Summary
In Parish Bingham Corp., the taxpayer sought a refund of interest paid on a deficiency assessment agreed to in a closing agreement.
Summary of this case from Zaentz v. Commissioner of Internal RevenueOpinion
No. J-445.
November 3, 1930.
Suit by the Parish Bingham Corporation and others against the United States.
Petition dismissed.
This suit is for the recovery of $10,186.04 as interest, under section 1019 of the Revenue Act of 1924 ( 26 USCA § 153 note), on an overpayment of tax for 1918 of $51,635.60 credited against an additional assessment for 1917 from the date of the payment on December 17, 1919, to March 19, 1923, the date of the additional assessment. Plaintiffs also claim interest upon interest sued for at 6 per cent. per annum from March 19, 1923.
Plaintiffs made claim for this interest on March 24, 1928, and the Commissioner denied it on April 10, 1928, on the ground that the matter had been finally settled and closed by an agreement of June 7, 1926, under section 1106(b) of the Revenue Act of 1926 ( 26 USCA § 1249 note).
Special findings of fact:1. Parish Bingham Corporation, hereinafter referred to as the corporation, at all times hereinafter mentioned to the date of dissolution, June 10, 1926, was a New York corporation with principal office and place of business at Cleveland, Ohio. It was dissolved under the laws of the state of New York on June 10, 1926, at which time the plaintiffs, Agnes D. Morse, George A. Coulton, C.S. Eaton, Hallock C. Sherrard, S.J. Wainwright, Jr., E.J. Kulas, and Frank H. Ginn, were its directors and since the date of dissolution they have been, and are now, acting as trustees for the creditors and stockholders under and in conformity with the laws of New York. The laws of New York, and particularly section 35 of the General Corporation Law (Consol. Laws N.Y. c. 23) and section 105, paragraph 8, of the Stock Corporation Law of New York (Consol. Laws N.Y. c. 59), authorized these individuals to prosecute and maintain suit in the name of the corporation and to collect and receive the proceeds of any judgment which may be recovered.
2. April 1, 1918, an extension having been granted to April 10, 1918, the corporation filed income and profits tax returns for 1917 showing a tax of $506,293.24, which was paid June 17, 1918. June 16, 1919, it filed its tax return for 1918 showing a tax of $558,141.52 which was paid in four installments of $150,000 on March 21, 1918; $129,070.76 on June 18, 1919, and $139,535.38 each on September 23 and December 17, 1919.
3. March 14, 1923, the Commissioner of Internal Revenue, after an examination and an audit of the returns for 1917, notified the corporation that he had determined an additional tax for that year of $134,104.34. The Commissioner made an additional assessment of this tax on March 19, 1923. On March 29, 1923, the collector of internal revenue mailed the corporation a notice and demand for said amount. April 8, 1923, the corporation filed a claim for the abatement of the entire additional assessment. After several conferences in Washington and the submission by the corporation of evidence in support of its abatement claim, the Commissioner, by letter of August 18, 1924, notified the corporation that he had determined an overassessment of $64,143.94. By another letter to the corporation, on June 5, 1925, the Commissioner sustained his previous conclusion and notified the corporation that its claim for abatement was rejected for $69,960.40.
4. August 26, 1925, the Commissioner approved the schedule of overassessments for 1917 showing an overassessment in respect of the tax of the corporation for that year of $64,143.94. The certificate of overassessment was transmitted by the collector to the corporation September 14, 1925. Inasmuch as the additional assessment had never been paid, the said overpayment was applied as an abatement against the additional assessment, leaving a balance to be paid of $69,960.40.
5. August 25, 1925, the Commissioner, after an examination and an audit of the return for 1918, notified the corporation that he had determined an overassessment of $51,635.60 for that year. October 21, 1925, the Commissioner approved the schedule of overassessment designated IT:A:15932, form 7805, embracing the overassessment for 1918. This schedule was transmitted to the collector for the Eighteenth district of Ohio for his action in accordance with the directions appearing thereon. The collector complied, and on November 3, 1925, signed and returned this schedule to the Commissioner, together with a schedule of refunds and credits, IT:R: 15932, form 7805 — A.
6. The overassessment for 1918 was found to be an overpayment, and was credited against the underpayment of tax of $69,960.40 for 1917, hereinbefore referred to, leaving a balance due for 1917 of $18,324.80. This balance, together with interest thereon of $2,840.34, computed at 6 per cent. from the date of the additional assessment to the date of payment, was paid to the collector on November 4, 1925, after notice and demand.
