Opinion
No. 45501.
December 7, 1942.
Dion S. Birney, of Washington, D.C., for plaintiff.
Daniel F. Hickey, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by the Lynchburg Coal Coke Co. against the United States for alleged overpayments of income and excess profits taxes for the years 1934 and 1935.
Petition dismissed.
This case having been heard by the Court of Claims, the court upon the evidence makes the following
Special Findings of Fact.
1. Plaintiff was organized as a corporation under the laws of the State of West Virginia in the year 1890 and maintained its corporate existence and full corporate powers continuously from that date and during all times material hereto and until the ninth day of November, 1940, when its formal dissolution as a corporation was completed and a certificate thereof issued by the Secretary of State of said State of West Virginia. Plaintiff's principal office was at Kyle, West Virginia, and its books were and are now kept at 1309 Allied Arts Building, Lynchburg, Virginia.
2. Upon its incorporation in 1890, plaintiff entered into a certain lease agreement with Samuel A. Crozer, of Upland, Delaware County, Pennsylvania, the fee owner of the certain 933 acres, more or less, of lands located in McDowell County, West Virginia, more particularly described in said lease, under the terms of which, among other things, plaintiff as lessee became exclusively entitled to develop said lands for the production of coal and to mine and sell coal from said lands or to coke such coal and sell the same as coke upon payment as rental by it to said owners of a royalty of ten cents for each and every ton (of 2,240 pounds) of coal mined, dug, or carried away from, or used or sold on said demised premises for any purpose other than the manufacture of coke for shipment; and fifteen cents per ton for each and every ton (of 2,240 pounds) of coke made upon the said premises. And plaintiff did so develop said lands and continuously thereafter and during all times material hereto and until just prior to its dissolution in 1940 as aforesaid, mined and sold coal from said properties and otherwise exercised its rights and performed its obligations in accordance with the terms of said lease.
3. Plaintiff's leased properties were developed and in full operation on March 1, 1913. On that date plaintiff's development cost was $53,750.00, the amount of recoverable coal in place was 5,200,000 tons, and its then value to plaintiff was $182,229.95.
4. Prior to the final decision on March 2, 1925, of Lynch v. Alworth-Stephens Co., 267 U.S. 364, 45 S.Ct. 274, 69 L.Ed. 660, the Bureau of Internal Revenue did not allow any deduction to lessees of mines for depletion of March 1, 1913 value in computing federal income taxes for the taxable years 1913 to 1917, both inclusive. The Bureau allowed deductions for such depletion only to the owners of fee titles to such mining properties. After that decision the Bureau allowed lessees of mining properties to deduct depletion upon the basis of March 1, 1913, value in computing federal income taxes for the taxable years 1913 to 1917, both inclusive. However, no such deduction was ever allowed to the plaintiff for any of the years 1913 to 1917, inclusive.
5. In the computation of its federal income taxes for the taxable years 1913 to 1933, both inclusive, plaintiff as a lessee was allowed deductions for depletion upon its development cost at March 1, 1913, of $53,750.00 as given above, in amounts shown as follows:
------------------------------------------------------- Year | Production | Unit | Depletion | | Rate | ---------------|----------------|----------|----------- 1913 ......... | 207,912 | 1c | $2,079.12 1914 ......... | 193,536 | 1c | 1,935.36 1915 ......... | 220,632 | 1c | 2,206.32 1916 ......... | 275,260 | 1c | 2,752.60 1917 ......... | 236,173 | 1c | 2,361.73 | ______________ | ________ | __________ | 1,133,513 tons | ........ | $11,335.13 1918-1933 .... | 2,977,003 tons | ........ | $29,770.03 | ______________ | ________ | __________ Grand Total .. | 4,110,516 tons | ........ | $41,105.16 -------------------------------------------------------
6. For each of the taxable years 1918 to 1933, both inclusive, plaintiff was allowed deductions taken for additional depletion upon the basis of its March 1, 1913 value of $182,229.95 as aforesaid at a unit rate of 3½ cents per ton for the years 1918 to 1925, inclusive, and at a rate of 3.538 cents for the years 1926 to 1933, inclusive, this difference being brought about by carrying out a computation two additional decimal points. The rate was obtained by a division of 5,200,000 tons of coal into its $182,229.95 value. The total depletion so allowed amounted to $104,772.05. This, plus the depletion allowance of $41,105.16 at the 1-cent unit rate upon development cost mentioned in the preceding paragraph, made a total aggregate depletion allowance to the plaintiff for the years 1913 to 1933, both inclusive, of $145,877.21.
