Court Opinion

ID: 8910931
Source: CourtListenerOpinion
Date Created: 2022-11-27 02:59:02.248621+00
Date Added: 2024-06-11T17:08:31.448879
License: Public Domain

A. LEON HIGGINBOTHAM, Jr., Circuit Judge,
dissenting.
The issue raised by this appeal — whether the payment of tax in response to the issuance of an I.R.S. deficiency notice brings the instant situation within the coveragé of § 1312(3)(A) of the I.R,C., 26 U.S.C. § 1312(3)(A), thereby allowing mitigation of the statute of limitations — is not entirely free from doubt. However, notwithstanding the majority’s argument that a payment in response to a deficiency notice is not the type of payment comprehended by Section 1312(3)(A), I would affirm the judgment below and hold that such a payment is a circumstance of adjustment within the meaning of that section. I find four compelling reasons that require such a conclusion: a straightforward reading of the statutory language; the existence of a clear regulation that was virtually adopted contemporaneously with the statute and that has remained in force for nearly four decades; the previously uncontroverted case law precedent set by the Court of Claims over a decade ago; and the policy considerations advanced in that decision of the Court of Claims. For these reasons, I respectfully dissent.
The starting point must, of course, be the statute. Section 1312 of the Internal Revenue Code enumerates the circumstances of adjustment that bring into play the provisions of Sections 1311-1314, and thereby mitigate the effect of the normal statute of limitations. Section 1312(3) governing the double exclusion of an item of income contains two subsections — “A,” which applies to “an item included in a return filed by the taxpayer or with respect to which tax was paid, and “B,” which applies to “an item not included in a return filed by the taxpayer and with respect to which the tax was not paid.” I.R.C. § 1312(3) (emphasis added). It is clear that if subsection 1312(3)(A) is the applicable provision then the assessment under consideration is valid and the decision of the Tax Court should be affirmed. However, if subsection 1312(3)(B) is applicable, the mitigation provisions would not apply, see Section 1311(b)(2)(A), and the assessment in question would be barred by the statute of limitations.
The appellants admit that they did indeed pay the tax on the item in question. However, they observe that they did not pay the tax with the appropriate return, but only in response to an I.R.S. notice of deficiency that they were in the process of contesting. Hence, they contend, and the court today agrees, that subsection 1312(3)(A) is inapplicable. The statute, though, draws no distinctions regarding the manner or time of the underlying payment of tax. In the clearest terms, subsection 1312(3)(A) applies whenever the item in question was one *100“with respect to which tax was paid.” And, in equally clear terms, subsection 1312(3)(B) only applies when the item was one “with respect to which the tax was not paid.” To contravene such clear statutory language surely requires more than the policy considerations which the majority ultimately relies upon.
Furthermore, to interpret the statute in the manner advanced by the majority renders meaningless the second half of subsection 1312(3)(A), as well as the second half of subsection 1312(3)(B). By in effect reading into subsection 1312(3)(A) the requirement that a notice of deficiency be issued while the correct tax year remains open, the majority has effectively eliminated from the statute the language relating to payment of the tax on the item in question. Under the majority’s interpretation there would be no possible situation in which the provisions of subsection 1312(3)(A) relating to an item “with respect to which tax was paid” would apply that would not also be encompassed within subsection 1312(3)(B) relating to an item “with respect to which the tax was not paid.” Yet, if one fact is clear on the face of the statute, it is that these two sections are not synonymous, but rather are intended to deal with different situations. And it is equally clear that subsection 1312(3)(A), because it is not subject to the restrictions of subsection 1311(b)(2)(A), was intended to apply in situations foreclosed under subsection 1312(3)(B). The majority opinion, today, in effect reads the distinctions between these two sections out of the statute.
In addition to subverting the language of the statute, .the majority opinion flatly contradicts a Treasury Regulation that was adopted virtually contemporaneously with the statute and has stood as unchallenged authority for 40 years. See Treas.Reg. § 1.1312-3, Example (1)(ii). It is clear that such regulations should be honored by this court unless they flout the will of Congress. Fulman v. United States, 434 U.S. 528, 533, 98 S.Ct. 841, 845, 55 L.Ed.2d 1 (1978); C.I.R. v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 698, 92 L.Ed. 831 (1948). This regulation not only does not flout the congressional intent, but rather serves to implement a straightforward reading of the statute, a reading that, unlike the one adopted by the majority, gives meaning to each provision of the statute. In such a situation, we should accord a great deal of deference to this established and authoritative interpretation of the statute.
Furthermore, the majority opinion is not only inconsistent with a plain reading of the statute and at odds with a long-established Treasury regulation, but also flies in the face of decisional precedent that has been accepted for over a decade. In Birchenough v. United States, 410 F.2d 1247, 187 Ct.Cl. 702 (1969), the Court of Claims dealt squarely with the issue before us today, and determined that the applicable circumstance of adjustment was that described in subsection 1312(3)(A), thus making the mitigation provisions applicable.
