Court Opinion

ID: 6894631
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:48:16.931669+00
Date Added: 2024-06-11T16:05:56.454829
License: Public Domain

SIBLEY, Circuit Judge
(dissenting).
I must concede that the cited cases support the majority decision, but the Supreme Court has not spoken on the precise point and I venture to express my opposing view.
That view is that it is an abuse of the principles of res judicata to say that the refusal of the Commissioner to entertain the present application for a refund timely made is justified on the ground that an application for refund on another ground and on directly opposite facts was refused previously, sued on and the United States won.
I will state the exact pertinent facts. This corporation, owned by six members of the Clark family, owed two of its stockholders notes for large sums, and in 1934 the directors made a resolution to pay $30,000 each year on thfem. In 1937 there were distributable profits of $118,500 and $30,000 thereof was set aside to be paid on the notes, and a dividend declared to the stockholders of the whole $118,500 of profits, represented by its notes. After the tax year and early in the next year the stockholders received in substitution cash *491amounting to $88,500 and surrendered the notes. The corporation’s tax return showed as dividends paid only the cash payment, and claimed no dividends paid credit for the $30,000 in notes given and surrendered, nor for the $30,000 paid on its note indebtedness. A refund of taxes was later asked solely because a credit was due under Section 26(c) on the ground that the $30,000 of profits paid on the notes could not be distributed because of a contract within that section. The refund was refused and suit brought on June 20, 1940, the sole issue made in the pleadings being that a refund was due on the ground just stated. The court on October 17, 1940, held that the directors’ resolution was not a contract which would excuse non-distribution of profits; and that alone was considered and adjudged in this court on appeal. C. C. Clark, Inc., v. United States, 5 Cir., 126 F.2d 292. Meanwhile the stockholders, except C. C. Clark, in their returns reported as income only their proportion of the $88,500 cash dividend. C. C. Clark reported his proportion of $118,500. On September 10, 1940, the contention was first made that a proportion of the $118,500 dividend in notes ought to be reported by them all, and on December 6, 1940, additional taxes were assessed and were collected from the stockholders on December 12, 1940. This was after the trial of the corporation’s case in the district court. After the adverse decision by this court, but within the period for applying for refunds, the corporation, conceiving that if the entire $118,500 note dividend was a dividend paid so as to charge the stockholders, it was a credit of dividends paid for the corporation against its tax on undistributed profits under Section 27(a) and (d) of the Revenue Act of 1936, made another application for refund on these new facts and this different law. The Commissioner did not consider its merits but held he could not, because of the court judgment on the other claim. This suit followed.
It is probably true that the dividend in notes made during the tax year -was the payment of a dividend for tax purposes, and not retractable during. the next year, so that the additional tax on the stockholders successfully asserted by the Commissioner was according to law. It is just as true that a corresponding credit for dividends paid was owing to the corporation under Section 27(a) and (d). This was admitted in argument before us. The tax on the corporation so far as produced by the $30,000 under discussion was unlawfully collected, and ought under Internal Revenue Code Sect. 3770, 26 U.S.C.A. Int.Rev. Code, § 3770, to be refunded by the Commissioner. The authority to refund implies a duty. The language of Congress is broad and strong. He is “authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected * * * all taxes that appear to be unjustly assessed or excessive in amount, or in any manner wrongfully collected." The application for refund here is timely, the excessive tax admittedly wrongfully assessed and collected, and Congress has put no strings on the Commissioner which interfere with his doing what is right.
