Court Opinion

ID: 4478600
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:11.11577+00
Date Added: 2024-06-11T14:53:55.873284
License: Public Domain

Pierce, J., dissenting: Because of the importance of this case, in its bearing upon the statutory prerequisites to this Court’s obtaining jurisdiction of income tax controversies, and also in its bearing upon the powers and duties of the Court in dealing with the issues presented in cases properly before it, I believe it appropriate to set forth the reasons for my dissent from the majority opinion. Such dissent is based on three principal grounds: I. This Court does not, in my opinion, have jurisdiction to decide the present case, on its merits. And I believe that the motion filed by respondent, to dismiss the case for lack of jurisdiction, should have been granted. The reasons for such position are that, as is hereinafter shown, the Commissioner did not make any adjustment whatever, either to the amount of the taxable income reported by the petitioner corporation1 on the income tax return which, it filed for the taxable year involved, or to the applicable rate of tax which petitioner applied, or to the amount shown as the tax by the petitioner on said return. Thus, it is evident that the Commissioner has not herein determined a “deficiency” within the meaning of section 271(a) of the 1939 Code; 2 that, in the absence of such determination by the Commissioner, there is no “deficiency” available for “redetermination” by this Court under section 272(a) (1) ;3 and that there is no jurisdiction in this Court, under section 1101,4 to adjudicate the merits of the controversy. Moreover, as hereinafter further shown, the present controversy is not based on any contention of either party, that the Commissioner did make any determination that the amount of the tax imposed by chapter 1 of the Code exceeds the amount “shown as the tax by the taxpayer upon his [its] return.” The controversy is based, rather, on a “position” expressed by petitioner’s counsel in a letter addressed to the director of internal revenue, that notwithstanding the completeness and correctness of the return in its relation to the applicable statute, payment of the tax was refused solely on the ground that such statute is unconstitutional. Section 272(a) (1) makes no provisions for adjudication by this Court of a case in which the tax has been completely and correctly returned, and in which no “deficiency” within the meaning of section 271(a) has been determined by the Commissioner. The facts material to this jurisdictional question are as follows. The petitioner filed a “U.S. Mutual Insurance Company Income Tax Return” for tbe taxable year involved, on which it showed: Gross income taxable under section 207 (a) (2) (A) of the 1939 Code (including “net premiums” of $1,239,884.49) — $1,256,675.70; rate of tax— 1 per cent of the above gross income; and total income tax owing— $12,566.76. Attached to said return was a transmittal letter, signed by petitioner’s general counsel who was not a signatory to the return and who is not shown to have been an officer of the petitioner, which reads in material part as follows: Director of Internal Revenue Philadelphia, Pa. Dear Sirs: Unclosed herein find return on Form 1120 M * * *. While the return is made in the form as required, this company, as indicated in its last year’s return talces the position that the imposition of an income tax against this company based upon its receipts of net premiums, as indicated in line 20 of that return, is invalid and unconstitutional. * * * Therefore, under the circumstances, this company will not, wnder my advice, issue a Chech to the United States covering any part of the income tax based upon what we deem an invalid tax, to wit, the imposition of a 1% so-called income tax upon the net premiums * * * indicated in the return. [Emphasis supplied.] [[Image here]] Respectfully yours, /s/ Peteb P. Zion General Counsel Thereafter, the Commissioner mailed to the petitioner a notice in the usual form of a deficiency notice. In this, he gave recognition to the return as filed; he made no adjustment whatever to any of the items therein pertaining to the section 207(a) (2) (A) tax; and he designated, as a “Deficiency in income tax,” that portion of the amount shown as the tax on the return, which had not been administratively assessed. His explanation and computation of this so-called “Deficiency in income tax,” was: Adjustments [under sec. 207(a) (2) ] — 1952 Gross income disclosed by return_$1,256, 675. 70 Adjustments to gross income_ None Gross income as adjusted_ 1,256, 675. 70 [[Image here]] Computation of Tax — 1952 Gross amount of income_$1, 256, 675. 70 Income tax liability computed at 1 %_ 12, 566. 76 Balance of income tax liability_ 12, 566. 76 Tax assessed on return account #959005_ None Deficiency in income tax_ $12,566. 