Source: https://casetext.com/case/mallette-bros-const-co-v-united-states
Timestamp: 2020-02-26 13:16:46
Document Index: 289570735

Matched Legal Cases: ['§ 6001', '§ 1', '§ 446', '§ 1', '§ 1', '§ 7422', '§ 301']

Mallette Bros. Const. Co., v. United States, 695 F.2d 145 | Casetext
Mallette Bros. Const. Co., v. United States
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Full title:MALLETTE BROS. CONSTRUCTION CO., INC., PLAINTIFF-APPELLEE, v. UNITED…
695 F.2d 145 (5th Cir. 1983)
In Mallette Brothers Construction Co. v. United States, 695 F.2d 145, 155 (5th Cir. 1983), we explained that sovereign immunity applies with equal force to tax refund suits; and that, while the United States has consented to be sued in this context, it has expressly conditioned its consent on the taxpayer's prior presentation of the claim for refund to the IRS for review.
Summary of this case from Bruecher Foundation Servs. v. U.S.
January 14, 1983. Rehearing and Rehearing En Banc Denied March 2, 1983.
Year Ended Construction Gautier Truck
Fiscal 1-31-72 $ 8,461.40 2-28-72 $ 4,242.67 6-30-72 $ 5,838.74 1-31-73 24,712.70 2-28-73 15,076.43 6-30-73 11,994.68 [6] The three corporations paid the deficiencies, together with interest, on July 8, 1974, and filed claims for refunds. After these claims were denied, each of the corporations instituted a separate suit for a refund.
The district court ordered that the separate cases brought by the corporations be consolidated for all purposes. Subsequently, the case was tried to a jury on special interrogatories. During the trial, the Government moved for a directed verdict following the presentation of the corporations' case and again following the presentation of the Government's case. The court denied both of these motions. The jury decided each of the issues presented to it adversely to the Government. Initially, with respect to Construction, the jury found that for the year ended January 31, 1972, the "plaintiff [Construction was] entitled to deduct, as expenses paid or incurred, the amount of $21,977.26, and that this deduction was not allowed by the Government." As to Construction's year ended January 31, 1973, the jury found that Construction was "entitled to deduct, as expenses paid or incurred, the amount of $93,326.79 and that this deduction was not allowed by the Government." As to Gautier's year ended June 30, 1972, the jury found that Gautier did not "understate its accounts receivable by $37,687.32, as determined by the Internal Revenue Service." Finally, as to Truck's year ended February 28, 1973, the jury found that Truck "in its federal income tax return . . . [did not] understate its gross income by $39,994.62, as determined by the Internal Revenue Service . . . . " The district court subsequently entered judgments on the jury verdict reflecting the jury's findings.
II. PROPRIETY OF A JUDGMENT NOVAS TO CONSTRUCTION AND GAUTIER.
Before we review the evidence, it would be useful to set forth the taxpayers' burden in these cases and the standard of appellate review. Every taxpayer must maintain accounting records which enable him to file a correct tax return. I.R.C. § 6001; Treas. Reg. § 1.446-1. Where a taxpayer's books and records are incomplete or do not accurately reflect income, the Internal Revenue Service is authorized to use whatever method it deems appropriate to reconstruct the taxpayer's income. I.R.C. § 446(b); Webb v. Commissioner, 394 F.2d 366, 371-72 (5th Cir. 1968); see also United States v. Firtel, 446 F.2d 1005, 1006-07 (5th Cir. 1971). Any ensuing deficiency notice is accompanied by a presumption of correctness which places the burden on the taxpayer of establishing all matters necessary to show that it does not owe the taxes in question. Southwestern Life Insurance Co. v. United States, 560 F.2d 627, 635 (5th Cir. 1977), cert. denied, 435 U.S. 995, 98 S.Ct. 1647, 56 L.Ed.2d 84 (1978) (citing Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935)); Webb, supra, 394 F.2d at 372. A taxpayer seeking a refund must demonstrate not only the error in the asserted deficiency but also the amount of the refund to which he is entitled, i.e., the correct amount of his tax liability. United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); Griffin v. United States, 588 F.2d 521, 530 (5th Cir. 1979).
The district court is required to direct a verdict in favor of the Government or to enter a judgment notwithstanding the verdict in its favor if, considering all of the evidence in the light and with all reasonable inferences favorable to the taxpayer, the district court concludes that the taxpayer has failed to present substantial evidence either that the Internal Revenue Service's determination is erroneous or as to the correct amount of his tax liability. Group Life Health Insurance Co. v. United States, 660 F.2d 1042, 1050-51 (5th Cir. 1981), cert. denied, ___ U.S. ___, 102 S.Ct. 2958, 73 L.Ed.2d 1349 (1982); Boeing Co. v. Shipman, 411 F.2d 365, 374-75 (5th Cir. 1969).