7. The Commissioner determined that no interest was allowable on the overpayment of $51,635.60 for 1918 credited against the additional assessment for 1917, and no interest has been allowed or paid thereon. On March 19, 1926, the Commissioner's office notified counsel for the corporation that interest on the overpayment credited was barred by section 1116 of the Revenue Act of 1926. March 24, 1926, the corporation inquired in writing to the Commissioner as to the interest on the overpayment, and on April 9, 1926, the Commissioner replied by letter stating that the interest was barred by the Revenue Act of 1926. The matter of interest was again taken up with the Commissioner's office by plaintiffs' counsel, but nothing further took place with reference to interest before the execution of the agreement, hereinafter mentioned, under section 1106(b) of the Revenue Act of 1926 ( 26 USCA § 1249 note). Prior to June 7, 1926, the exact date not being shown, the board of directors of the corporation adopted the following resolution:
"Whereas this company has requested the Commissioner of Internal Revenue to enter into an agreement relative to final determination of its income and profits taxes and whereas it is necessary as a condition to making such an agreement that the president be duly authorized to execute same,
"Now, therefore, be it resolved that the president of this company be authorized and he is hereby authorized to enter into an agreement with the Commissioner of Internal Revenue in accordance with the provisions of section 1106 of the Revenue Act of 1926, with respect to any income, war-profits, and excess-profits taxes paid by this company.
"I, F.K. Conrad, secretary of the Parish Bingham Company, hereby certify that the foregoing is a true and correct copy of resolution duly and legally passed by the board of directors of Parish Bingham Company.
"[Seal.] F.K. Conrad, Secretary."
Prior to June 7, 1926, the exact date not being shown, the corporation, by E.J. Kulas, its president, pursuant to the aforementioned resolution, signed an agreement hereinafter set forth as to the final determination and assessment in respect of the tax liability of the corporation for the years 1917, 1918, and 1919, under and in pursuance of section 1106(b) of the Revenue Act of 1926, and the seal of the corporation was placed thereon. This agreement was not dated at the time it was filed with the Commissioner of Internal Revenue. June 7, 1926, H.W. Adkins, attorney in fact for the corporation, transmitted to the Commissioner of Internal Revenue the agreement above referred to, together with a certified copy of the resolution of the board of directors of the corporation above mentioned, giving the president of the corporation, one of the plaintiffs in this action, the authority to enter into such an agreement with the Commissioner of Internal Revenue, with the following letter:
"Reference is made to your letter of May 20th, 1926.
"In accordance with your instructions, we submit herewith certified copy of resolution passed by the board of directors for the above company giving the president authority to enter into an agreement with the Commissioner of Internal Revenue in accordance with the provisions of section 1106 of the Revenue Act of 1926.
"We also submit herewith copy of agreement under the above-mentioned section of the Revenue Act of 1926, which we respectfully request be executed and returned to us.
"[Signed] Parish and Bingham Company, "By H.W. Adkins, Attorney in Fact."
This letter and the agreement and resolution inclosed therewith were received by the Commissioner June 7, 1926.
8. On June 21, 1926, the Commissioner signed the closing agreement and placed the date of June 21, 1926, thereon. The Secretary of the Treasury approved the agreement June 29, 1926. The agreement, as executed, and approved, follows:
"This agreement, made in duplicate this 21st day of June, 1926, under and in pursuance of section 1106 of the Revenue Act of 1926 by and between Parish and Bingham Company, a taxpayer residing at, or having its principal office or place of business at Cleveland, Ohio, and the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury:
"Whereas there has been a determination and assessment of One Million Three Hundred Sixteen Thousand, Eight Hundred Fifty-two and 84/100 dollars ($1,316,852.84) as the amount of tax or tax and penalty due the United States of America from said taxpayer on account of ___________________ for the years 1917, 1918, and (Character of tax.) 1919; and
"Whereas said taxpayer has paid the amount of tax or tax and penalty so determined and assessed; and
"Whereas the taxpayer has accepted the adjustment made by the Commissioner of Internal Revenue with respect to any and all claims for abatement, credit, or refund filed in connection with such determination and assessment;
"Now, this agreement witnesseth, that said taxpayer and said Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, hereby mutually agree that such determination and assessment shall be final and conclusive.
"In witness whereof the above parties have subscribed their names to these presents in duplicate as of the day and year first above written.
"Parish Bingham Co., "By E.J. Kulas, President. "D.H. Blair, Commissioner of Internal Revenue." "Approved: June 29, 1926. "A.W. Mellon, Secretary of the Treasury."