76 [Emphasis supplied.] This Court has heretofore held in Hudson-Dugger Co., 7 B.T.A. 357, that notwithstanding that the notice mailed to a taxpayer is in the form of a notice of deficiency, it is not sufficient to give this Court jurisdiction, if the so-called deficiency set forth therein is not, in reality, a “deficiency” within the meaning of section 271(a), but is merely a statement as to the portion of the returned tax which has not been administratively assessed. The Court there said: It should be noted that the definition of deficiency in the statute does not set out as a requirement that the taxes shown due on the return must be assessed, but merely says “the amount shown as the tax by the taxpayer upon his return.” * * * This Court, of course, has no jurisdiction or control over the assessment or collection of taxes. Other decisions of this and other courts, to the effect that the mailing of a so-called notice of deficiency is not sufficient to give this Court jurisdiction, if the Commissioner has not actually determined a “deficiency” within the meaning of section 271(a), include: New York Trust Co. et al., 3 B.T.A. 583, 587; Stanley A. Anderson, 11 T.C. 841; McConkey v. Commissioner, 199 F. 2d 892, 894 (C.A. 4), affirming an order of dismissal of this Court, certiorari denied 345 U.S. 924; Bendheim v. Commissioner, 214 F. 2d 26 (C.A. 2). Also, it has been held that jurisdiction cannot be conferred either by consent of the parties or by estoppel, where jurisdiction does not exist by statute, National Builders, Inc. v. Secretary of War, 16 T.C. 1220, 1224-1225; Accessories Manufacturing Co., 12 B.T.A. 467; Theodore Stanfield, 8 B.T.A. 787; William C. Shanley, Jr., 7 B.T.A. 521, 522; see also E. C. Newsom, 22 T.C. 225, 228, affirmed per curiam 219 F. 2d 444 (C.A. 5). Jurisdiction must be established affirmatively, Herbert Brush Mfg. Co., 22 B.T.A. 646, 647; First Bond & Mortgage Co., 21 B.T.A. 1; Consolidated Companies, Inc., 15 B.T.A. 645, 651-652; see also 9 Mertens, Law of Federal Income Taxation sec. 50.09. And this Court must determine that it has jurisdiction, even though the existence of jurisdiction has not been questioned by the parties, National Committee to Secure Justice, Etc., 27 T.C. 837, 839; National Builders, Inc. v. Secretary of War, supra. Moreover, this Court has no power to extend the statutory limits of its jurisdiction, so as to afford to a taxpayer the procedural advantages of litigating in this Court; for the extent of its jurisdiction is a matter of policy which is solely within the control of Congress. As was aptly said by the Court of Appeals for the Second Circuit, in Superheater Co. v. Commissioner, 125 F. 2d 514, 515: a taxpayer can invoke the jurisdiction of the Board [now the Tax Court of the United States] only when the Commissioner has determined a deficiency. This limitation inherent in See. 274 (a) (b) (e) and (g) of the Revenue Act of 1926 [which provisions are substantially the same as those in section 272 of the 1939 Code] * * * has since been preserved in all material respects and the courts have given it effect. * * * [[Image here]] it seems clear that until the jurisdiction of the Board is further enlarged whatever procedural convenience might be attained by having a formal re-determination * * * [by the Board] must give way to the greater necessity for recognizing and giving effect to the limited statutory jurisdiction of the Board. The fact that petitioner refused payment of the returned tax for reasons satisfactory to it, and the fact that it has taken the position that the applicable statute is unconstitutional, are wholly irrelevant in determining whether the essential prerequisites to this Court’s acquiring jurisdiction have been met. The Congress has, in sections 271 (a) and 272(a) (1), established objective standards governing this Court’s jurisdiction, which are based solely on the return as filed, and upon the Commissioner’s determination of a “deficiency” in respect of the “amount shown as the tax by the taxpayer upon Ms iitsl return.” Since these statutes are free from ambiguity, there is no room for a judicial construction based upon subjective positions adopted by the petitioner or its counsel; and any such construction would violate the expressed policy of Congress. Nor do the cases cited in the second footnote of the majority opinion,5 lend support to the Court’s denial of respondent’s motion to dismiss the case for lack of jurisdiction. These cases were decided in a setting, and on the basis of facts and circumstances, wholly different from those here present; and none of them involved a contention that the controlling statute was unconstitutional. The first five of these cited cases arose under an earlier practice, now obsolete, where the Commissioner had denied claims in abatement in which the taxpayer had sought the benefit of exemptions, credits, or deductions provided by the statute for use in suitable situations; and the question presented was whether the amount of the tax returned was the gross tax shown, or the net tax after taking into consideration the claimed adjustments. Such