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Hartford-Connecticut Trust Co. v. Eaton

Circuit Court of Appeals, Second Circuit
Jun 17, 1929
34 F.2d 128 (2d Cir. 1929)

Opinion

Nos. 219, 220.

June 17, 1929.

Appeal from the District Court of the United States for the District of Connecticut.

Separate actions by the Hartford-Connecticut Trust Company, trustee of the estates of Orlando Miner and of Philip Corbin, deceased, late of Hartford, Conn., and New Britain, Conn., respectively, against Robert O. Eaton, as Collector of Internal Revenue of the District of Hartford, Conn. From adverse judgments [ 27 F.2d 530], plaintiff appeals. Reversed.

Appeals heard together from the District Court of the United States for the District of Connecticut.

Actions brought to recover penalties alleged to have been illegally collected by the defendant collector in connection with the filing by plaintiff of income tax returns for the year 1920 in the estates of Orlando Miner and Philip Corbin, of which plaintiff was trustee. Judgment for the defendant in each action, and the trustee appeals. Reversed.

The trustee in each of the above estates sold estate property at a profit during the year 1920. Before the time for making the annual returns of income, the trustee consulted the collector of internal revenue of the district, and was advised to make out an information return on Form 1041 provided by the Commissioner of Internal Revenue for fiduciaries. Returns were thereupon made in each estate on Form 1041, which fully disclosed the profits realized by the respective estates. No return was then made on Form 1040, and no taxes were paid on the profits, because of the decision in Brewster v. Walsh (D.C.) 268 F. 207, where it had been held that capital increase was not taxable. On March 28, 1921, 13 days after the fiduciary returns were filed, the judgment in Brewster v. Walsh, supra, which had been rendered in the United States District Court for the District of Connecticut, was reversed by the Supreme Court. Walsh v. Brewster, 255 U.S. 536, 41 S. Ct. 392, 65 L. Ed. 762. The latter court held that profits realized by a taxpayer from the sale of an investment were taxable. It is admitted that the trustee rested upon the decision in Walsh v. Brewster in the District Court, and did not follow the later developments in that case, because other matters of business engaged its attention.

On August 8, 1923, the collector requested the trustee to file a return on Form 1040 in each estate, which should show the respective profits, and to pay the taxes thereon. Such returns were filed, and the taxes on the profits were paid by the trustee in October of that year.

On December 8, 1923, a penalty of 25 per cent. was assessed against each estate, because of delinquent tax returns. The trustee thereafter filed claims for abatement of the penalties, which were disallowed, except in part, whereupon the penalties as so fixed were paid under protest and these actions were brought to recover back the sums paid under duress. Each action was tried upon a written stipulation waiving a jury, and judgments were rendered for the defendant on proof of facts, of which the foregoing statement is a summary.

The trial judge held that the trustee had reasonable cause for not making returns on Form 1040 on March 15, 1921, when returns were due under the act, because of the decision of the District Court in Brewster v. Walsh, supra, but said in his opinion: "The fact that the plaintiff did not follow the course of the Brewster v. Walsh Case, and that it had other business to perform, does not seem to me a reasonable cause for failure to file a return for more than 2½ years after the Supreme Court decision in the Brewster v. Walsh Case, and then not until two months after demand having been made by the Collector."

For the foregoing reasons, judgment was directed for the defendant in each action, and from these judgments the trustee has appealed.

E.F. Donaghue, of New York City, for appellant.

John Buckley, U.S. Atty., of Hartford, Conn. (George H. Cohen, Asst. U.S. Atty., of Hartford, Conn., and C.M. Charest and H.B. Hunt, both of Washington, D.C., of counsel), for appellee.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.


The imposition of penalties for failure to file income tax returns was governed at the time these tax penalties were assessed by section 3176 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918 (26 USCA § 98), which provided in part as follows:

"* * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. In case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax 50 per centum of its amount."

The collector takes the position that the information return made under Form 1041 was not a return at all, because it was not a return in such form as the Commissioner of Internal Revenue had prescribed. A proper return under the regulations would have been on Form 1040. Section 6336h (b) U.S. Comp. St., requires individuals to file a return in such form as the Commissioner shall prescribe, and section 6336h (e) requires trustees to make returns of income for their trusts and subjects them to all the provisions which apply to individuals. But while the return on Form 1041 may not have been adequate for some purposes, the provisions for imposing penalties do not seem to require a taxpayer to choose the right blank at his peril, when he acts in good faith and makes a full disclosure of his income.

It is to be noticed that, except in cases of a willfully false or fraudulent return, a penalty may be imposed only where there is a failure to make and file "a return or list." It is, to say the least, highly doubtful whether the right of the Commissioner to prescribe forms can be regarded as involving a nullification for all purposes of a sworn and complete statement of income, irregular or informal though it may have been.

The government would seem to be sufficiently protected in having complete information whereby the collector may make a return on behalf of the taxpayer as provided in Revised Statutes, § 3176, or may require the latter to file an amended return in the form prescribed.

Tax laws are to be strictly construed, and a reasonable doubt should be resolved in favor of the taxpayer. Gould v. Gould, 245 U.S. 151, 38 S. Ct. 53, 62 L. Ed. 211; Partington v. Attorney General, L.R. 4 H.L. at page 122. In view of the many rulings by the department relieving the taxpayer from penalties where he has acted in good faith (Dayton Bronze Bearing Co. v. Gilligan [C.C.A.] 281 F. 709), it may well be questioned whether the language of section 3176 would have been sufficient to permit the imposition of penalties upon the plaintiff, even if the word "return" had been the only word used in that section. But the statute imposes a penalty only in case of failure without reasonable cause to make or file "a return or list." The word "list" was put in the act for some purpose, and it may well have been inserted to cover by general language any full disclosure made of record by the taxpayer. It certainly was intended to mean less than a "return" of impeccable regularity. But, whatever the purpose of the language used, it is sufficient to indicate that a penalty should not be imposed upon a taxpayer, who has acted in good faith and given complete information, merely because he has not observed all the complicated requirements of the department. Upon the record presented, a judgment should have been directed for the plaintiff in each action.

Both judgments are accordingly reversed.


Summaries of

Hartford-Connecticut Trust Co. v. Eaton

Circuit Court of Appeals, Second Circuit
Jun 17, 1929
34 F.2d 128 (2d Cir. 1929)
Case details for

Hartford-Connecticut Trust Co. v. Eaton

Case Details

Full title:HARTFORD-CONNECTICUT TRUST CO. v. EATON, Collector of Internal Revenue…

Court:Circuit Court of Appeals, Second Circuit

Date published: Jun 17, 1929

Citations

34 F.2d 128 (2d Cir. 1929)

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