Opinion
Docket No. 63289.
Filed October 10, 1958.
SEC. 23 (b) — DEDUCTIBILITY OF INTEREST: YEAR OF PAYMENT: SUSPENSE ACCOUNT DEPOSIT. — In 1952, prior to any formal determinations or assessments of deficiencies in income tax for the years 1945-1950, inclusive, petitioner made a remittance to a collector of estimated tax deficiencies and interest thereon up to the date of the remittance for the purpose of stopping the running of interest upon proposed deficiencies. Petitioner's estimate of deficiencies was based upon information received informally from agents of the Commissioner about their reports recommending determinations of deficiencies plus 50 per cent additions for fraud under section 293 (b). The petitioner disputed some of the proposed deficiencies and the 50 per cent additions thereto. The collector credited the entire remittance to a suspense account. In 1955, after the issuance of a 30-day letter by the Commissioner, the petitioner executed waivers and consents, deficiencies and 50 per cent additions thereto were assessed, and the collector credited the deposit in the suspense account to the assessment account. Petitioner reported income on a cash basis. Held, there was no payment of interest on indebtedness in 1952, and a deduction for interest "paid" under section 23 (b), 1939 Code, is not allowable.
Arnold F. Bunge, Esq., and A. J. Beran, C. P. A., for the petitioners.
Maurice B. Townsend, Jr., Esq., for the respondent.
The Commissioner determined a deficiency in income tax for the year 1952 in the amount of $8,439.80. The question is whether there was a payment in 1952 of interest in the amount of $12,953.90 on deficiencies in income tax for prior years within the provisions of section 23 (b), 1939 Code, for which petitioners are entitled to a deduction in 1952.
The Commissioner determined that for the year 1951 an addition to tax is due under section 294 (d) (2) in the amount of $1,338.27. He has conceded that this determination was incorrect and that no addition to the tax for 1951 is due.
FINDINGS OF FACT.
The petitioners are residents of Toledo, Ohio. They filed joint returns for the years 1951 and 1952 with the collector of internal revenue for the tenth district of Ohio.
The issue relates to Fred J. Arheit only. Therefore, he is referred to hereinafter as the petitioner.
The petitioner reported his income for 1952, and for all other material years, on a cash basis.
In the joint return for 1952, a deduction was taken for interest which was claimed to have been paid in 1952 to the collector of internal revenue in Toledo in the amount of $12,953.90. The Commissioner disallowed the deduction on the ground that it was not allowable under section 23 (b) of the 1939 Code.
The amount, $12,953.90, was part of a larger amount, $66,639.70, which was the amount of a check which petitioner mailed to the collector of internal revenue in Toledo on April 7, 1952, under circumstances which are described hereinafter. The amount, $12,953.90, represents the total of various amounts of interest computed on proposed deficiencies in income tax for each of the years 1945 through 1950, as is explained hereinafter, the proposed deficiencies totaling $53,685.80. The proposed deficiencies and the interest thereon computed to April 7, 1952, aggregated $66,639.70.
As of April 7, 1952, the Commissioner had not mailed either a 30-day letter or a final notice of deficiency (90-day letter) setting forth determinations of deficiencies for the years 1945-1950, and deficiencies for those years had not been assessed.
The collector of internal revenue in Toledo, upon receipt of petitioner's check for $66,639.70, credited that amount to a suspense account.
On or about July 1, 1955, petitioner agreed to the assessment of deficiencies in income tax for the years 1945-1950, inclusive, in the total amount of $54,497.70, and to 50 per cent additions to the deficiencies under section 293 (b) (so-called fraud penalties) in the total amount of $28,462.38. The agreed deficiencies and 50 per cent additions totaled $82,960.08. Petitioner agreed to the deficiencies and additions by executing Forms 870. Thereafter, in 1955, the Commissioner made assessment of the deficiencies and interest, and of the additions to the deficiencies.