claims in abatement have now been abolished. Sec. 273(j), 1939 Code. Others of said cited cases, i.e., Powell Coal Co. and Taylor cases, involved in one instance a situation pertaining to the effect of an amended return, and in the other instance a situation where the taxpayer had filed no return whatever. This Court, in the later ease of John A. Gebelein, Inc., 37 B.T.A. 605, specifically distinguished this line of cases cited by the majority, as follows: If tbe freedom from liability were alleged to be attributable to a statutory provision legislatively granting exemption to a described class, sucb as personal service corporations, or "building and loan corporations, it would be clear that a determination had "been made which upon proper notice would be the foundation of a proceeding within the Board’s jurisdiction, Continental Accounting & Audit Co., 2 B.T.A. 761, and Fred Taylor, 36 B.T.A. 427. See also I.T. 2400, VII-1 C.B. 138. But the claim here is not for statutory exemption, but for constitutional immunity, and, since for another reason the notice was ineffective to support a petition, consideration must be reserved as to whether the question is the same. * * * And finally the majority, in its acceptance of jurisdiction in the instant case, has failed to observe the distinction between a controversy involving an originally returned tax in respect of which the Commissioner has not determined a “deficiency” within the meaning of section 271(a), and a controversy involving a “deficiency” administratively determined in respect of such originally returned tax. The procedures for handling these two classes of liability are entirely different. As to an originally returned tax, the Commissioner is authorized and required to assess the same, without notice to the taxpayer. See section 3640, 1939 Code; and the even more specific provisions of section 6201(a) (1), 1954 Code. The statute specifically prohibits any court from restraining the assessment or collection of the same. Sec. 3653, 1939 Code. And the taxpayer’s remedy, in seeking relief from an originally returned tax which he believes to be illegal, lies in payment of the tax, filing a claim for refund, and bringing a suit in a District Court or in the Court of Claims, to get his money back. Dodge v. Osborne, 43 App. D.C. 144, affd. 242 U.S. 118. See also footnote 10 in Flora v. United States, 357 U.S. 63 (1958). On the other hand, as regards a deficiency determined by the Commissioner in respect of the originally returned tax, section 272(a) (1) provides for giving notice of same to the taxpayer, and for the filing of a petition to this Court for a “redetermination of the deficiency.” After the filing of such a petition, assessment of the deficiency is stayed until this Court’s decision has become final; and, notwithstanding the provisions of section 3653, earlier assessment of the deficiency (as distinguished from the original tax) may be enjoined by a proceeding in the proper court. In the instant case, the majority of the Court has accepted jurisdiction over a controversy as to the legality of the originally returned tax, which was completely and correctly reported by petitioner on its return, and in respect of which the Commissioner has not determined a “deficiency” within the meaning of section 271 (a). The effect of this is to prevent prompt assessment of the correctly returned tax, notwithstanding the provisions of section 3653; and to disturb the existing balance between the jurisdictions of the various courts which are authorized to adjudicate tax controversies. As before stated, I think the respondent’s motion to dismiss the case for lack of jurisdiction, should have been granted. II. The second principal ground for my dissent from the majority opinion is that, assuming that the Court does have jurisdiction, it has failed to decide the issues raised by the pleadings. The petitioner herein assigned only one error which, though stated rather indirectly, may fairly be construed to present the question of whether section 207(a) (2) of chapter 1 of the 1939 Code is constitutional, in its imposition of an income tax on the “net premiums” received by the petitioner, notwithstanding that the company suffered a substantial loss in the operation of its business. Inherent in this assignment of error and also in the petition as a whole, are the following questions which should have been answered by the Court, in passing on said constitutional question: (1) Whether the principal subject of the tax (i.e., the “net premiums” received by the petitioner indemnity company), are in truth and substance “income,” either gross or net, irrespective of their being so labeled in the statute; (2) whether, if such premiums are not “income,” they constitutionally can be taxed “as income,” under said section 207(a) (2) of the Code; and (3) whether, if such premiums do constitute “income,” they constitutionally can be taxed on a “gross income” basis, as distinguished from a “net