If the plaintiff had been allowed depletion upon its March 1, 1913 value at the unit rate of 3½ cents per ton for the years 1913 to 1917, inclusive, it would have been entitled to further deductions for depletion, as follows:
Year: Depletion 1913 ......................... $ 7,276.92 1914 ......................... 6,773.76 1915 ......................... 7,722.12 1916 ......................... 9,634.10 1917 ......................... 8,266.06 __________ $39,672.96
7. Plaintiff duly filed its federal corporation income and profits tax return for the calendar year 1934 on March 11, 1935, reporting a total gross income of $135,684.70; deductions therefrom, including a deduction for depletion of $19,795.58, amounting in all to $70,555.50; a net income of $65,129.20; an income tax thereon of $8,609.00; and an excess-profits tax of $1,381.46. The aggregate tax of $9,990.46 was timely assessed and paid in quarterly installments during 1935, as follows:
March 11 ....................... $2,497.66 June 8 ......................... 2,497.60 September 12 ................... 2,497.60 December 11 .................... 2,497.60
These payments are not now in controversy.
The depletion deduction of $19,795.58 mentioned above was calculated upon plaintiff's return, as follows:
Leasehold value 3/1/13 ...... $182,229.95 Development value 3/1/13 .... 53,750.00 ___________ $235,979.95 Depletion at 12/31/33 .................... 145,877.21 ___________ Balance 1/1/34 ........................... $ 90,102.74 90,102.74 ---------- = 0.78136 G.T. 835,727.00 Production 1934 183,613 G.T. @ 10.78136 ... $ 19,795.58
8. Plaintiff duly filed its federal corporation income and profits tax return for the calendar year 1935 on March 10, 1936, reporting a total gross income of $118,670.11; deductions therefrom, including a deduction of $18,541.71 for depletion, amounting in all to $65,964.85; a net income of $52,705.26; an income tax of $7,027.73; and an excess profits tax of $911.88. Among other deductions taken upon this return was an item of $724.07 of federal sales tax. This item will be referred to in a subsequent paragraph. The aggregate tax of $7,939.61 was timely assessed and paid in quarterly installments during 1936 as follows:
March 11 ....................... $1,984.91 June 11 ........................ 1,984.90 September 12 ................... 1,984.90 December 7 ..................... 1,984.90
These payments are not now in controversy.
The deduction of $18,541.71 for depletion mentioned above was calculated as follows:
Leasehold value 3-1-13 ....... $182,229.95 Development value 3-1-13 ..... 53,750.00 ___________ $235,979.95 Depletion 1-1-35 ............. 165,672.79 ___________ $ 70,307.16 $70,307.16 ÷ 652,114 G.T.=10.78142c per G.T. Production 1935 171,978.35 G.T. at 10.78142c=$18,541.71
9. During 1934, plaintiff ascertained that the recoverable tons of coal upon its leased premises were in fact less than the estimate thereof which had been previously made and determined that as of January 1, 1934 the recoverable quantity was only 835,727 tons, whereas on the basis of the original estimate of 5,200,000 tons as of March 1, 1913, less 4,110,516 tons removed between March 1, 1913 and December 31, 1933, there would have been 1,089,484 tons recoverable as of January 1, 1934. Plaintiff's 1934 and 1935 federal tax returns, particularly the above-quoted excerpts therefrom showing the calculation of depletion claimed as a deduction thereon, each reflected plaintiff's changed estimate of coal in place as of January 1, 1934. After an investigation, the Commissioner of Internal Revenue acquiesced in and accepted plaintiff's revised estimate of 835,727 tons as the recoverable coal in place on January 1, 1934.