In my view the rationale adopted by the Birchenough court is equally valid today. After commenting that the regulation discussed above was consistent with the statutory language as well as congressional intent, the court noted: •
The only argument plaintiffs can make is that the regulation disfavors taxpayers who choose to pay the deficiency and “then litigate by refund suit, rather than” to defer payment and sue in the Tax Court; the former are subject to adjustment under Section 1312(3)(A) (because they have paid the tax) while the others are not. In an early and authoritative article, then Professors Maguire, Surrey and Traynor gave the “sound reason * * * for such rigid dichotomy” (Section 820 of the Revenue Act of 1938, 48 Yale L.J. 719, 755-57 (1939)). There is no way to distinguish, these commentators pointed out, between a taxpayer who “may have paid the deficiency because he thought it correct but later decided to change his position because of the favorable opportunity presented by the expiration of the period of limitations for the earlier year” and another taxpayer who pays the deficiency solely because he prefers to litigate by refund action rather than before the Tax Court. “As there is no feasible method of differentiating between the two cases, and as the taxpayer against whom the deficiency is asserted *101can protect himself from an adjustment * * * simply by not paying the deficiency, no unjustifiable hardship is worked by the rule * * * .” Certainly, this ground is adequate to support the contemporaneous regulation, which must be accepted unless we can say that it is unreasonable or flouts the Congressional will.
410 F.2d at 1252, 187 Ct.Cl. 702 (footnotes omitted).
There is an additional reason for following the Treasury regulation and the Birchenough decision and affirming the Tax Court. That reason is evident when one considers the underlying justification for both the statute of limitation and, more particularly, the mitigation provisions. Statutes of limitation serve the function of eliminating stale claims, but in certain situations the policies behind such statutes are not furthered by their application. The mitigation provisions were enacted to deal precisely with such a situation. See Maguire, Surrey and Traynor, Section 820 of the Revenue Act of 1938, 48 Yale L.J. 509, 517—20 (1939). There is simply no reason to allow the appellants to raise the claim, in the context of the ongoing litigation they initiated regarding their 1955 tax return, that the item in question was attributable to 1954, and then allow them to argue that the issue of their 1954 taxes is stale. “He who seeks repose should practice it by letting sleeping dogs lie.” Id. at 518.
The mitigation provisions, thus, have the salutary effect of minimizing litigation when the issue is merely whether income is taxable in one year or another. They accomplish this by removing the weapon of the statute of limitation from the arsenal of the party initiating such litigation. Clearly, Congress did not intend the party resisting a stale demand to be deprived of the defense of the statute of limitations but only the party that takes the offensive. Id. The appellants, though, fall within the latter category. By voluntarily paying the deficiency asserted against them with regard to 1955, and then bringing suit in District Court, the appellants took the offensive in raising the claim that the item of income in question was attributable to 1954. The mitigation provisions, then, prevent them from doing an “about face” and arguing that their income for 1954 is a stale issue.
Of course, had the appellants never paid the 1955 deficiency, but merely contested the deficiency from a defensive posture, the Commissioner could not now raise the issue of their 1954 liability. The majority objects to this distinction in treatment, based solely on the fact of payment, as being unjustified. There are, however, several reasons to accept this distinction. First, and most importantly, the distinction is found in the statute which, as noted above, expressly distinguishes between items “with respect to which tax was paid” and items “with respect to which the tax was not paid.” I.R.C. § 1312(3). Second, as noted in Birchenough, as well as in the article by Messrs. Maguire, Surrey and Traynor, the distinction is necessary because “there is no feasible method of differentiating,” 48 Yale L.J. at 757, between the taxpayer who paid the deficiency solely because he preferred to litigate in District Court and the taxpayer who paid the deficiency believing it to be correct, but who now seeks to take advantage of the “favorable opportunity presented by the expiration of the period of limitations for the earlier year.” Id. See 410 F.2d at 1252, 187 Ct.Cl. 702. Finally, it is worth bearing in mind that the decision to make this payment rests solely with the taxpayer, who can “protect himself from an adjustment under Section 820 simply by not paying the deficiency.” 48 Yale L.J. at 757.
Recognizing that the appellants could have easily avoided re-opening their 1954 tax year by not voluntarily paying the 1955 deficiency, the majority seems to view the appellants’ decision to make that payment as a kind of unwitting tactical error for which the appellants should not be held responsible. However, in all likelihood, the appellants’ decision to pay the 1955 deficiency was a calculated one, designed to enable them to litigate in District Court where they may have believed that a favorable outcome was more probable. There is simply no reason to excuse the appellants from the legal consequences of the decision they made.
*102Indeed, even if the appellants’ decision to pay the 1955 deficiency was a mere slip-up, there is no reason to reverse the decision below. The majority appears to believe it inequitable that the appellants should be required to pay tax some 25 years after receiving an item of income. However, my sense of equity would not be seriously troubled if the appellants were now required to pay this tax, 25 years after it was due, most of which time appellants have spent contesting the issue of their liability for the tax and the question of which particular year they are liable for. After 40 years of regulatory history and 10 years of case law precedent, during which time Congress could easily have modified this statute, I believe it is inappropriate for us to tinker with the previously accepted meaning of the mitigation provisions. No injustice would be worked by accepting a straightforward interpretation of the statute and applying the mitigation provisions to this situation. I would affirm the decision below.