The circumstances leading up to the assessment in 1955 of the income tax deficiencies and additions are as follows:
Prior to February 26, 1952, the respondent caused an audit to be made of the returns of the petitioner for the years 1945-1950, inclusive. On February 26, 1952, agents of the respondent, who had completed their audits and made their reports, advised petitioner orally, at a conference, that their audits showed that there were deficiencies in income tax for each of the years 1945-1950, inclusive, in the amounts set forth below; that they had determined that the deficiencies were due to fraud with intent to evade tax; and that 50 per cent additions to the deficiencies under section 293 (b) were proposed. Petitioner did not agree to the 50 per cent additions to the deficiencies, and after his counsel and accountant had checked the amounts of the proposed deficiencies, he did not agree with the amounts computed by the agents for 1949 and 1950, although he did not dispute the amounts of the deficiencies computed for the years 1945-1948, inclusive. The amounts of the deficiencies in income tax computed by the respondent's agents for the years 1945-1950 were as follows:
Year Deficiency
1945 ........................................ $12,595.69 1946 ........................................ 14,324.96 1947 ........................................ 7,447.49 1948 ........................................ 7,442.62 1949 ........................................ 1,653.56 1950 ........................................ 11,515.68 ------------ Total ................................. 54,980.00
Petitioner's counsel and accountant, in their computations of deficiencies for 1949 and 1950, arrived at the amounts of $1,323.96 and $10,551.08, respectively. The deficiencies in income tax for 1945-1948, inclusive, which petitioner did not dispute, totaled $41,810.76. Added to that figure the amounts of deficiencies for 1949 and 1950 computed by petitioner's accountant, the total deficiencies in income tax which petitioner estimated in February 1952 amounted to $53,685.80.
Although petitioner's representatives were satisfied that there were some deficiencies in income tax for each of the years in dispute, they protested the imposition of the 50 per cent additions for fraud in 1952, and they continued to object to the imposition of such civil fraud penalties up to the time in 1955 when petitioner finally agreed to them at the time he executed the Forms 870. On April 14, 1952, petitioner's counsel sent a letter to the special agent in charge, in the Intelligence Division of the Internal Revenue Service in Toledo, in which he discussed, inter alia, the petitioner's denial of liability for 50 per cent civil fraud additions to the deficiencies under section 293 (b), in which he said: "In our opinion no fraud penalty should be assessed and we are hopeful that this matter may be finally closed without the assessment of a fraud penalty or any further proceedings upon the part of your department."
In the early part of 1952, there were pending against petitioner charges of fraudulent tax evasion under the criminal statutes. Because of the charges, the Commissioner withheld issuing formal notice under either a 30-day letter or a 90-day letter of determinations of deficiencies in income tax for the years 1945-1950, inclusive, and of 50 per cent additions to the deficiencies, as recommended by his agents in their reports and audits which had been completed as of February 26, 1952. The Commissioner withheld issuing a formal notice of his determinations of deficiencies pending the outcome of proceedings involving the charges of criminal tax evasion.
Prior to April 7, 1952, petitioner requested the collector's office in Toledo to compute interest on estimated deficiencies (with petitioner's adjustments for 1949 and 1950) to April 7, 1952. The collector's office orally advised petitioner of the amounts of such interest. On April 7, 1952, petitioner sent his check for $66,639.70 to the collector with the following letter of his attorney:
The Revenue Department has made an audit of the tax returns of Fred J. Arheit for the years 1945, 1946 and 1947, and of Fred J. Arheit and Gertrude E. Arheit for the years 1948, 1949 and 1950. The Revenue Agent has proposed the assessment of certain deficiencies for the years in question. While the taxpayers are not entirely in agreement with the figures submitted by the Revenue Agent, nevertheless there does appear to be a deficiency in the tax for those years and the taxpayer, in order to save interest upon the proposed deficiencies, tenders herewith his check in the amount of $66,639.70 which is to be applied as follows:
Year Proposed Interest to Total deficiency 4/7/52 1945 ................... $12,595.69 $4,582.07 $17,177.76 1946 ................... 14,324.96 4,351.65 18,676.61 1947 ................... 7,447.49 1,815.55 9,263.04 1948 ................... 7,442.62 1,367.80 8,810.42 1949 ................... 1,323.96 163.88 1,487.84 1950 ................... 10,551.08 672.95 11,224.03 ---------- ---------- ---------- $53,685.80 $12,953.90 $66,639.70 Will you please endorse your receipt upon a copy of this letter and return it to us.The collector deposited the $66,639.70 in the collector's suspense account pending the Commissioner's assessment of tax deficiencies and interest.