The total amount of $1,316,852.84 set forth in the above-mentioned agreement is made up of the tax of $576,253.64 finally determined for 1917, representing the amount of $506,293.24 paid on the original return plus an additional assessment in March, 1923, of $134,104.34 less amount abated of $64,143.94; the tax of $506,505.92 finally determined for 1918, representing $558,141.52 paid on the original return less the overassessment of $51,635.60 credited against the additional tax for 1917; the tax of $234,093.28 finally determined for 1919, representing the amount of $225,288.16 paid on the original return plus an additional assessment in October, 1925, of $8,805.12. On October 8, 1926, the Commissioner of Internal Revenue informed the corporation that the agreement closed the case and it could not be reopened.
9. On March 24, 1928, a claim for interest in the amount $18,192.88 on the overpayment for 1918 credited as aforesaid was filed with the collector for the eighteenth district of Ohio. The Commissioner of Internal Revenue by letter of April 10, 1928 notified Parish Bingham Company of his refusal to compute and allow interest on the overpayment for 1918 for the reason that the said year 1918 had been finally closed under an agreement in accordance with the provisions of section 1106 of the Revenue Act of 1926 ( 26 USCA § 1249 note). The commissioner refused, and still refuses, to compute and allow interest on the overpayment for 1918.
Henry M. Ward and Harry A. Fellows, both of Washington, D.C. (Thos. P. Littlepage, of Washington, D.C., and J.C. Little, on the brief), for plaintiffs.
Charles R. Pollard, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (Chas. F. Kincheloe and J.S. Franklin, both of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and WILLIAMS, GREEN, and LITTLETON, Judges.
Plaintiffs claim interest of $10,186.04 on the overpayment of $51,635.60 for 1918 credited against an additional assessment made March 19, 1923, for 1917 from the date of the overpayment, December 17, 1919, to the date of the additional assessment, a period of three years three months and two days. They also claim interest upon this amount at 6 per cent. from March 19, 1923, to the date specified in section 615(a) of the Revenue Act of 1928 (28 USCA § 284). The claim for interest is based on section 1019 of the Revenue Act of 1924 ( 26 USCA § 153 note).
Parish Bingham Company, prior to its dissolution on June 10, 1926, executed a closing agreement authorized by section 1106(b) of the Revenue Act of 1926 ( 26 USCA § 1249 note), and on June 7, 1926, forwarded the same to the Commissioner of Internal Revenue, together with a certified copy of the resolution of the board of directors authorizing the execution of the agreement, as instructed by the Commissioner in his letter to the corporation of May 20, 1926. The closing agreement was signed by the Commissioner on June 21 and was approved by the Secretary of the Treasury on June 29, 1926. On October 8, 1926, the Commissioner informed the corporation that the agreement closed the case and that it could not be reopened.
With respect to the closing agreement, it is insisted on behalf of plaintiffs, first, that the settlement agreement is void because it was signed by the Commissioner and approved by the Secretary of the Treasury after the corporation had been dissolved; secondly, that, if the agreement is valid, it does not affect plaintiffs' right to recover interest because it relates only to the tax, and the right to interest exists independently of the tax. It is insisted that section 1106(b) does not authorize either the liability of the taxpayer to pay interest or his right to recover interest, as the case may be, to be conclusively settled by agreement; that all that is to be settled is the "determination and assessment" of the principal amount of the tax; that, when an agreement has been made, the Commissioner is deprived of power to make any further assessment and to determine any overassessment but the taxpayer is not precluded from suing to recover an item not covered by or within the scope of the agreement.
The defendant takes the position that the closing agreement is valid; that the matter of interest was included within it, and that by the statute plaintiffs are precluded from maintaining this suit; that, irrespective of the settlement agreement, the plaintiffs are not entitled to recover interest on the overpayment for a period of time during which plaintiff corporation owed the United States an equal amount of tax upon which it is insisted the government had a right to demand interest.
We are of opinion, first, that the closing agreement is valid; and, secondly, that the matter of the allowance of interest on the credit was a part of the Commissioner's determination for 1917 and 1918 within the meaning of the term "determination" used in section 1106(b) of the statute which was made final and conclusive by the agreement, and that, under the statute, plaintiffs are precluded from maintaining this suit.
Article 2, section 35, of the General Corporation Law of New York as amended by Laws 1927, c. 423, provides as follows:
"Directors as Trustees in Case of Dissolution. Upon the dissolution of any corporation, its directors, unless other persons shall be designated by law, or by a court of competent jurisdiction, shall be the trustees for its creditors, stockholders or members, and shall have full power to settle its affairs, collect and pay its outstanding debts, and distribute to the persons entitled thereto the assets remaining after payment of debts and necessary expenses.