After determining each corporation's gross income, Agent Shelton proceeded to determine the deductions (including expenses accrued, but not yet paid) that the corporation was entitled to claim. That determination was made primarily by examining the underlying documents — invoices, checks, Gautier's delivery receipts and Construction's log books. Turning to the specific expense items at issue here for Construction — asphalt purchases and payroll expenses — Agent Shelton testified that in order to determine the amount of asphalt purchased by Construction each month for each of the years in question (1972 and 1973), he used the delivery receipts prepared by Gautier and Construction's log of purchases to make a schedule listing the cost of asphalt purchased each month. Similarly, in determining the appropriate payroll expense deductions for Construction, Agent Shelton used the actual checks and the bank statements from the payroll account maintained by Construction.
No testimony was ever offered by Construction suggesting that Agent Shelton's schedule of asphalt purchases was erroneous — that he had failed to include all of the transactions disclosed by the delivery receipts and log or that the delivery receipts and log were incomplete. Glynn Mallette, one of Construction's two witnesses, testified on cross-examination by the Government that the total amount of asphalt purchased by Construction from Gautier, and its cost, could properly be determined from the log maintained by Construction. Mr. Alexander, the other witness for Construction testified that although he believed, for the reasons addressed below, that Construction was entitled to additional deductions for asphalt purchased, he did not know how much asphalt Construction had actually purchased during the years in question. Insofar as payroll expense is concerned, except for the theory addressed below, no witness for Construction offered any testimony questioning Agent Shelton's calculations or the records he relied on. Mr. Mallette testified generally that he could not "point out any error" in plaintiffs' exhibit 8, which was the income tax audit changes (Form 4549) prepared by Agent Shelton. Mr. Alexander's testimony did not specifically address Construction's payroll expense. In summary, the only testimony which specifically addressed actual expenses paid or incurred by Construction for asphalt and payroll for 1972 and 1973 was that of Agent Shelton.
Although Mr. Alexander's testimony at trial and the corporations' appellate briefs are somewhat unclear on this point, they may be making a related argument that there is some sort of legal requirement that the Government use the double entry method of accounting simultaneously to reflect items of income and expense when it reconstructs a taxpayer's taxable income on audit. But, as the Governmental correctly points out, the bank deposits method, as used and supplemented by Agent Shelton in this case, is not a method of accounting — as distinguished from the double entry system of accounting — but is, instead, an audit procedure used by the Government to establish a taxpayer's correct taxable income. See Snyder v. Commissioner, 28 T.C.M. (CCH) 856, 866 (1969) ("[The bank deposits and expenditures method] is not a system of accounting; it is not a substitute for either the cash or the accrual basis of accounting or any other recognized method of keeping books. When correctly applied to the facts of a particular situation it is merely evidence of income.") (citing Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954) (to the same effect, dealing with the net worth method)). Because the Government's only objective, in employing the bank deposits method, as supplemented by Agent Shelton in this case, is to reconstruct taxable income, the Government is concerned only with transactions entered into during the relevant periods that affected taxable gross income or deductible expenses. It was, therefore, unnecessary for Agent Shelton to record every transaction on a double entry basis in the manner which would be required for an accounting of the transaction in accordance with generally accepted accounting principles. If Construction was of the view that the deficiency assessments for 1972 and 1973 resulting from Agent Shelton's auditing procedures were inaccurate because items of deductible expense paid or incurred by Construction had not been taken into account, then it was incumbent upon it to offer specific proof of those items and of the fact that they had not been allowed. No such specific proof was offered by Construction. Instead, Construction chose to rely on testimony by Mr. Alexander about the theoretical necessity under generally accepted accounting principles for double entries, which was inapposite, and the theoretical necessity under the audit method employed here for deductions to offset the concededly proper increase in Construction's gross income, which is legally incorrect.