On January 15, 1955, a grand jury in Toledo, upon consideration of the charges against petitioner of fraudulent tax evasion, failed to indict petitioner.
On April 29, 1955, the collector of internal revenue in Toledo mailed 30-day letters to petitioner in which he advised him formally of the determination of deficiencies in income tax for each of the years 1945-1950, inclusive, and of 50 per cent additions to the deficiencies under section 293 (b), to which letters the reports of the revenue agents were attached. He also enclosed agreement forms for petitioner to execute, and he advised the petitioner that his execution of the forms would expedite assessment of the deficiencies. The deficiencies in income tax which were set forth in the Commissioner's 30-day letters dated April 29, 1955, were in the same amounts for each of the years 1945-1949, inclusive, as had been determined by the agents in their reports which had been completed in the early part of 1952, of which petitioner had been advised orally at the conference in the agents' office on February 26, 1952. The deficiency for 1950, however, was determined to be $11,033.38, or $482.30 less than the agents had computed in their reports.
Petitioner again protested the additions of the 50 per cent civil fraud penalties. At a conference on May 31, 1955, petitioner's counsel submitted an informal argument, under a letter dated June 13, 1955, in which reasons were set forth why petitioner believed he should not be held liable for the civil fraud penalties. In this letter it was stated that petitioner had already "paid a considerable amount of back taxes with interest."
The efforts of petitioner's counsel to have the Commissioner's representatives set aside the proposed 50 per cent additions to the deficiencies for the years at issue were not successful.
On or about July 1, 1955, petitioner agreed to the assessment of the deficiencies and the 50 per cent additions set forth in the 30-day letters by executing Forms 870, which are waivers of restrictions on assessment and collection of deficiencies and consents to assessment of the deficiencies and interest thereon and additions. The Forms 870 were filed with the collector in Toledo on July 6, 1955. The petitioner thereby agreed, inter alia, to deficiencies for 1949 and 1950 in the amounts of $1,653.56 and $11,033.38, respectively, with respect to which he had estimated only $1,323.96 and $10,551.08, respectively, as has been stated above.
The amounts of the deficiencies and of the 50 per cent additions to which petitioner agreed upon executing the Forms 870 on July 1, 1955, were as follows:
Year Deficiencies Additions Total Sec. 293 (b) 1945 ................... $12,595.69 $6,297.85 $18,893.54 1946 ................... 14,324.96 7,162.48 21,487.44 1947 ................... 7,447.49 3,723.75 11,171.24 1948 ................... 7,442.62 3,732.74 11,175.36 1949 ................... 1,653.56 2,028.87 3,682.43 1950 ................... 11,033.38 5,516.69 16,550.07 ---------- ---------- ----------- Total ............ 54,497.70 28,462.38 82,960.08 On August 8, 1955, after receiving the Forms 870, the Commissioner assessed the above-stated amounts of deficiencies and 50 per cent additions, together with interest on the deficiencies. The amounts of interest which were assessed on the deficiencies for the years 1945-1948, inclusive, constituted interest which had accrued to April 7, 1952, and they were the same amounts as petitioner had forwarded to the collector in Toledo on April 7, 1952, included in his check for $66,639.70.Since the amounts of the deficiencies for 1949 and 1950 which were agreed to by petitioner in 1955 were larger than the amounts which, in 1952, he estimated, the amounts of interest on those deficiencies which were assessed on August 8, 1955, were greater than had been computed in 1952 on deficiencies for 1949 and 1950 which petitioner had estimated.