10. After the investigation of plaintiff's adjustment for recoverable coal in place on January 1, 1934, and after acceptance of plaintiff's revised figure of 835,727 tons, as stated in the preceding paragraph, the Commissioner of Internal Revenue made a further adjustment in calculating plaintiff's unit rate for depletion after January 1, 1934, as follows: Although as stated in paragraphs 4 and 6 above plaintiff had never been allowed depletion upon its March 1, 1913, value at the unit rate of 3½ cents per ton for the years 1913 to 1917, inclusive, in the aggregate amount of $39,672.96, the Commissioner nevertheless considered that the Revenue Act of 1934, particularly the provisions of Section 113(b)(1)(B), 26 U.S.C.A. Int.Rev. Code, § 113(b)(1)(B), controlled a determination of the depletion allowable to the plaintiff for the years 1934 and 1935 and required an adjustment not only for depletion actually allowed but not less than the amount allowable under prior income-tax laws. He, therefore, considered that even though plaintiff had never been allowed that depletion for the years 1913 to 1917, inclusive, aggregating $39,672.96 as shown in paragraph 6 above, it was nevertheless a proper adjustment required by the applicable statute. That adjustment resulted in a revised depletion unit rate per ton of 6.034 cents, calculated as follows:
Plaintiff's computation Commissioner's in 1934 computation return: Leasehold value 3/1/13 ................ $182,229.95 $182,229.95 Development value 3/1/13 ................ 53,750.00 53,750.00 Total depletable basis ................. 235,979.95 235,979.95 $235,979.95 Less depletion taken from 3/1/13 to 12/31/33 .............. 145,877.21 145,877.16 Less depletion allowable from 3/1/13 to 12/31/17 ........... none. 39,762.96 185,550.12 __________ Balance remaining 1/1/34 ............... $ 90,102.74 $50,429.83 | $ 90,102.74 | Unit rate =10.78136c | 835,727 tons | | $ 50,429.83 | Unit rate .................... =6.034c | 835,727 tons |
This is the basic figure that is now in dispute.
11. The Commissioner's adjustment for the item of $39,672.96 and his determination of a depletion unit rate of 6.034 cents per ton as of January 1, 1934, plus a disallowance of the claimed deduction on plaintiff's 1935 return of $724.07 as federal sales tax which plaintiff's refund claim conceded to be a proper adjustment, produced additional and deficiency taxes for the years 1934 and 1935 as follows:
------------------------------------------------ | 1934 | 1935 -------------------------|-----------|---------- Income tax ............. | $1,198.50 | $1,222.18 Interest ............... | 223.10 | 154.18 Excess profits tax ..... | 435.82 | 202.52 Interest ............... | 81.13 | 25.55 | _________ | _________ Total .............. | $1,938.55 | $1,604.43 ------------------------------------------------
Appropriate so-called deficiency letters were duly addressed to the plaintiff by the Commissioner advising of his adjustment calculation and of the asserted deficiencies. Those deficiencies and accrued interest were thereafter timely assessed and paid by the plaintiff to the Collector of Internal Revenue for its district on May 5, 1938.
12. Separate formal claims for refund of the payments of $1,938.55 for 1934, and $1,604.43 for 1935, were filed with the Collector of Internal Revenue on December 9, 1938. Those claims set forth as grounds in substance (a) that the Commissioner erred in adjusting plaintiff's unit rate for depletion by the amount of $39,672.96 representing depletion allowable but never in fact allowed for the years 1913 to 1917, inclusive, and (b) that in the alternative if the adjustment was correct then plaintiff is entitled to recoup overpayments of its taxes for the years 1913 to 1917, inclusive, resulting from the same identical depletion adjustments for the separate years, upon the authority of Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421.
Copies of plaintiff's refund claims appear as Exhibits "A" and "B" to its petition in this suit, except that as shown in the petition they are incomplete in that the certificate of the Notary Public is not shown filled out. It is agreed that both claims as filed were properly subscribed and sworn to on November 7, 1938 before R.M. Younger, a Notary Public in and for Lynchburg, Virginia, and bear his official seal. Its grounds for refund as stated in those claims appear in paragraphs 1 and 2 on pages 19 and 20 of the petition.
Plaintiff's claims for refund were formally rejected by the Commissioner of Internal Revenue upon a schedule dated January 8, 1940, and plaintiff was so advised by registered letters of the same date, as required by law.