In support of Mr. Alexander's novel legal proposition, Gautier cites only two sources — Lustman v. Commissioner, 322 F.2d 253 (3d Cir. 1963), and Treas. Reg. § 1.1312-6(a). In Lustman v. Commissioner, the Court of Appeals for the Third Circuit affirmed the trial court's determination that the taxpayer had failed to present sufficient evidence demonstrating that it was entitled to certain deductions the taxpayer had claimed. One of the factors noted by the Court of Appeals in reaching this result was that a related corporation had failed to include these items in its gross income. Lustman, supra, at 256-58. We agree with the Government, however, that the case hardly stands for the proposition that one entity may exclude amounts of admitted income if another corporation does not claim a corresponding deduction.
Treas. Reg. § 1.1312-6(a) provides that where a determination is made either allowing or disallowing a deduction or a credit as to one corporation, and as a result a "correlative deduction or credit [is] erroneously allowed, omitted, or disallowed in respect" to an affiliated corporation, even though the correction of the second error is normally barred by the statute of limitations, it will be taken into account in determining the correct tax liability of the first corporation. Once again, we agree with the Government that this position does not support the proposition that Gautier is entitled to either an exclusion or a deduction from its gross income to reflect an expense incurred but allegedly not deducted by Construction.
The taxpayer should be permitted to exclude the $39,995 from gross income as it consists of inter-company adjustments for which no corresponding deduction has been allowed in two affiliated companies; if intercompany accounts were to be set up, to be proper, they should have been reconciled balanced in detail between the 3 affiliates.
[4.] With respect to such allegations, (a) state the facts upon which such allegations are based, . . . and (e) state specifically (1) whether the $39,995 constituted gross income to the plaintiff for its fiscal year ended February 28, 1973, (2) whether the $39,995 was reported as income in the plaintiff's federal income tax return for the fiscal year ended February 28, 1973, (3) the heading under which the $39,995 was reported in the plaintiff's federal income tax return for the fiscal year ended February 28, 1973, (4) the names of the "two affiliated companies" referred to, (5) the facts which indicate that the companies referred to are "two affiliated companies," (6) the facts which indicate that a corresponding deduction should have been allowed in "two affiliated companies," (7) the amount of the $39,995 which should have been allowed as a deduction to each of the two affiliated companies, (8) whether the "two affiliated companies" reported the $39,995 in their federal income tax returns, (9) the amount of the $39,995 which each of the "two affiliated companies" reported in their federal income tax returns, respectively, and (10) the facts which indicate that each such amount was properly reported in such returns, respectively.
At the pre-trial conference, Truck simply repeated the above contentions. Thus, in the pre-trial order, Truck stated under its claim of ultimate facts that "[b]ecause of these adjustments the income of the plaintiff [Truck] is overstated by the amounts thereof, and the plaintiff brings this action to recover income taxes and interest that resulted from this . . . $15,076 [$10,859 after the net operating loss carrybacks] for 1973."
4. (e)(6) The answer is amended to the following: $28,200,00 [ sic] of the $39,995 adjustment consisted of loans received from the Mallette Bros. Construction Co., Inc. that were erroneously included in the income of the Truck line company. The $28,200 in loans should have been deducted from gross income on the Truck Line's return, in as much as the loans did not represent taxable income to the Truck Line Corporation.
During the trial, Mr. Mallette testified that eleven checks totaling $39,200 represented loans from Construction to Truck. The Government objected on the ground that the allegation was not set forth in the claim for refund or in the pleadings. Mr. Warren argued that it was unfair to allow Truck to raise this issue at such a late hour — long after discovery had been completed. Truck's counsel argued that the omission in the interrogatories was "a typographical error or something." Truck also claimed that the "innercompany [ sic] adjustment" language in the claim for refund included the loan argument.
The district court overruled the Government's objection, finding that "it is apparent that there was a typographical error . . . in the answers to interrogatories that were given by the plaintiff because it is apparent that the plaintiffs are contending that these were loans, or at least innercompany [ sic] adjustments . . . ." In addition, the court noted that Mr. Warren addressed the loan argument in his opening statement. The court did not address the variance with the claim for refund, although that issue was clearly raised by Mr. Warren's objection.
When requested to state for the record where specifically in the answers to the interrogatories the typographical error occurred, Truck's counsel stated that it was in question 4(e)(6) (set forth above) of the original set of answers. He further stated that the response "was meant to be the same thing as the first response for the first year which is identical to the problem and an identical thing. We said that these were loans — the exact wording: `This consisted of loans from affiliate, Mallette Bros. Construction Company, Inc.'"