The following schedule shows the amounts of the interest on the deficiencies which were assessed by the Commissioner on August 8, 1955, and the amounts computed as interest on deficiencies which petitioner had forwarded to the collector in Toledo on April 7, 1952:
Year Assessed on Forwarded by Difference Aug. 8, 1955 petitioner on Apr. 7, 1952 1945 .................. $4,582.07 $4,582.07 0 1946 .................. 4,351.65 4,351.65 0 1947 .................. 1,815.55 1,815.55 0 1948 .................. 1,367.80 1,367.80 0 1949 .................. 204.68 163.88 $40.80 1950 .................. 703.72 672.95 30.77 --------- --------- ------ 13,025.47 12,953.90 71.57 On August 26, 1955, petitioner paid the 50 per cent additions to the deficiencies for the years involved in the total amount of $28,462.38. Also, on August 26, 1955, petitioner paid the balances due on the deficiencies for 1949 and 1950, which totaled $811.90, and the balance due on interest which totaled $71.57. The payment which had been credited to a suspense account in April 1952 was credited to the assessment account in petitioner's name.The stipulated facts which are not set forth above are found as stipulated.
OPINION.
The question is whether petitioner's remittance to the collector on April 7, 1952, of interest on proposed tax deficiencies, prior to the assessment of taxes and interest, constituted payment of interest for the purpose of a deduction under section 23 (b), 1939 Code. The amount tendered in advance of assessment was deposited to a suspense account.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * * * * *
(b) INTEREST. — All interest paid or accrued within the taxable year on indebtedness * * *
The respondent's position is that the remittance prior to assessments of the deficiencies and interest did not constitute payment of taxes and interest, but was a mere deposit pending the determination and defining of petitioner's liability for additional taxes for the years 1945-1950, inclusive. He contends that both the existence and the amount of petitioner's liability was in dispute in 1952 and thereafter until settlement in 1955, so that in 1952 there was no indebtedness for taxes and interest, nor payment in discharge of indebtedness. Respondent contends, further, that his position is consistent with the principles stated in Rosenman v. United States, 323 U.S. 658; and Lewyt Corp. v. Commissioner, 215 F.2d 518, modified on another point 349 U.S. 237.
Respondent's counsel stated at the trial that the Commissioner's position contemplates allowance of the claimed deduction for 1955.
The petitioner argues that since he reports income on a cash basis he is entitled to a deduction for 1952 of interest "paid," and that he should not be deprived of the deduction in computing his net income for 1952 merely because the respondent "refused" to make formal assessments of additional taxes in 1952. He relies on dictum in Chestnut Securities Co. v. United States, 62 F. Supp. 574, 576.
The narrow question here is whether any indebtedness existed in income tax or interest on April 7, 1952, when the collector received the petitioner's check for $66,639.70, so that the money could constitute an actual payment of tax and interest and a portion be deductible as interest paid on indebtedness under section 23 (b).
It is now well established that a remittance which is credited to a collector's suspense account does not constitute a payment of tax. Rosenman v. United States, supra; Lewyt Corp. v. Commissioner, supra; Rose v. United States, 256 F.2d 223, reversing 151 F. Supp. 514; Budd Co. v. United States, 252 F.2d 456; United States v. Dubuque Packing Co., 233 F.2d 453, 460; Busser v. United States, 130 F.2d 537. A collector's suspense account, as the parties have agreed, is a separate internal bookkeeping account maintained for the purpose of recording identified remittances received with respect to additional taxes or interest which have been proposed or recommended for assessment but have not been assessed. "Money held in these accounts is held not as taxes duly collected are held but as a deposit made in the nature of a cash bond for the payment of taxes thereafter found to be due." Rosenman v. United States, supra. Interest does not accrue and is not owing by the Government on the amount deposited to a suspense account which proves to be in excess of the amount of the tax eventually assessed. Busser v. United States, supra. For the same reasons which underlie the above, if the amount of the tax and interest which eventually is assessed is less than the total sum which was deposited to a suspense account, the excess will be refunded to the taxpayer by the collector on the basis of a credit memorandum issued by the collector to a disbursing agent, without the taxpayer's filing a claim for refund. With respect to this matter, the parties, by their stipulation, are in agreement.
