Court Opinion

ID: 9653618
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:50:00.794341+00
Date Added: 2024-06-11T18:13:00.401712
License: Public Domain

WILBUR, Circuit Judge.
I dissent.
The opinion of the majority sustains the contention of the collector that on the appeal from the second deficiency letter the Board of Tax Appeals had jurisdiction to determine the total tax due from the taxpayer for the years 1920 and 1921. This decision is in accord with the decision of the Circuit Court of Appeals for the Fifth Circuit in Peerless Woolen Mills v. Rose, 28 F.(2d) 661, 663, cited by the Attorney General in support of his contention. That court declined to enjoin the collection of a tax assessed October 19, 1919, because it appeared that an appeal had been taken from a second deficiency assessment made December 18, 1925, and the question of the validity of the first assessment (also a deficiency assessment) was thus presented to the Board of Tax Appeals. The court stated: “The jurisdiction of the' Board extends to the whole controversy, to the end that it may determine or redetermine the correct amount of the tax.” This view is in accord with a decision of the Circuit Court of Appeals for the First Circuit in American Woolen Co. v. White, 56 F.(2d) 716. That court cites with approval the decision in Peerless Woolen Mills v. Rose, supra, and Bankers’ Reserve Life Ins. Co. v. United States (Ct.Cl.) 44 F.(2d) 1000, 1002, and holds that on an appeal from a second deficiency notice given December 17, 1930, the Board of Tax Appeals had jurisdiction of an assessment made on the taxpayer’s return in 1922.
I am inclined to agree with my associates that the Board of Tax Appeals, on the appeal of the taxpayer from the second deficiency letter, had jurisdiction to consider and determine the entire tax of the taxpayer for the year. Having agreed with the premise of the collector, I think his conclusion logically follows. The conclusion is stated in his brief as follows:
“In stipulating that the additional deficiencies for 1920 and 1921 as shown in the March, 1930, notice were correct the appellant necessarily conceded that its tax liability for such years as shown therein was correct and that the deficiencies determined in 1929 were validly assessed. If the 1929 assessments were not valid, then its tax liability and the additional deficiencies as shown in the March, 1930, notice were not correct, because as pointed out the deficiency is the excess of tax liability over the tax shown on the return increased by previously assessed deficiencies and decreased by abatements, credits and refunds. [26 U.S.C.A. § 1047, post now 26 U.S.C.A. § 271 and note]. The stipulation of deficiencies entered into before the Board of Tax Appeals necessarily was predicated upon the validity of the deficiency assessments in November, 1929. For like reasons, the order of the Board of Tax Appeals finding the additional deficiencies for 1920 and 1921 in accordance with the stipulation of the parties necessarily assumed and was based upon valid assessments of the deficiencies here involved in November, 1929.
“Thus it seems plain that the decision of the Board of Tax Appeals, which has become final, conclusively determined the appellant’s tax liability for 1920 and 1921 and as a necessary incident thereto that the November, 1929, assessments of the deficiencies for 1920 and 1921, here in question, are valid. The jurisdiction of the Board extended to the whole controversy of the tax liability for 1920 and 1921 and its jurisdiction- was exclusive. The Board having decided the tax liability for such years and, as a necessary incident thereto, the validity of the November, 1929, assessments of deficiencies for 1920 and 1921, that question is now res adjudicata. Tait v. Western Maryland Ry. Co., supra [(C.C.A.) 62 F.(2d) 933]. The appellant may not now question the validity of the deficiency assessments for 1920 and 1921 made in November, 1929, in this proceeding.”
This view was sustained by Judge Cos-grave who tried. the case in the District Court. 6 F.Supp. 327, 331. His opinion in that regard is as follows: “Defendant further contends that, in so far as the years 1920 and 1921 are concerned, the judgment of the Board of Tax Appeals, with respect to those two years, entered on July 24, 1931, is conclusion in its favor and is an adjudication of the question here litigated so far as the years mentioned are concerned. As heretofore shown, that judgment, while it affected only the assessment of March 29, 1930, yet it was made on the assumption that the assessment of *162November 2, 1929, was a valid assessment. This of necessity appears because it is so recited in the schedules transmitted with a letter of March 29, 1930, the correctness of 'which proposed deficiency the plaintiff at first contested, but later consented to, and which was finally established by the judgment referred to. It was determined by the Board of Tax Appeals that the total amount for the year 1920 was $896,-824.30; that of this amount $682,136.82 had been previously assessed. As heretofore pointed out, this last amount of necessity included the assessment of November 2, 1929, which the plaintiff now disputes. The adjudged deficiency was $214,687.48; the same with the year 1921. In order that the judgment of the Board of Tax Appeals be correct, a valid assessment must have been found to exist for the two years. The correctness of the assessment in question was involved, and, the Board of Tax Appeals having jurisdiction of the parties and the subject-matter, and having entered judgment thereon and such judgment now being final, the question is definitely settled.”