Taxpayer suits for refunds are governed, in part, by the principles of sovereign immunity. The United States may be sued only where Congress has expressly provided its statutory consent. See United States v. Mitchell, 445 U.S. 535, 538, 100 S.Ct. 1349, 1351-52, 63 L.Ed.2d 607 (1980); United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953, 47 L.Ed.2d 114 (1976); United States v. Sherwood, 312 U.S. 584, 586-88, 61 S.Ct. 767, 769-70, 85 L.Ed. 1058 (1941). In suits for tax refunds, the United States has consented to be sued, but only when the taxpayer follows the conditions set forth in I.R.C. § 7422(a). That section provides that "[n]o suit [for refund] . . . shall be maintained in any court . . . until a claim for refund or credit has been duly filed with the Secretary or his delegate, according to the provisions of law in that regard, and the regulations of the Secretary or his delegate established in pursuance thereof." Treas. Reg. § 301.6402-2(b)(1) provides, in pertinent part, as follows:
(b) Grounds set forth in claim. (1) No refund or credit will be allowed . . . except upon one or more of the grounds set forth in a claim [properly] filed . . . . The claim must set forth in detail each ground upon which a credit or refund is claimed and the facts sufficient to apprise the Commissioner of the exact basis thereof. . . .
Absent a waiver by the Government, a taxpayer is barred from raising in a refund suit grounds for recovery which had not previously been set forth in its claim for a refund. See Angelus Milling Co. v. Commissioner, 325 U.S. 293, 295-99, 65 S.Ct. 1162, 1163-65, 89 L.Ed. 1619 (1945); United States v. Felt Tarrant Manufacturing Co., 283 U.S. 269, 272-73, 51 S.Ct. 376, 377-78, 75 L.Ed. 1025 (1931); Group Life Health Insurance Co. v. United States, supra, 660 F.2d at 1058-59; Southwestern Life Insurance Co. v. United States, supra, 560 F.2d at 630-32. The alleged error must be clearly and specifically set forth in the refund claim. A generalized plea of error will not suffice. See Angelus Milling Co. v. Commissioner, supra, 325 U.S. at 296-97, 65 S.Ct. at 1164-65; United States v. Felt Tarrant Manufacturing Co., supra, 283 U.S. at 272, 51 S.Ct. at 377; Stoller v. United States, 444 F.2d 1391, 1393 (5th Cir. 1971). As this court stated in Alabama By-Products Corp. v. Patterson, 258 F.2d 892, 900 (5th Cir. 1958), cert. denied, 358 U.S. 930, 79 S.Ct. 318, 3 L.Ed.2d 303 (1959):
One purpose of these rules is to assure that the Commissioner is apprised of the exact nature of the claim and the facts upon which the claim is advanced so that there is an opportunity to make an administrative determination of the claim. United States v. Felt Tarrant Manufacturing Co., supra, 283 U.S. at 272, 51 S.Ct. at 377; Stoller v. United States, supra, 444 F.2d at 1393. Another purpose is "to limit the litigation to the issues which have been re-examined by the Commissioner and which he is prepared to defend." Carmack v. Scofield, 201 F.2d 360, 362 (5th Cir. 1953).
Turning to the question of Truck's answers to the interrogatories, the district court found that a typographical error was made by Truck in response to question 4(e)(6). We agree with the Government that it is difficult to understand how Truck can contend that the omission of the phrase "[t]his consisted of loans from affiliate, Mallette Bros. Construction Company, Inc." was a typographical error where no such assertion was made in the claim for refund, the complaint, the first supplemental answers to the Government's interrogatories or the pretrial order. Furthermore, the response to question 4(e)(6) referred to Gautier, not Construction. But apart from the accuracy of the district court's finding as to the existence of a typographical error, we note that the finding that a typographical error occurred does not even address the question whether the Government was on notice of the nature of the claim. Typographical errors (in the form of omissions) may well fall into two categories — those in which the omitted material might fairly have been understood by the reader in spite of the error, and those in which the omitted material could not be understood from a reading of the document. Clearly, whether the omission in this case was the result of a typographical error or not, the omitted material could not be fairly ascertained from the contents of the responses to interrogatories.
Accord, Group Life Health Insurance Co. v. United States, supra, 660 F.2d at 1058-59; Salyersville National Bank v. United States, 613 F.2d 650, 651-52 (6th Cir. 1980); Southwestern Life Insurance Co. v. United States, supra, 560 F.2d at 630-32.
explaining section 7422 and purposes thereof
In Mallette Bros. Construction Co., Inc. v. United States, 695 F.2d 145, 157 (5th Cir. 1983), the Fifth Circuit held that the United States did not waive its variance defense by addressing an issue at trial and submitting evidence with respect to the issue.
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