Opinion
Docket No. 46416.
1955-09-21
GEORGE H. BAKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Symington P. Landreth, Esq., and Bertram P. Rambo, Esq., for the petitioners. William G. Handfield, Esq., for the respondent.
Held, upon the facts the assessment and collection of the deficiencies and additions to tax because of fraud herein determined are not precluded by reason of a compromise within the purview of section 3761, Internal Revenue Code of 1939. Symington P. Landreth, Esq., and Bertram P. Rambo, Esq., for the petitioners. William G. Handfield, Esq., for the respondent.
Respondent determined deficiencies in income tax and additions to tax because of fraud in the following amounts:
+--------------------------------+ ¦ ¦ ¦50 per cent ¦ +----+----------+----------------¦ ¦Year¦Deficiency¦addition to tax ¦ +----+----------+----------------¦ ¦1944¦$682.03 ¦$1,330.83 ¦ +----+----------+----------------¦ ¦1945¦638.13 ¦4,030.36 ¦ +----+----------+----------------¦ ¦1946¦1,015.26 ¦9,882.60 ¦ +--------------------------------+
The additions to tax exceed the deficiencies because substantial amounts of the deficiencies were paid prior to the issuance of the notice of the notice of deficiency.
Petitioner concedes the correctness of the deficiencies in tax determined by respondent. He also concedes that each of the original returns filed for the taxable years involved was fraudulent. The only issue presented is whether the respondent is precluded from assessing and collecting the deficiencies and additions to tax by reason of a compromise.
FINDINGS OF FACT.
Petitioner is an individual residing in the State of Pennsylvania. During the years 1944, 1945, and 1946 petitioner was doing business under the name of Howard Cleaners in and around Philadelphia, Pennsylvania. Petitioner filed fraudulent income tax returns for each of those years with the collector of internal revenue for the first district of Pennsylvania.
On October 15, 1947, upon advice of counsel, petitioner filed amended income tax returns for the taxable years 1944, 1945, and 1946 disclosing deficiencies in income tax, to which the petitioner added 5 per cent as self-imposed penalties for negligence. The amounts of such deficiencies and penalties, together with interest to October 15, 1947, for each of those years were as follows:
+---------------+ ¦1944¦$2,385.44 ¦ +----+----------¦ ¦1945¦8,498.86 ¦ +----+----------¦ ¦1946¦20,343.70 ¦ +---------------+
On the same date petitioner paid the tax, penalties and interest shown on the amended returns as due for the years 1944 and 1945 and made a partial payment of $5,343.70 on the amount due for 1946.
On February 11, 1949, the United States Government filed a tax lien against petitioner for the amount of $14,988.55 in the Office of the Prothonotary of the Courts of Common Pleas, Philadelphia, Pennsylvania, and in the Office of the Clerk of the United States District Court for the Eastern District of Pennsylvania.
Both before and after the filing of these liens Thomas J. Clary, now Judge of the United States District Court for the Eastern District of Pennsylvania and then one of petitioner's counsel, had several conversations with Edward A. Dooley (now deceased), Chief Field Agent of the Bureau of Internal Revenue in Charge of Collections, concerning settlement of the balance owing for the year 1946. Clary told Dooley that if petitioner's assets were sold on levy, the Government would not get more than 35 or 40 per cent of the tax due. He further explained that petitioner could borrow enough money from the Broad Street Trust Co. of Philadelphia to pay the balance due together with accrued interest if the bank could be assured no fraud penalty would be asserted. Dooley was specifically asked to check with his superiors in Washington so that Clary would have the assurance from him that no fraud penalty would be imposed.
Sometime in late April or early May 1949 Clary and Symington Landreth, also an attorney for petitioner, conferred with Dooley and an internal revenue agent named Donnelly. At that conference Dooley orally assured Clary that no fraud penalty would be imposed on petitioner. Petitioner's counsel left the conference confident that Dooley had full authority from his superiors to give that assurance. Bertram P. Rambo, another of petitioner's attorneys, negotiated the loan with the bank solely on the strength of the assurance given to Clary. Rambo had no memorandum or statement from any Treasury official to the effect that such assurance had been given.
A check in the amount of $15,341.12 drawn on the account of the firm of Rambo, Knox and Landreth, dated May 19, 1949, was mailed to Chief Field Deputy E. A. Dooley. The payment was accepted, the check cashed, and the liens discharged by the Government in June 1949.
Subsequently petitioner was indicted in the United States District Court for the Eastern District of Pennsylvania for attempted evasion of income taxes for the years 1944, 1945, and 1946. On February 6, 1951, upon his plea of nolo contendere, petitioner was given a suspended sentence and 3 years probation and was fined $10,000.
A statutory notice of deficiency was mailed to petitioner on October 16, 1952, determining deficiencies in income tax for the years 1944, 1945, and 1946 in the aggregate amount of $2,335.42 and additions to tax under section 293(b), Internal Revenue Code of 1939, in the net aggregate amount of $13,836.18 ($15,243.79 less $1,407.61).
OPINION.