Assuming, as my associates hold, that decision of the Board of Tax Appeals on the petition of the taxpayer is conclusive as to its tax liability for 1920 and 1921, the question then arises, what did the Board of Tax Appeals decide? It is immaterial that the order was based on a stipulation, for the order of the Board in the absence of an appeal to the Circuit Court of Appeals is as final and conclusive as a judgment of a court. 26 U.S.C. A. § 1228 (now 26 U.S.C.A. § 640) section 1005 Revenue Act of 1926; see Old Colony Trust Co. v. Com’r, 279 U.S. 716, 725, 49 S.Ct. 499, 73 L.Ed. 918. “A judgment by consent of the parties is more than a mere contract in pais; having the sanction of the court, and entered as its determination of a controversy it has all the force and effect of any' other judgment being conclusive as an estoppel upon the parties and their privies. * * * ” 23 Cyc. 729, citing New Orleans v. Warner, 175 U.S. 120, 20 S.Ct. 44, 44 L.Ed. 96, which holds a consent judgment to be conclusive on the parties.
It was stipulated in that proceeding that the Commissioner “may assess and collect any deficiencies for the taxable years 1919, 1920, 1921.” It was stipulated “that there are deficiencies in the federal income and profit taxes of petitioner for the taxable years 1919, 1920, 1921’.’ in the above amounts for the respective years. Upon the stipulation the Board of Tax Appeals “ordered and decided that there are deficiencies for the years 1919, 1920, 1921 in the amounts of $59,256.84, $214,687.48 and $100,223.75, respectively.”
The effect of this order turns on the meaning of the word “deficiencies,” for the Board of Tax Appeals does not render judgments for money, but determines the amount of the income and profit taxes for which the taxpayer should be assessed. A “deficiency” does not mean the total tax due or unpaid, nor does it mean the total tax for which the taxpayer should be assessed for the year in question. If it did I should agree with my associates as to the effect of this order. The word “deficiency” is defined by statute. (26 U.S. C.A. § 1047 [now 26 U.S.C.A. § 271 and note], Revenue Act 1926.) I quote the statute with the amounts here involved in the decision of the Board of Tax Appeals inserted in brackets. “ * * * the term deficiency means, (1) The amount by which the tax imposed by this chapter [that is, the correct tax, $896,824.30 for 1920 and $680,719.25 for 1921] exceeds the amount shown as the tax by the taxpayer [$488,581.54 for 1920, $313,417.58 for 1921]; but the amount shown on his return [$488,581.54 for 1920, and $313,417.58 for 1921] shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency [November 2, 1929, $193,555 for 1920, and $267,077.92 for 1921, making total $682,-132.82 for 1920, and $580,495.50 for 1921] and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect to such tax.” To define deficiency in accordance with the terms of the statute, and in dollars as shown, the deficiency would be the amount fixed by the stipulation and by the deficiency notice from which the taxpayer appealed which advised the taxpayer of a deficiency of $374,168.07 for the years 1919, 1920, 1921 and an overassessment for 1918, 1924, 1925 of $52,069.41 as shown in the statement attached to the deficiency notice. This statement, so far as 1920, 1921, the years here involved and considered by the Board of Tax Appeals, is as follows:
“Tax liability, Ventura Consolidated Oil Fields.

*163It is clear then that the Commissioner intended by his deficiency notice to inform the taxpayer that his total tax for 1920 would be $896,824.30 and for 1921 would be $680,719.25, and that all but $214,687.48 for 1920 and $100,223.75 for 1921 had already been assessed. Nor was the taxpayer ignorant of this assessment of 1929. The appellant alleged his knowledge of the facts in his complaint herein, as follows:
“That on the 2nd day of November, 1929, the Commissioner of Internal Revenue made certain entries upon the record of assessments in his office, which entries had the appearance of and were listed in said office of said Commissioner as, and purported to be, assessments against plaintiff, as follows:
“1. An assessment in respect to an alleged deficiency of income taxes and excess profits taxes imposed by Titles II and III of the Revenue Act of 1918 for the taxable year 1920, in the sum of $193,555.-28, together with interest thereon in the sum of $42,804.88, being a total of $236,-360.16.
“2. An assessment in respect to an alleged deficiency of income taxes and excess profits taxes imposed by Titles II and III of the Revenue Act of 1921 for the taxable year 1921 in the sum of $267,077.-92, together with interest thereon in the sum of $116,301.46, being a total of $383,-379.38.