In 1952, there had not been any formal determination by the Commissioner of liability of the petitioner for additional taxes for any of the years 1945-1950, inclusive, and no tax deficiencies had been assessed. Although agents of the Commissioner had completed reports in which they recommended determinations of tax deficiencies in stated amounts, plus 50 per cent additions thereto for fraud, the Commissioner had not concluded that such proposals could be adopted. One of the reasons for his not making definite and formal determinations of deficiencies for the years in question was that charges against petitioner of fraudulent tax evasion, with respect to which criminal prosecution might be recommended, were pending and awaiting presentation to a grand jury. It is clear that the Commissioner, by not making any definitive determination in 1952 of liability for additional taxes, left open his procedures for revising the then-proposed deficiencies, upward or downward, in the light of any new evidence and facts which might be discovered during a grand jury hearing or a subsequent trial of the charges, if any.
See 9 Mertens, Law of Federal Income Taxation par. 49.111.
In this situation, when petitioner was informally advised by agents at a conference on February 26, 1952, that they had recommended in their reports the formal determination of tax deficiencies in stated amounts for each of the years involved, petitioner used the information which he obtained from the agents, with which he was then confronted, to make his own estimates of the amounts of tax deficiencies, without, however, 50 per cent additions for fraud. Thus, on brief, petitioner concedes that he proceeded to make his own computation of tax deficiencies. Having done that, petitioner voluntarily tendered to the collector an amount covering his estimates of deficiencies, plus interest thereon to the date of the tender of the amount thereof, having requested the collector's office to compute for him the amounts of interest on the amounts of the estimated deficiencies. But petitioner did not enter into any agreement with the Commissioner establishing his liability for any additional taxes. He could not obtain an agreement in 1952 from the Commissioner about his liability for additional taxes because, among other reasons, the petitioner would not agree to a liability for the entire amount of the deficiencies then proposed informally, or for 50 per cent additions for fraud to the agents' proposed deficiencies. If there had been any such agreement the collector, of course, could have accepted petitioner's remittance in 1952 as an amount "collected without assessment," section 271 (a) (1) (B), but he did not.
The petitioner argues that he "admitted" that he owed deficiencies in the amounts set forth in the letter of his attorney dated April 7, 1952, which has been set forth in the findings of fact. But granting that the use of the word "tender," in the letter of April 7, 1952, might be construed to mean that he offered to accept liability for additional taxes in the amount of $53,685.80, such offer was not accepted in 1952 by the Commissioner, and upon the facts before us we cannot make a finding that in 1952 petitioner formally acquiesced in any proposed deficiencies. See Lewyt Corp. v. Commissioner, supra, pp. 522, 523. For the purpose of the issue before us, it cannot be said that a mere offer on the part of a taxpayer establishes a liability for tax which is at once discharged by the check which accompanies the offer. Furthermore, it was stated in the letter which accompanied petitioner's check that he made the tender of $53,685.80 "in order to save interest on the proposed deficiencies." His use of the expression "applied," with respect to the handling of the total sum of $66,639.70 which was tendered, is of no more consequence here than it was in Busser v. United States, supra. And, likewise, the fact that petitioner did not make the remittance on April 7, 1952, under "protest" is no more significant here than it was in Budd Co. v. United States, supra.
