Court Opinion

ID: 9459195
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:13:04.103456+00
Date Added: 2024-06-11T17:36:03.583598
License: Public Domain

*1252MANSFIELD, Circuit Judge
(concurring and dissenting):
I dissent from that part of the majority opinion which deals with the taxpayer’s attempt to reduce the basis of its assets for the years 1955 and 1956 by filing consents pursuant to § 108(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 108(a). In my view the Commissioner’s refusal to give effect to the consents filed by Columbia on the ground that they had been filed too late was, under the circumstances in this case, plainly arbitrary.
With the aid of hindsight we are able to say that Columbia should have filed the consents at the time when it filed its 1955 and 1956 returns. But looking at the situation as of that time it must be recognized that the 1954 Internal Revenue Code offered at least 74 elections as to the configuration in which the Commissioner might seek to restructure a transaction described in a taxpayer’s return. See Budlong, How to Avoid — Or Amend — Improper Tax Elections Despite the Many Uncertainties, 21 J.Taxation 298, 302 (1964) (list of 78 elections) ; Schwanbeck, Elections and Options Available to Taxpayers in the 1954 Code, 32 Taxes 748, 752 (1954) (list of 74 elections). I believe it is unreasonable and unrealistic to assert that the taxpayer should have anticipated in 1955 and 1956 that the District Director would years later contend that income had been realized from cancellation of indebtedness upon conversion of the Debentures, much less the specific ground on which the contention would be based.
When Columbia, concededly acting in good faith, filed the returns, it had no reason to believe that the transaction was one which might require the filing of consents since it reasonably believed that accrued interest was paid by the delivery of its common stock upon conversion of the Debentures. It was not until years later, when its returns were audited, that the deduction for interest paid or accrued, which had been taken by the taxpayer pursuant to 26 U.S.C. § 163(a), was disallowed. Thereupon Columbia promptly paid the additional taxes assessed, filed its claims for refunds, which were disallowed, and promptly filed the consents pursuant to § 108(a). It was not until the Government later filed its memorandum of law in the present suit that the Commissioner’s theory finally came to light.
The first definitive decision on the merits of the central issue before us was not handed down until 1970, Bethlehem Steel Corp. v. United States, 434 F.2d 1357, 193 Ct.Cl. 459 (1970). As Judge Davis wrote in that case, the issue of whether conversion of debentures would represent in part the payment of accrued interest was a “closely-balanced” one in which the taxpayer had “substantial grounds for its stance,” adding: “We do not find the choice readily foreordained or easy to come by. The scales continue to sway from side to side and do not promptly come to rest.” Id. at 1360. Since Columbia acted in good faith and could not reasonably have anticipated the position later taken by the Commissioner, there was no reason for it to file the consents in 1955 and 1956 against the possibility that its deduction of the interest might be disallowed.
Treas.Reg. § 1.108(a)-(2), promulgated pursuant to § 108, provides:
“In special eases, however, where the taxpayer establishes to the satisfaction of the Commissioner reasonable cause for failure to file the necessary consent with his original return, he may file the consent with an amended return or claim for credit or refund.
*1253Viewed in context, the taxpayer’s predicament clearly constituted a special case in which there obviously was “reasonable cause for failure to file the necessary consent with [its] original return.”
Although the Commissioner has discretion as to whether to allow late filing, his discretion is not absolute. In my view his refusal to accept the late filing in this case was arbitrary and unreasonable. See Kean v. Commissioner, 469 F.2d 1183 (9th Cir., filed Nov. 14,1972); Calavo, Inc. v. Commissioner, 304 F.2d 650 (9th Cir. 1962); Mamula v. Commissioner, 346 F.2d 1016 (9th Cir. 1965); The Welworth Realty Co., 40 B. T.A. 97 (1939), acquiesced in 1939-2 Cum.Bull. 39. In recently holding that the District Director abused his discretion in refusing under similar circumstances to allow a taxpayer an extension of time in which to file consents, the Ninth Circuit said:
“There was reasonable cause for Mur-dock MacPherson’s failure to file a timely consent. Murdock MacPherson was not a shareholder of record. He believed that whatever ownership interest he had in the shares did not necessitate his consent to Bowl’s election.' When the Internal Revenue Service disagreed with this position, the petitioners sought a judicial determination. Until the Tax Court issued its opinion, Murdock MacPherson did not know that his consent was required to consummate Bowl’s election under § 1371.
* * *
“The District Director abused his discretion by arbitrarily refusing to allow petitioners an extension of time in which to file their consent to Bowl’s Subchapter S election.” Kean v. Commissioner, supra 469 F.2d 1189.
The case of Denman Tire & Rubber Co. v. Commissioner, 192 F.2d 261 (6th Cir. 1951), relied upon by the Government, is clearly inapplicable for the reason that it predated the promulgation in 1953 of the above-quoted regulation authorizing the Commissioner to permit late filing of a consent upon a showing of “reasonable cause.”
Accordingly, I would reverse the district court’s decision to the extent that it upheld the Commissioner’s refusal to give effect to the late-filed consents.