“3. An assessment in respect to an alleged deficiency of income taxes imposed by Title II of the Revenue Act of 1921 for .the taxable year 1922 in the sum of $19,065.73, together with interest thereon in the sum of $7,158.38, being a total of $26,224.11.
“4. An assessment in respect to an alleged deficiency of income taxes imposed by Title II of the Revenue Act of 1921 for the taxable year 1923 in the sum of $16,-298.13, together with interest thereon the sum of $5,141.37, being a total of $21,439.-50. * * *
“VII. That on the 2nd day of November, 1929, the said Commissioner of Internal Revenue included the said amounts of principal and interest referred to in Paragraph V , hereof as assessments against plaintiff in a list of assessments made under and pursuant to the Revenue Act of 1926, and on said last mentioned day duly certified such list and thereupon transmitted the same, so certified, to defendant. That defendant received the same and became and was charged therewith and with the collection thereof.”
The appellant alleges that these assessments were made by the Commissioner “under the mistaken belief that there had been filed with him a notice in writing by or in behalf of plaintiff waiving the restrictions provided by subdivision (a) of Section 274, * * * ” which section provides for a 60-day deficiency notice. It is clear then that the Commissioner claimed the assessments of November 2, 1929, to be valid and that the plaintiff was fully advised of that claim, both by previous notice and by the deficiency notice from which, it appealed to the Board of Tax Appeals. In the proceeding before the Board of Tax Appeals the appellant did not challenge the assessment of November 2, 1929, as such, either because premature or otherwise, but did raise many points going to the amount of its entire net income for the years involved. Its petition before the Board of Tax Appeals alleges: "The taxes in controversy are income and profits taxes for the calendar years 1918 to 1924, inclusive, and the period January 1, 1925 to October 15, 1925, and are in the amount of $374,168.07.” (Italics ours.) There is no suggestion that the changes that the appellant claimed in its petition to the Board of Tax Appeals should be made in its net income would be so great as to affect the amount covered by the assessment of November 2, 1929. In fact the petitioner does not allege what deductions it claims, nor the amount of the tax which would result from the fixing of its net income in the manner requested, nor can the amount be determined from the record. As the appellant states in its brief: “It is impossible in this proceeding to consider the merits of the tax attempted to be imposed, nor can we here attempt to show what plaintiff’s tax liability for the years 1920-1923 is or ought to be.” The stipulation before the Board of Tax Appeals fixed the deficiency at the amount claimed by the Commissioner which was the amount alleged by the taxpayer to be in controversy, that is, $374,168.07 for the three years. The order of the Board of Tax Appeals based thereon fixed the deficiency at $214,687.48 for 1920 and $100,-223.75 for 1921. In other words, the stipulation and the order both assumed the liability of the taxpayer for the assessment of 1929 now in dispute. There could be no deficiency as defined in the statute until the tax liability exceeded the assessment *164of 1929. The stipulation to the amount of the “deficiency” was a stipulation that the assessment of 1929 was a part of the appellant’s total tax. If, however, we assume that the premature assessment of November 2, 1929, was not an “assessment” within the meaning of the law defining “deficiency,” the conclusion is nevertheless inescapable that when the appellant stipulated with the Commissioner as to the deficiency in the tax, it understood that the Commissioner claimed the amount of the November 2, 1929, assessment as an amount previously assessed as a deficiency assessment. Further statement of the facts will make it plain that this was the actual intent of the parties to the stipulation before the Board of Tax Appeals. The parties stipulated in the lower court as follows as to the facts:
“On the 2nd day of November, 1929, the Commissioner of Internal Revenue made the following as additional assessments against the plaintiff herein:

Hence, both parties evidently considered the assessment of November 2, 1929, to be an assessment when stipulating before the Board of Tax Appeals as to the amount of the deficiency for the years 1920 and 1921. Hence, the stipulation and the order or decree based thereon assumed the obligation of the taxpayer to pay the amounts previously assessed, although the “assessment” was premature.
The word “deficiency,” as used in the decree and as defined in the statute, as I have shown, means the amount over and above previous assessments; consequently, as I view it, the Board of Tax Appeals by necessary inference affirmed the validity of the previous assessment of November 2, 1929. Furthermore, if the order did not affirmatively approve the assessment of 1929, the decision of the Board of Tax Appeals is equally effective as res judicata on the validity of that assessment because the taxpayer had an opportunity to challenge the assessment of November 2, 1929, before the Board of Tax Appeals and failed to do so. In my judgment there is no merit in the appellant’s claims either in law or equity as to the assessments of 1920, 1921.
