Court Opinion

ID: 9652867
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:33:57.400929+00
Date Added: 2024-06-11T18:12:54.715982
License: Public Domain

*819HUXMAN, Circuit Judge
(dissenting).
My disagreement with the majority arises over the interpretation to be placed on the exceptions in Section 501(c), which bars the right to the refund of undistributed profits taxes authorized by the 1942 Act. The precise question is, what compromises did Congress have in mind as barring a right to the refund when it said that the refund should be granted notwithstanding any other provision of law or rule of law except, however, those sections of the law “relating to compromises.” The majority holds that to bar a recovery the compromise must have been related to surtax liability on undistributed profits, and that since the compromise in question was not of that nature, it is no bar to the right to the refund. With this, I cannot agree. Why would Congress intend to deny the right to the refund of undistributed profits taxes merely because the taxpayer had been in dispute with the government only as to the amount of such taxes? The reason Congress passed the refund law of 19.42 was that under the original Act in some instances a tax was collected on undistributed profits when the taxpayer was prevented from distributing such profits. Congress was of the opinion that in such instances no tax should have been collected, and that therefore such tax should be refunded. But, under the theory of the majority, if a taxpayer, without protest, paid the entire amount of such a demand he now could have it back, but if after a protest, an agreement was reached by which he paid only one-half of the original demand, he could not recover it, notwithstanding that the intent of the law was to refund all such payments, because they should not have been collected in the first instance. Such a construction would not only penalize a taxpayer who challenged an erroneous assessment of undistributed profits taxes, but would in such cases defeat the manifest intent of Congress to refund what should not have been collected in the first instance. •
Neither do I agree that undistributed profits taxes were not involved in the compromise of taxes for the years in which such taxes were in force. The issue in dispute, and which was compromised, was the corporation’s tax liability for the years in question. The rate of depreciation was merely the factor which caused the dispute as to the taxpayer’s total tax liability. The government was not primarily concerned with the rate of depreciation set up on the taxpayer’s books. It was concerned with the amount of tax due from the corporation. The tax liability always depends upon numerous factors, such as depreciation, operating expenses, and business losses. There can be no dispute as to the amount of taxes due without a dispute over the application of some of these factors. In the end, however, what is compromised is the total amount of the tax liability.
All taxes, whether normal taxes or undistributed profits taxes, are levied on net taxable income. When the rate of depreciation was compromised it resulted in a deceased net income subject to taxes. This reduced the amount of the undistributed profits tax which would be due, as well as the amount of the normal tax which would be due. Both were determined from the amount of net taxable income. The corporation’s 1936 tax return shows the following computations:
Normal tax.......... $ 1,354.83
Total surtax.......... 1,589.14
Total normal and surtax... $ 2,943.97
For 1937, it shows the following:
Normal tax .............. $ 4,342.99
Total surtax.............. 6,162.63
Total normal and surtax... $10,505.62
Raising the rate of depreciation would correspondingly reduce the amount of the net taxable income, which in turn would reduce both the normal tax and the surtax on undistributed profits. It follows that when the total tax liability was compromised by compromising the rate of depreciation, the compromise involved both normal taxes and surtaxes on undistributed profits.
If all that had been involved in the compromise settlements was the liability for undistributed profits tax due from the corporation, such a compromise, in my view, would be no bar to recovery under the *8201942 Act, because it would be without consideration. In the Big Diamond Mills Co. case, cited in the majority opinion, the government and the taxpayer compromised the amount of interest on a delinquent assessment. Later, when the assessment was declared invalid and was refunded, the government resisted an action to recover the compromised interest on the ground of the compromise. The court, however, held that the tax liability was .single, and that what the parties compromised was not* the penalty interest but the tax liability for the year in question, and that since there was no valid tax liability there was no consideration for the compromise of the interest. The Act of 1942 destroyed the right of the government to retain the undistributed profits taxes collected from this corporation. It would seem to follow that when it lost this right, a compromise concerning such tax element -would fall with the tax for want of consideration.
As stated in the Dig Diamond Mills case, a compromise is a contract, which must have all the elements of ordinary contracts, such as parties, subject matter, and consideration. Is it not therefore reasonable to conclude that Congress intended to bar the right to a recovery of an undistributed profits tax which admittedly should not have been collected, when the taxpayer’s tax liability for the year in question had been compromised by an agreement supported by valuable consideration, rather than by a compromise which concerned only the tax item which Congress intended to refund?
The compromises which were made with this taxpayer were supported by valuable consideration. The government was contending for a rate of depreciation which would have given it the right to collect a greater amount of normal tax, as well as surtaxes, than were actually collected. When the government compromised its contentions as to the applicable rate of depreciation, it compromised its claim - to greater normal taxes, as well as to surtaxes, This right has been lost and cannot be restored by the refund of the undistributed profits tax. It follows that the compromise was. supported by valuable consideration and should be a bar to the refund of the,. undistributed profits tax in this case. For these reasons, I am impelled to the conclusion that the compromises were bars to the corporation’s right to recover the surtaxes in question.