BRUCE, Judge:
Petitioner filed fraudulent income tax returns containing substantial understatements of income for each of the years 1944, 1945 and 1946. Thereafter, upon advice of counsel and after an investigation had been begun by internal revenue agents, petitioner filed amended returns disclosing additional income and deficiencies in tax, to which he added 5 per cent as penalties for negligence and interest to October 15, 1947, the date of filing. On the same date he paid all the tax, penalty, and interest shown thereon for the years 1944 and 1945 and a portion of tax for the year 1946. In May 1948, after counsel for petitioner had been assured by one of the internal revenue agents that, if petitioner paid the balance of the tax, penalty, and interest shown on the amended return, no fraud penalties would be imposed on him, petitioner paid the balance.
Petitioner contends that such assurance and payment constituted a compromise and settlement of all his tax liabilities for the years 1944, 1945, and 1946, by reason of which respondent is now estopped from assessing and collecting any further taxes and penalties for those years.
Assuming the assurance given petitioner's counsel by the revenue agent amounted to an agreement, it is clear such agreement is not binding upon the respondent herein. The agent was only a subordinate official in the Bureau of Internal Revenue and there is no evidence that such agreement was called to the attention of the Commissioner or approved by him. Petitioner's counsel merely assumed it had been. Nor is there any evidence that any agreement compromising petitioner's tax liabilities was approved by the Secretary of the Treasury, the Under Secretary, or an assistant secretary, as required by section 3761 of the Internal Revenue Code of 1939.
SEC. 3761. COMPROMISES.(a) AUTHORIZATION.— The Commissioner, with the approval of the Secretary, or of the Under Secretary of the Treasury, or of an Assistant Secretary of the Treasury, may compromise any civil or criminal arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General may compromise any such case after reference to the Department of Justice for prosecution, or defense.(b) RECORD.— Whenever a compromise is made by the Commissioner in any case there shall be placed on file in the office of the Commissioner the opinion of the General Counsel for the Department of the Treasury, or of the officer as such, with his reasons therefor, with a statement of—(1) The amount of tax assessed.(2) The amount of additional tax or penalty imposed by law in consequence of the neglect or delinquency of the person against whom the tax is assessed, and(3) The amount actually paid in accordance with the terms of the compromise.
The leading case on this point is Botany Worsted Mills v. United States, 278 U.S. 282, wherein the Supreme Court, referring to section 3229 of the Revised Statutes, from which source section 3761, supra, was derived, stated:
We think that Congress intended by the statute to prescribe the exclusive method by which tax cases could be compromised, requiring therefor the concurrence of the Commissioner and the Secretary, and prescribing the formality with which, as a matter of public concern, it should be attested in the files of the Commissioner's office; and did not intend to intrust the final settlement of such matters to the informal action of subordinate officials in the Bureau. When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode. * * *
It is plain that no compromise is authorized by this statute, which is not assented to by the Secretary of the Treasury. Leach v. Nichols (C.C.A.) 23 F.2d 275, 277. * * *
See also L. Loewy & Son, Inc., v. Commissioner, (C.A. 2) 31 F.2d 652 Bank of New York, Exec. v. United States, (C.A. 3) 170 F.2d 20; Victoria R. Johnston, 19 B.T.A. 630.
Willingham v. United States, 208 F. 137; Rau v. United States, 260 F. 131; and Oliver v. United States, 267 F. 544, relied upon by petitioner, were all decided prior to the decision of the Supreme Court in Botany Worsted Mills case and, to the extent they are contrary thereto, are no longer authority. Victoria B. Johnston, supra. Backus v. United States, 59 F.2d 242, certiorari denied 288 U.S. 610; Reynolds v. Gnichtel, 1 F.Supp. 606; and Loeb v. United States, 17 F.Supp. 966, also cited by petitioner, are distinguishable. In the Backus case there was a consent judgment entered into pursuant to a stipulation between the taxpayer and authorized officers of the United States in an action pending before the Board of Tax Appeals. In Reynolds v. Gnichtel, supra, an order of dismissal was entered in an action pending before the Court of Claims, pursuant to a settlement as to which the statutory requirements were met. The Loeb case held that the compromise of cases should be encouraged and in the absence of compelling reasons would not be set aside.
Nor does discharge of the lien filed by the Government in the Office of the Prothonotary of the Courts of Common Pleas, and in the Office of the Clerk of the United States District Court, after payment of the balance of the tax disclosed by the amended returns, preclude respondent from determining additional taxes and penalties. See Joseph T. Miller, 23 T.C. 565 (on appeal C.A. 5), wherein we held that the effect of section 3675 of the Internal Revenue Code of 1939
is to extinguish the tax lien and not the tax liability, and that reliance upon the extinguishment of a lien could not result in an estoppel against the Government.
SEC. 3675. EFFECT OF CERTIFICATES OF RELEASE OR PARTIAL DISCHARGE.A certificate of release or of partial discharge issued under this subchapter shall be held conclusive that the lien upon the property covered by the certificate is extinguished.
For the reasons discussed above we hold that respondent is not estopped from assessing and collecting the deficiencies and additions to tax determined by him.
Decision will be entered for the respondent.