The courts in the cited cases have. They say that because the taxpayer sued once before about this excessive tax, and did not then present this question, different both in fact and law from that which the court decided, he is cut off — is fined in effect some $3,337. I think this is morally and legally wrong for two reasons: First, there was a mistake as to the effectiveness of the attempt to recall the note dividend, brought to light and corrected in favor of the United States after the former trial, and it ought to be corrected as to all parties. The United States ought not to be blowing hot and cold as to whether this $30,000 was paid as a dividend in 1937. In such cases of inequity the strict rule of res judicata is not to be enforced in public litigation. White v. Adler, 289 N.Y. 34, 43 N.E.2d 798, and note thereto in 142 A.L.R. 905. Second, if the corporation had the duty of presenting all contentions at once, under the rule against splitting actions, in this case it could not. It had a right to sue on the refusal of its first claim for refund, but only on the grounds presented in that claim. Internal Revenue Code § 3772, 26 U.S.C.A. Int.Rev. Code, § 3772. Not even by amendment could any different ground be added without the consent of the United States. J. P. Stevens Engraving Co. v. United States, 5 Cir., 53 F.2d 1; Snead, Collector, *492v. Elmore, 5 Cir., 59 F.2d 312; Real Estate Land Title & Trust Co. v. United States, 309 U.S. 13, 60 S.Ct. 371, 84 L.Ed. 542. No such consent existed. The court not only did not but could not consider and decide the issue now tendered. .Counsel for the United States, knowing perhaps of the position about to be taken by the Commissioner as to the stockholders, refused any importation of an additional dividends paid credit issue, for the fifth ground of the written motion for judgment, which was sustained, is this: “5. The plaintiff is not entitled to claim dividends paid credit for the taxable year 1937 in excess of $88,500 in this proceeding- for the reasons that no such claim was made in the complaint, and there were no such facts alleged in the complaint to support such claim, nor was any such claim made in the claim for refund.”
Therefore the United States stands with $3,337 of the taxpayer’s money which ought to be refunded, but which will not be because the proper ground was not presented to a court, although the court could not entertain it without the consent of the United States, which consent the United States would not give. The United States is claiming a $30,000 dividend was paid so as to get taxes from the stockholders, and refusing to admit it was paid in order to keep a tax from the corporation assessed because the $30,000 was not so paid. This is so wrong as to look dishonest. None of us judges would suffer ourselves to be put in that position, and we ought not to put our government there.
Why do we have to? Congress has not said we must. Cleveland v. Higgins, 2 Cir., 148 F.2d 722, follows Guettel v. United States, 5 Cir., 95 F.2d 229, 118 A.L.R. 1060, and the latter rests on the Court of Claims decision in Chicago Junction v. United States, 10 F.Supp. 156, 80 Ct.Cl. 824. The first case in the Court of Claims on the point was International Curtis Marine Turbine Co. v. United States, 56 F.2d 708, 74 Ct.Cl. 132, and in that I think the correct approach was taken. It was thought the second claim for refund would not be barred if it was different from the first which had been adjudged, for the very reason that the second could not have been presented in the former suit. But it was concluded that this saving difference did not exist. In the next case a successful struggle was made to deliver an unpresented credit from the harsh rule of res judicata. Cambridge Loan & Building Co. v. United States, 57 F.2d 936, 74 Ct.Cl. 500. The Supreme Court in Tait v. Western Maryland Ry. Co., 289 U.S. 620, 53 S.Ct. 706, 77 L.Ed. 1405, said that the principles of res judicata are to be applied to tax litigation, but the actual application was estoppel by judgment against relitigating the very issue which had previously been fully heard. Against that there can be no good objection raised. And I think a judgment by the Tax Court ought to settle the taxes for the year as a whole, for that court has the power and the duty to “redetermine” the taxes, to entertain each and every debit and credit. Not so the district court, which can only (absent consent) consider the claim which has been presented to the Commissioner and by him rejected or ignored.
In a case like this the basic maxim of res judicata, Interest reipublicae ut sit'finis litium ought not to' be applied, but rather Fiat justitia, ruat coelum. It is more for the public good that the United States Government in its own courts should deal honorably with its taxpayers than that a few hours of court time should be saved. “The rule against splitting a cause of action is one made by judges to promote the public policy of the State. It should not be applied ‘to frustrate the purpose of its laws or to thwart public policy.’ ” White v. Adler, supra [289 N.Y. 34, 43 N.E.2d 803], “A plaintiff who is not authorized to join the claims cannot later be met with the defense that he split the cause of action.” 1 C.J.S., Actions, § 102, page 1310; 1 Am. Jur., Actions, § 100. The district judge ought to be sustained in this case.