund for 1928 in the sum of $8,399.61, alleging the following grounds for the allowance thereof:
'Reference is hereby made to letter of Deputy Commissioner of Internal Revenue, J. C. Wilmer, to the taxpayer, of date February 2nd, 1931, and the revenue agent's report for the year 1928 referred to therein, and both said letter of February 2nd, 1931, and the revenue agent's report are incorporated herein by reference and adoption to the same effect as if they were copied herein in full.'
11. July 23, 1934, the Commissioner advised plaintiff as follows:
'Reference is made to your claim for refund in the amount of $8,399.61, income taxes for the taxable year 1928.
'Your claim is based upon the report of the internal revenue agent in charge, Detroit, Michigan, which disclosed an overassessment of $8,399.61, due to the transfer of income in connection with stock transactions, from your return to the return of your husband.
'It is held by this office that a joint venture or partnership relation existed between you and your husband. In accordance therewith, your return has been accepted as filed.
'For the foregoing reasons, your claim will be disallowed. Official notice of the disallowance of your claim will be issued by registered mail in accordance with section 1103(a) of the Revenue Act of 1932 * * *.'
July 26, 1934, plaintiff's representative replied to the foregoing letter protesting the proposed action and, after reciting the previous action of the Bureau with respect to the tax liability for 1928 of William N. Krug and plaintiff, stated in part:
'From the foregoing, it is obvious that the Bureau in its above mentioned correspondence has taken a clearly inconsistent position. The Board of Tax Appeals has officially determined the matter and its decision is now not subject to appeal.
'Representatives of the Bureau have stated, in informal conferences, that as a matter of administrative policy the Bureau will refuse to make a refund to Mrs. Krug because her husband's tax liability as determined by the Board of Tax Appeals has not been satisfied and paid.
'No one will disagree with the proposition that collection and the determination of the question of to whom income is attributable have in law any relationship.
'It is respectfully urged that the most careful consideration be given to the situation discussed in this letter so that the annoyance, expense, and delay incident to the institution of suit may be eliminated. No one in the Bureau has yet stated to the undersigned any authority in law for the position taken by the Bureau, and it is believed that taxpayers and their representatives are entitled to a disposition of tax cases according to law.'
August 13, 1934, the Commissioner reaffirmed the position taken in his letter of July 23, 1934, and September 5, 1934, sent plaintiff a formal notice of disallowances as required by section 1103(a) of the Revenue Act of 1932, 26 U.S.C.A. §§ 1672-1673(a).
12. November 6, 1934, plaintiff's representative wrote the Commissioner calling attention to his letter of February 2, 1931, wherein the Commissioner advised plaintiff of the apparent overassessment of $8,399.61 for 1928 (see finding 5) and requested advice as to whether an overassessment certificate in that amount had been executed in favor of plaintiff. November 12, 1934, counsel for plaintiff wrote the Commissioner asking that the claim be referred to the General Counsel's Office for an opinion.
November 30, 1934, the Commissioner advised plaintiff as follows:
'Reference is made to your letter of November 12, 1934, relative to the income tax case of Mrs. Hettie E. Krug, Detroit, Michigan.
'You request that the claim filed by Mrs. Krug for refund of taxes paid for the year 1928 be reconsidered and referred to the office of the Assistant General Counsel for the Treasury Department for an expression of opinion as to the contention presented.
'You have been advised orally upon other occasions that, in the view taken by this office of your client's case and of all similar cases, a claimant's only possibility of relief lies in litigation. The nature of the question involved leaves no doubt as to the manner of procedure to be adopted.
'Consequently your request for reconsideration of the claim must be denied.'
WHALEY, Judge.
The mere reading of the facts in this case shows beyond even a reasonable doubt that the position of the Commissioner of Internal Revenue in denying a refund to the plaintiff cannot be maintained in any court of law or equity. The arbitrary refusal to make a refund to one spouse merely because collection cannot be made of a deficiency from the other spouse is unlawful and inequitable. The recitation of the facts or the citation of authorities we feel is superfluous. A quotation from the case of United States ex rel. Girard Trust Co. v. Helvering, 66 App.D.C. 64, 85 F. (2d) 230, 232, is appropriate here: 'When the United States is properly a party in litigation in its own courts, it occupies no different or better position than the humblest citizen. Overreaching on its part should be no more condoned than if practiced by an individual. We have said as much before.'
The plaintiff is entitled to recover the amount sued for with interest according to law. It is so ordered.
BOOTH, Chief Justice, and WILLIAMS and GREEN, Judges, concur.
LITTLETON, Judge, dissents.