"Such trustees shall have power in the corporate name to transfer and convey its property, and may sue and be sued in such name. They shall jointly and severally be accountable to its creditors, stockholders or members, for the property which shall come into their possession."
Article 10, section 105, paragraph 8, of the Stock Corporation Law of New York (Consol. Laws N.Y. c. 59), provides that "such corporation shall continue for the purpose of paying, satisfying and discharging any existing liabilities or obligations, collecting and distributing its assets and doing all other acts required to adjust and wind up its business and affairs, and may sue and be sued in its corporate name." Under the last-mentioned section the corporation continued and is still in existence for the purpose of paying, satisfying, and discharging its liabilities or obligations, collecting its assets, and doing all other acts required in adjusting and winding up its affairs, and for the purpose of suing and being sued in its corporate name. The execution of the agreement in question was to satisfy and discharge any existing liability of the corporation and was an act incident to adjusting and winding up the business affairs of the corporation.
The authority of the corporation with respect to the agreement did not end upon dissolution on June 10, and the dissolution did not invalidate the execution of the agreement by the corporation. Furthermore, the president of the corporation who signed the agreement on behalf of the corporation and who was himself a director, and the other directors of the corporation, who by resolution had authorized the execution of the agreement, were trustees in dissolution of the corporation and had full knowledge of what had been done. They took no steps to notify the Commissioner of the dissolution or to recall the agreement. As trustees, they had authority under the statute to execute such an agreement. Their silence in objecting to the signing of the agreement by the Commissioner, and the approval thereof by the Secretary, precludes them from now attacking its validity. The Corporation Law of New York continued the corporation and gave its directors broad authority, as trustees, finally to wind up and settle the affairs of the corporation. The very purpose of this agreement was to accomplish that result, and authority to execute it was clearly within the terms of the statute. Moreover, it appears that on October 8, 1926, which was a reasonable time after the execution of the agreement by the Commissioner, he notified the corporation that the agreement had been executed; that it closed the case and it could not be reopened.
We are of opinion that the matter of interest was included within the terms of the agreement. The term "determination," used in section 1106(b) of the Revenue Act of 1926 ( 26 USCA § 1249 note) comprehends everything concerning which the Commissioner is required to make a determination in fixing the amount of the liability of the taxpayer to the government for the tax, penalty, interest, additional amount or additions to the tax, or the liability of the government to the taxpayer for the refund or abatement of a tax, penalty, additional amount or additions to the tax, and the allowance and payment of interest. The plain purpose of section 1106(b) was finally to settle all questions relating to the liability of the taxpayer or the government in respect of the period covered by the agreement and to prevent the reopening of any question entering into the Commissioner's determination for such period except on the ground of fraud, malfeasance, or material misrepresentation of fact affecting such determination. None of these exceptions exists in this case. The Commissioner is charged by law with the duty of allowing and paying interest upon a credit, and this was a part of his determination which section 1106(b) includes, and which was finally settled by the closing agreement, and prior to the execution thereof he had made such a determination.
When a closing agreement is entered into between the taxpayer and the Commissioner under section 1106(b), it must, of necessity, embrace every element of the Commissioner's determination; otherwise it is not an agreement under that section, and, when so entered into, it is final and conclusive as to all questions with respect to which the Commissioner has made a determination or as to which he is by law required to make a determination. The parties have no authority under the statute to limit the agreement to any particular feature of the determination made. To hold otherwise would so restrict the meaning of the language of the section as to make it of little effect, and would defeat the purpose which the section plainly sought to accomplish. The provisions of the statute that, if a "taxpayer has paid in whole any tax or penalty, or accepted any abatement, credit, or refund based on such determination," and an agreement is entered into, must be interpreted, not as a limitation on that which is to be included in the determination, that is to be made final and conclusive, but rather as a specification of that which the taxpayer must do to become entitled to make the closing agreement.
The closing agreement precludes recovery, and the court is without authority to annul or modify it. Cf. Bankers' Reserve Life Co. v. United States, 42 F.2d 313, and Wisconsin National Life Insurance Co. v. United States, 42 F.2d 316, decided by this court June 16, 1930.
Even if plaintiffs were entitled to maintain this suit, there are other reasons why they are not entitled to recover the entire amount claimed, but it is unnecessary to discuss these matters.
The petition must be dismissed, and it is so ordered.
WHALEY, Judge, did not hear this case, and took no part in the decision thereof.