income” basis, notwithstanding that the petitioner suffered a substantial loss for the taxable year in the operation of its indemnity business. It is significant that the petitioner’s refusal to pay the challenged tax was based on similar grounds, as is shown by the statements contained in the above-mentioned transmittal letter for its return. The majority opinion has not decided any of these questions. Eather, it devotes principal attention to the extent of the plenary power of Congress under article I, section 8, clause 1 of the Constitution, to lay “Taxes, Duties, Imposts and Excises,” without apportionment; and to whether “the crippling and inequitable apportionment requirement has * * * application here.” But in the instant case which involves liability for income tax, it is unnecessary to consider whether Congress had power to lay such tax without apportionment, for such power is specifically granted under article I of the Constitution, as modified by the 16th amendment. Nor does this case involve the power of Congress to lay duties, imposts, and excises without apportionment, for the only tax which has here been imposed upon the petitioner is one “upon the income of every mutual insurance company [other than those specifically excluded]” which tax is measured at 1 per cent on the “gross amount of income from interest, dividends, rents and net premiums.” (Emphasis supplied.) Thus the issue here is not as to the power of Congress to lay taxes, but rather the validity of the particular tax here laid, in its application to the facts of the instant case. Notwithstanding, that the tax here involved was laid on gross income under chapter 1 (relating to income taxes), that it was returned by petitioner on the prescribed Treasury form entitled “U.S. Mutual Insurance Company Income Tax Return,” and that the so-called deficiency upon which the majority bases its jurisdiction is designated a “Deficiency in income tax,” the majority opinion has nowhere determined that the “net premiums” subjected to tax actually were income. Nor has the majority opinion determined whether the income tax here imposed could validly be imposed on gross income, as distinguished from net income. Indeed, it is stated in the latter portion of the ma j ority opinion: it seems unlikely that there is a constitutional requirement based upon the 16th amendment calling for the deduction which petitioner insists is indispensable to the validity of the unapportioned tax. However, that is an issue that we need not reach. [Emphasis in last sentence supplied.] In Eisner v. Macomber, 252 U.S. 189, the Supreme Court said: This case presents the question whether, by virtue of the Sixteenth Amendment, Congress has the power to tax, as income, of the stockholder and without apportionment, a stock dividend * * * It arises under the Kevenue Act of September 8, 1916 * * * which, in our opinion, notwithstanding a contention of the government that will be noticed), plainly evinces the purpose of Congress to tax stock dividends as income * * * [[Image here]] In order, therefore, that the clauses cited from article 1 of the Constitution may have proper force and effect, save only as modified by the amendment [16th amendment], and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not “income,” as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised. [Emphasis supplied.] The principle of the Macomber case is still in effect, notwithstanding the expressed but unsuccessful attempt of the Government, in Helvering v. Griffiths, 318 U.S. 371, to have the Macomber case overruled. And, so long as such principle continues in force, it should be followed and applied by this Court. In my view, the Court should have decided, one way or the other, whether the “net premiums” herein taxed as gross income, are (as stated in the Macomber case) “income * * * according to truth and substance, without regard to form.” And, if the majority had determined that such premiums are not income, it should have decided whether they constitutionally can, under an income tax statute, be taxed as income. If on the other hand the majority had determined that said premiums are income, it should further have decided whether they constitutionally can be taxed under an income tax statute, on a gross income basis as distinguished from net income basis, under the particular circumstances of this case. It is well settled that, under our judicial system, courts act only on “cases and controversies,” involving issues which have been submitted to them by adverse parties. Old Colony Tr. Co. v. Commissioner, 279 U.S. 716. The present parties have a right to expect that the income tax questions presented in the instant case, would be decided. I think it inappropriate for me, in this dissenting opinion, to express my views on these questions which the majority, in its opinion, has not decided. III. The third and final principal ground for my dissent is that, assuming this Court has jurisdiction to determine income tax liability