13. If the plaintiff was and is entitled to make use of the additional deductions for depletion for the years 1913 to 1917, inclusive, in the aggregate amount of $39,672.96, its federal income taxes for those years have been overpaid in amounts as follows:
For the year 1913 ...................... $ 72.78 For the year 1914 ...................... 67.74 For the year 1915 ...................... 77.22 For the year 1916 ...................... 192.68 For the year 1917 ...................... 5,158.01 _________ Total ............................... $5,568.43
Plaintiff, pursuant to claims for refund timely filed and rejected by the Commissioner of Internal Revenue, sues to recover alleged overpayments of income and excess profits taxes for the years 1934 and 1935 which, plaintiff asserts, were wrongfully collected from it.
Plaintiff's theory as to the asserted excessiveness of the taxes collected from it in 1934 and 1935 is as follows: Plaintiff is, and has been since 1890, the lessee of coal lands in West Virginia from which it mined coal, paying to the lessor a royalty per ton of coal mined. When taxes on incomes began to be levied in 1913, plaintiff, because it was a lessee and not an owner of the coal in place, was not permitted to deduct from its income for tax purposes depletion resulting from its removal of coal. Treasury Regulations No. 33 of January 5, 1914, Art. 145; Treasury Regulations No. 33 (Revised) of January 2, 1918, Art. 171. In 1918 the statute was amended to give to a lessee such as plaintiff the right to a depletion deduction (Revenue Act of 1918, Sec. 214(a) (10), 40 Stat. 1057, 1067), and for the years 1918 to 1933 plaintiff was permitted to deduct depletion occurring in those years from its income for tax purposes. The regulations which had been applied for the years 1913-17 were invalidated by the decision of the Supreme Court of the United States in Lynch v. Alworth-Stephens Co., 267 U.S. 364, 45 S.Ct. 274, 69 L.Ed. 660, a case in which plaintiff was not a party. This decision, made in 1925, came too late to permit plaintiff to sue for its overpayments made in 1913-17. Those overpayments amounted to $5,568.43, the erroneously disallowed depletion having amounted to $39,672.96.
During the years 1918-33 the defendant, in applying its formula for allowable depletion, treated the coal actually mined in 1913-17, but for which no depletion allowance had been made, as if it were still in place. Specifically, it treated plaintiff as having, in 1918, coal in place of a value of $182,229.95, when in fact that was the 1913 value, plaintiff having taken out coal of the depletion value of $39,672.96 in the years 1913-17. Since the value of intact coal at the beginning of a year is a factor in the formula by which the value per ton of coal mined in that year is set for the purposes of the depletion allowance, plaintiff would have been able, if this treatment of its intact coal as of 1918 had continued, to take all the depletion allowable by the time its mine would have been in fact exhausted, since the depletion unit per ton in the later years would have been larger, and would thus have made up for the amount erroneously disallowed in the years 1913-17.
In 1934, however, the Commissioner of Internal Revenue changed his former practice with reference to plaintiff's operation, and reduced the intact value of the coal, which had up until that time been annually reduced by the value of the number of tons taken out in each of the years 1918-33, by the additional amount of $39,672.96, which, as we have seen, was the value of the number of tons mined in the years 1913-17. The consequence of this reduction was that the smaller intact value thus left, divided by the number of tons actually remaining in place, produced a depletion unit of 6.034 cents per ton for the coal actually mined in 1934. If the $39,672.96 had been left in the intact value, as plaintiff desired, the depletion unit would have been 10.78136 cents per ton. A similar difference existed for 1935. The resulting difference in the amount of taxes for the two years was $3,542.92, which, with interest, but reduced by an item of sales tax not in dispute, plaintiff seeks to recover.
