Opinion ID: 357068
Heading Depth: 1
Heading Rank: 5

Heading: the delinquency penalty set-off on the 1961 return:

Text: 215 The final issue before us on appeal is unrelated to the preceding three issues. It poses an intriguing question concerning an audit of the Corporation's 1961 tax return initiated at the Corporation's own request. 216 In 1961, the Corporation filed its tax return late. In doing so, it incurred a 10% delinquency penalty, pursuant to § 6651(a) of the Code. The following year, the Corporation filed for a refund on its 1961 return because of a claimed carryback of 1962 losses. 217 In auditing the 1961 return, the Commissioner reevaluated it in its entirety, as permitted by law. See, Lewis v. Reynolds, 284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293 (1932). This reevaluation resulted in the disallowance of several deductions originally asserted by the Corporation. These disallowed deductions amounted to $34,000 in income that should have been declared at the time the 1961 return was filed. Because that return was filed late, that extra increment of income, generated by the disallowed deductions, would have produced an additional late filing tax because of the application of the 10% delinquency penalty to that increment. 218 In the course of performing this audit of the 1961 return, the Commissioner also determined that the loss carryback arising from 1962 corporate losses was applicable to the 1961 return. Altogether, that loss carryback, diminished by the newly found deductions that were improperly asserted, would have produced a refund of $5,854 from the 1961 return. However, the Commissioner then reduced this refund by an amount derived from applying the 10% late filing penalty to the additional increment in income that arose from the deductions which were improperly asserted in the late filed 1961 return. Offsetting that amount $3400 (10% X disallowed deductions) produced a net refund slightly over $2000. 219 Thus, the Commissioner used the additional late filing penalty as a set-off against a refund determined several years after the 1961 return was filed. Both parties agree that no additional tax can be asserted by the Government against a taxpayer once three years have elapsed after the return in question is filed. 26 U.S.C. § 6501(a). The parties disagree as to whether the increase in the delinquency penalty, which penalty initially was asserted in a timely manner as to the 1961 return, constituted the imposition of an  additional tax. The district court struck down the imposition of this increment by the Commissioner. We disagree. 220 In conducting an audit for the purpose of determining the refund due a taxpayer, the Commissioner is guided by the Supreme Court's decision in Lewis, supra. Lewis permits the Commissioner to reopen the prior return to determine whether there were any deficiencies in that return which were undetected at the time it was filed. At the same time, the Commissioner is not permitted to assess a new tax. 221 In performing the audit, the Commissioner did find deductions that were improperly asserted. Had these deficiencies been discovered at the time the 1961 return was filed, they would have increased the amount of income tax that the Corporation owed the Government. Because of this, they would have increased the additional amount owed to the Government from the 10% delinquency penalty since the amount owed under that penalty increases as the amount of income tax owed for the year to which it applies increases. It is undisputed that this delinquency penalty was assessed in a timely fashion initially when taxpayers delayed in filing their 1961 corporate return. 222 Prior to the filing of the 1962 return, the 1961 return represented an independent entity. That is, prior to the 1962 return, the amount of income tax owed for 1961 was calculated entirely on the basis of the 1961 return. Had that return been filed without the improper deductions, more income tax would have been owing for that year. Thus, the amount owing under the 10% delinquency penalty would have been increased a commensurate amount. The fact that in 1962, losses sufficient to trigger a loss carryback arose, does not alter the amount of tax that was owing in 1961 prior to the filing of the 1962 return. Simply stated, the net operating loss carryback which arose from the 1962 return was not in existence at the time the Commissioner calculated the amount owing under the application of the delinquency penalty to the 1961 return. 223 In an audit of the 1961 return, the net operating loss carryback of 1962 cannot be utilized to disturb the amount that would have been found due had the delinquency penalty been applied to a return that had been completed properly. This proposition derives support from Manning v. Seeley Tube & Box Co. of New Jersey, 338 U.S. 561, 70 S.Ct. 386, 94 L.Ed. 346 (1950). See, also, Kingston Products Corp. v. United States, 368 F.2d 281, 287, 177 Ct.Cl. 471 (1966). 224 In Manning, deficiencies were assessed by the Commissioner with regard to the return of a corporate taxpayer. In addition, the Commissioner required the taxpayer to pay the interest due on the deficiency from the date on which the tax initially should have been paid to the date on which the assessment was made. As in the case sub judice, the taxpayer had a subsequent net operating loss which it chose to carry back to the year in question. This loss, when carried back, was sufficiently large to eliminate any tax and interest found owing. However, if the interest was permitted as a set-off, taxpayer's refund would be correspondingly reduced. 225 The problem before the Supreme Court was whether the interest on a validly assessed deficiency is abated when the deficiency itself is abated by the carry-back of a net operating loss. 338 U.S. at 565, 70 S.Ct. at 389. The Court decided that it was not. 226 From the date the original return was to be filed until the date the deficiency was actually assessed, the taxpayer had a positive obligation to the United States: a duty to pay its tax. 227 338 U.S. at 565, 70 S.Ct. at 389. Absent a clear legislative indication to the contrary, the right to possess money owed the Government for the period in which it is owed must reside with the Government. This formed the predicate for the Court's decision in Manning. It is equally cogent in the present case. 228 The Manning analysis of the relationship between the carryback provisions and the interest provision is quite helpful here. Chief Justice Vinson found that the Government's authority to charge interest on funds withheld by the taxpayer was legislated prior to the enactment of the carryback provision of 1942. The adoption of the carryback provision did not alter the taxpayer's obligation to file a timely return and to render timely payment thereon. 80 This proposition was quite clear in the Court's mind. Indeed, a contrary conclusion would have rendered 26 U.S.C. § 3771(e) inexplicable for that provision stated that a taxpayer cannot claim interest from the Government on amounts refunded after an audit is performed on the basis of net operating loss carrybacks. 229 The interest payment in Manning was asserted against taxpayer because he failed to fully report his income. See, 26 U.S.C. § 271(a). In like fashion, the delinquency penalty in the present case was assessed against taxpayer because it failed to report its income on time. There is no reason that either assessment should be nullified by a subsequent net operating loss carryback a factor which does not in any way relate to taxpayer's prior failure to fully or timely report his income. 230 In sum, the delinquency penalty already was in existence prior to the 1962 return because the 1961 return was filed late. It did not arise because the Commissioner, in 1967, suddenly discovered items that had not been reported properly. Had those items been discovered in 1961, the amount owing under the late filing penalty would have been increased. That they were discovered later does not alter this fact. Their assessment, as a set-off against a refund, does not represent the imposition of an additional, or new tax. This is the import of Lewis. For 231 although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have properly been assessed and demanded. 232 Lewis, 284 U.S. at 283, 52 S.Ct. at 146 (emphasis added). See, also, Patterson v. Belcher, 302 F.2d 289, 295 (5th Cir. 1962). 233 We reverse the district court's determination on this final issue. Therefore: 234 As to the deficiencies assessed primarily on the basis of the constructive dividend found in connection of the land clearing operation we VACATE AND REMAND to the District Court. 235 As to the deductibility of expenses by the corporation prior to the transfer of the land to the partnership we AFFIRM; as to the deductibility of expenses after the transfer of land we VACATE AND REMAND. 236 As to the finding of fraud made as to Loftin we VACATE AND REMAND. 237 As to the use of the increase in the delinquency penalty as a set-off against the 1961 return we REVERSE.