herein, it does not, in my opinion, have jurisdiction to sustain the challenged tax as an excise, as the majority has done. The majority opinion states: “Thus, the challenged tax herein is * * * sustainable as an excise on carrying on an insurance business, * * *” (Emphasis supplied.) But in the instant case, no excise tax has been laid, or been returned, or been determined to be owing. Nor has any issue regarding liability for an excise tax been raised by the pleadings. The challenged tax is, as before shown, imposed under section 207(a) (2) of chapter 1 of the 1939 Code, which chapter is entitled “Income Tax”; and subsection (a) of said section provides: (a) Imposition op Tax. — There shall he levied, collected and paid for each taxable year upon the income of every mutual insurance company [other than as specifically excepted] * * * a tax computed under paragraph (1) or paragraph (2) whichever is the greater * * * [Emphasis supplied.] Also, as hereinbefore shown, the prescribed Treasury form on which the tax was returned by the petitioner was entitled “U.S. Mutual Insurance Company Income Tax Return (Form 1120M)”; and the only tax liability determined by the Commissioner was stated, in his so-called notice of deficiency, to be a “Deficiency in income tax.” In such circumstances, it is obvious that section 207(a) (2), both by its own terms and as interpreted and applied by the Commissioner of Internal Revenue “plainly evinces [to use the words employed in Eisner v. Macomber, supra] the purpose of Congress to tax * * * [the subjects therein specified, including “net premiums”] as income”; and that no question as to the petitioner’s liability for any excise tax, has either been presented to this Court, or is properly before it. As regards the majority’s emphasis on the power of Congress to impose an excise tax on the net premiums without apportionment, the Supreme Court aptly stated in Helvering v. Griffiths, supra, at 394: “Under our judicial tradition we do not decide whether a tax may constitutionally be laid until we find that Congress has laid it.” Moreover, this Court has no jurisdiction or authority to determine liabilities for excise taxes on the carrying on of a business. No such jurisdiction is conferred by section 1101 of the 1939 Code (see footnote 4), wherein the scope and limits of the jurisdiction of this Court are specifically defined. Also, subtitle A of the Internal Beve-nue Code of 1939, which is designated “Taxes Subject to the Jurisdiction of the Board of Tax Appeals,” does not include excise taxes on carrying on a business. The imposition of excise taxes on business is provided for in subtitles B and C; and as to such excises this Court has not been given jurisdiction. In my view, the majority’s above-mentioned holding that “the challenged tax herein is * * * sustainable as an excise on carrying on an insurance business” (emphasis supplied) is outside the limits of this Court’s statutory jurisdiction. Withey, J., agrees on point I only of this dissent.  A statutory! liquidator of Penn Mutual Indemnity Company is now the substituted petitioner herein.    SEC. 271. DEFINITION OF DEFICIENCY. (a) In General. — As used in this chapter in respect of a tax imposed by this chapter [chapter 1 — income tax], “deficiency” means the amount by which the tax imposed by this chapter exceeds the excess of— (1) the sum of (A) the amount shown as the tax by the taxpayer upon Ms return, if a return, was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus (B) the amounts previously assessed (or collected without assessment) as a deficiency, over— (2) the amount of rebates, as defined in subsection (b)i(2), made. [Emphasis supplied.]' In the instant case, there were no amounts previously assessed as a deficiency, and no rebates.    SEC. 272. PROCEDURE IN GENERAL. (a) (1) Petition to Board of Tax Appeals [now called Tax Court of the united States], — If in the case of any taxpayer, the Commissioner determines that there is a deficiency [which term is defined in section 271(a)] in respect of the tax imposed by this chapter, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within ninety days after such notice is mailed * * * the taxpayer may file a petition with Board of Tax Appeals for a redetermination of the deficiency. * * * [Emphasis supplied.]    SEC. 1101. JURISDICTION. The Board and its divisions shall have such jurisdiction as is conferred on them by chapters 1 [income tax], 2 [additional income taxes], 3 [estate tax], and 4 [gift tax] of this title [Internal Revenue Title],, by Title II and Title III of the Revenue Act of 1926, 44 Stat. 9 [relating to income tax and estate tax], or by laws enacted subsequent to February 26, 1926.    The eases cited by the majority are: Continental Accounting & Audit Co., 2 B.T.A. 761, 763-764; John Moir, 3 B.T.A. 21, 22; United States Fidelity & Guaranty Co., 5 B.T.A. 23, 26; Powell Coal Co., 12 B.T.A. 492, 497; Edward J. Lehmann, 21 B.T.A. 664, 671; Fred Taylor, 36 B.T.A. 427, 429.