Plaintiff does not seriously dispute the correctness of the Commissioner's computations for 1934 and 1935 standing by themselves. The applicable statute, Revenue Act of 1934, §§ 23(m) (n), 114(b)(1), 113(a) (13), and (b)(1)(B)(C), 26 U.S.C.A. Int.Rev. Code, §§ 23(m, n), 114(b)(1), 113(a) (13), (b)(1) (B, C), required the Commissioner to make deductions for depletion previously allowed but not less than the amount allowable under prior income-tax laws. Since the 1913-17 erroneously disallowed depletion was allowable, the Commissioner was required to deduct it. But, plaintiff urges, the net consequences of his deducting it in 1934 and 1935, when in fact it had been disallowed in 1913-17, means that plaintiff over-paid its taxes in those earlier years and the government is unjustly enriched by that amount. This is true, and, of course, plaintiff's right to sue directly for a refund of the 1913-17 taxes is long since barred by the Statute of Limitations. But plaintiff urges that by the doctrine of recoupment it may be permitted to subtract its barred overpayment from its current taxes, or may at least insist that the Government pursue to the end the method of computation which it followed in the years 1918-33, which would result in the correction of the overpayments of 1913-17.
We think that we are not free to apply the equitable doctrine of recoupment, assuming that it would otherwise be applicable, because to do so would contradict the specific language of Sections 608 and 609 of the Revenue Act of 1928, 45 Stat. 791, 874, 26 U.S.C.A. Int.Rev. Acts, pages 459, 460. The language of those sections here pertinent is as follows:
"§ 608. A refund of any portion of an internal-revenue tax (or any interest, penalty, additional amount, or addition to such tax) made after the enactment of this Act, shall be considered erroneous —
"(a) if made after the expiration of the period of limitation for filing claim therefor, unless within such period claim was filed; * * *."
"§ 609. * * *
"(b) Credit of Barred Overpayment. A credit of an overpayment in respect of any tax shall be void if a refund of such overpayment would be considered erroneous under section 608.
"(c) Application of Section. The provisions of this section shall apply to any credit made before or after the enactment of this Act."
It cannot be that the Commissioner's refusal to do an act, here crediting plaintiff in 1934 and 1935 with overpayments made in 1913-17, which act Section 609 expressly declares to be void if he attempts to do it, will lay the Government open to suit because he did not do it.
The case of Josephine V. Hall v. U.S., 43 F. Supp. 130, 95 Ct.Cl. 539, recently decided by this court, is directly in point. The Hall case followed McEachern v. Rose, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46, and that case is likewise controlling here. Plaintiff urges that the case of Stone v. White, 301 U.S. 532, 57 S.Ct. 851, 81 L. Ed. 1265, should control this case. But the statutory provisions directly applicable here were not applicable in Stone v. White. There trustees paid a tax upon income of a trust, which tax should have been paid by the beneficiary. It was timely, though erroneously, assessed against the trustees before, and paid by them after, the statute had run against collection from the beneficiary. The Court, because of the trustee-beneficiary relation, treated the payment as if it had been made by the beneficiary herself, as it was made from her funds, though the amount was less than it would have been if assessed against her. So the beneficiary was really suing to get back money which she had in fact owed and which had been paid out of her funds by her trustee. It was a clear case for the equitable doctrine of recoupment in the absence of a controlling statute. The Court held that since the collection from the trustees though erroneous, was not barred by limitation, Section 607, which relates only to overpayments barred by limitation, was not applicable. In the instant case, Sections 608 and 609 are applicable, and we cannot disregard them.
Plaintiff urges that Section 820 of the Revenue Act of 1938, 52 Stat. 581, Internal Revenue Code, Sec. 3801, 26 U.S.C.A. Int.Rev. Code, § 3801, gives it a right of adjustment. Plaintiff did not, in its claim for refund filed with the Commissioner of Internal Revenue, include this ground for its claim. We do not determine whether or not its failure in this regard has disqualified plaintiff from here asserting this ground for recovery, as we think Section 820 has no application. Subdivision (f) of that section says:
"No adjustment shall be made under this section in respect of any taxable year beginning prior to January 1, 1932."
Plaintiff contends that since its claim is for a refund of taxes for 1934 and 1935 it comes within the affirmative provisions of the statute, and not within subdivision (f). We think, however, that the intent of the statute was that its operation should not go back of 1932. Here the adjustment sought is really for taxes wrongfully collected in the years 1913-17, rather than for the years 1934 and 1935, and we think that Congress could not have intended to mean that any claim, however old, would come within the statute merely because the later tax, against which the old one might be offset, was for the year 1932 or later.
It follows that plaintiff is not entitled to recover, and its petition will be dismissed. It is so ordered.