We must reject petitioner's contention that in 1952 there was definitely established a liability on his part for additional taxes in the total amount of $53,685.80, which constituted an "indebtedness" within the meaning of section 23 (b), or that such liability was established in 1952 because petitioner made a tender of $53,685.80 which was deposited in the collector's suspense account. No liability for additional taxes was definitively established until 1955 when the Commissioner, on April 29, 1955, issued his 30-day letter to petitioner; and there was no indebtedness owing by petitioner for additional taxes until 1955. We think it is clear from the record here that the petitioner did not discharge, by the remittance in 1952, what he deemed to be an indebtedness, nor pay one that existed. Furthermore, it appears to be agreed by the parties in their stipulation relating to the collector's suspense account, that if petitioner had made a request for a return of the remittance prior to assessment, the collector would be required to initiate action to make such return. The fact that jeopardy assessment procedure could be utilized to retain the fund is not a material consideration. Rose v. United States, supra.
Petitioner's argument here, in our opinion, boils down to a contention that the collector was under a duty, under the circumstances, to accept the remittance as payment in 1952 of an indebtedness and of interest due on an indebtedness. But, admittedly, there was no agreement in this respect between the petitioner and the Commissioner in 1952, and, as was pointed out in Lewyt Corp. v. Commissioner, supra, the collector was not under any duty to regard the remittance as payment either of taxes or interest. In 1952, petitioner's tax liability for each of the years 1945-1950, inclusive, was still in dispute when the remittance was made, it having been proposed by the agents that deficiencies in the total amount of about $82,960, including 50 per cent additions for fraud, should be determined, and petitioner disclaimed any liability for around $28,462 of such proposed amount. Formal notices of proposed deficiencies were not sent to petitioner until 1955, and there was no settlement, in whole or in part, of petitioner's liability for additional taxes which established indebtedness owing by petitioner until 1955. In these circumstances, we think that the collector's action in placing the 1952 remittance in his suspense account to await the disposition of the dispute then existing between the petitioner and the respondent was proper. Rosenman v. United States, supra, supports this view. The Supreme Court under the facts of that case held that no "payment" occurred until there had been an assessment followed by its satisfaction in whole or in part out of funds already deposited with the collector. We must reach the same conclusion here.
The question in this case arises under section 23 (b), and in order to allow the claimed deduction for 1952 for interest "paid" the requirements of that section must be met. Our conclusion, upon the facts before us, is that in 1952 an "indebtedness" of the petitioner for additional taxes of $53,685.80 had not been definitively established, and interest on that amount was not "paid" in 1952. In the Rosenman case, the Supreme Court rejected an argument (which there was made by the Government) that because a remittance which is credited to a suspense account stops the running of penalties and interest it is therefore to be treated as a "payment" by the parties. Such, in effect, is petitioner's argument here, and it is rejected for the same reasons as were stated in the Rosenman case.
Upon all of the facts here we are unable to conclude that petitioner's 1952 remittance satisfied an asserted tax liability. We agree with the statement in Lewyt Corp. v. Commissioner, supra, at 522-523, as follows:
While we do not read Rosenman to foreclose treating as a tax payment any remittance made prior to assessment, we do think that it supports the view that a remittance which does not satisfy an asserted tax liability should not be treated as the "payment" of a tax. Satisfaction may, as in Rosenman, follow from payment of a tax assessed, for such a payment extinguishes the asserted liability, even though the taxpayer is left with an independent claim for refund which survives the discharge of the assessment.
Petitioner's reliance upon dictum in Chestnut Securities Co. v. United States, supra, is misplaced. It is noted that the taxpayer there reported income on an accrual basis, and, in addition, that the court, in the dictum found on page 576, had reference to a situation (as shown by the facts) where there were both a determination of a liability for tax deficiencies by a tax authority and an actual payment thereof by the taxpayer. We do not have such situation here. Petitioner's reliance upon the District Court's decision in Rose v. United States, 151 F. Supp. 514, is not helpful to his cause. We agree with the views of the Court of Appeals for the Third Circuit in Rose v. United States, supra, reversing the lower court.
It is held that a deduction for 1952 of $12,953.90, as interest paid, is not allowable under section 23 (b). Under this issue the respondent is sustained.
The parties are now agreed that for 1951 there is no deficiency in addition to tax under section 294 (d) (2). With respect to the taxable year 1952, decision must be for the respondent.
Decision will be entered for the respondent.