The assessments of 1922, 1923, were not involved in the decision of the appeal to the Board of Tax Appeals amounting to $19,065.73, with $7,158.38 interest, a total of $26,224.11 for 1922j and for the year 1926, $16,298.13, with interest amounting to $5,141.37, a total of $21,439.-50, because no second deficiency had been asserted as to this tax. As to these taxes the Board dismissed the petition of the taxpayer on the stipulation for lack of jurisdiction. Hence, the amount of these deficiencies fixed in November 2, 1929 involves a different question.
As to these taxes of 1922 and 1923, and as to the taxes for 1920 and 1921 also, in my judgment the bill of complaint fails to state a cause of action because no payment or tender is made of the amount of the tax justly due.
I agree with my associates that the assessment of 1929 was premature for the reasons stated in the majority opinion. If section 274 (a) expressly authorized an injunction to be issued by the courts in all cases where there has been a premature assessment, I would agree with my associates as to the taxes for 1922 and 1923. The statute, however, does not take that form. It does not purport to grant a right to an injunction in such case; it merely raises the prohibition against such an injunction contained in section 3224 of the Revised Statutes (26 U.S.C.A. § 1543), which prohibits any injunction to restrain the collection of a tax. The intent of Congress must be determined from the language of the statute, which is as follows: “Notwithstanding the provisions of section 3224 of the Revised Statutes [section 1543 of this title], the making of such assessment or the beginning of such proceeding or distraint during the time such prohibition is in force may be enjoined by a proceeding in the proper court.”
*165It is a fundamental principle of equity-jurisprudence that he who seeks equity must do equity, and that in an action to enjoin the collection of a tax alleged to be invalid the plaintiff must do equity by paying or offering to pay the amount of the tax justly due. This rule is thoroughly established and is of long standing and has recently been applied by the Supreme Court in the case of Rowley v. Chicago & N. W. Ry. Co., 293 U.S. 102, 55 S.Ct. 55, 79 L.Ed. 222, decided November 5, 1934. I believe that this rule is applicable in a court of equity upon an application of a taxpayer to enjoin the collection of a tax just as it was before the enactment of section 3224 of the Revised Statutes (26 U.S. C.A. § 154 (now 26 U.S.C.A. § 1543), and that it remains applicable to such actions notwithstanding the lifting of the prohibition of an action to enjoin the collection of a tax imposed by section 3224 of the Revised Statutes. It has been applied uniformly in the federal courts in actions to enjoin state officers from the collection of state taxes where such taxes were claimed to be absolutely void. In such cases, although the tax is void, the plaintiff, in order to secure the injunction from a court of equity, must tender the amount equitably due.
My associates seem to be of opinion that if the taxpayer challenges the validity of the assessment and makes no concession as to the amount of tax justly due, he may be excused from tendering the tax which is equitably due. I think this is too narrow a view of the duty of plaintiff in an action to enjoin the collection of tax. For instance, in the case at bar, the appellant does not expressly concede that any tax is due, neither does it challenge the finding of the Commissioner as to its net income. The failure to challenge the correctness of the finding of the Commissioner is in effect an admission that the net income of the taxpayer is that found by the Commissioner. The taxpayer does not base his action to enjoin the tax upon the theory that the tax was erroneous or too great, hut solely upon the proposition that it was premature, and therefore an invalid and mistaken exercise of power on the part of the Commissioner. It does not allege that it desires to appeal from the assessment of November, 1929, or that its claimed deductions from its gross income are different from those fixed by the Commissioner. The taxpayer in its return stated the amount of its gross income; it agreed to
the assessment which was in fact made by the Commissioner, although, as my associates have pointed out, this agreement was not binding upon the taxpayer because it was not accepted by the Commissioner. Subsequently, in its appeal from the second deficiency assessment it was ’assumed by the Commissioner and not denied in any way by the taxpayer, that the amount of tax already erroneously assessed was binding upon the taxpayer. The last deficiency assessment which was finally adjusted by stipulation of the parties contemplated the payment of the erroneous assessment. Under these circumstances, in the absence of any contention on the part of the taxpayer that the premature assessment made by the Commissioner was excessive, I think it was incumbent upon the taxpayer to pay or tender the total amount fixed by the Commissioner.
Assuming that the taxpayer is not bound by the judgment of the Board of Tax Appeals or by its own agreement to pay the tax upon that portion of its net income which was covered by the premature assessment, nevertheless before it can invoke the power of a court of equity to enjoin the collection of that portion of the tax covered by the premature assessment, it. should show that such tax was not equitably due, or should do equity by paying the tax.
It is my view that Congress had no intention of repealing or modifying the well-established principles of equity jurisprudence applicable to the granting of injunctions to restrain the collection of a tax when it removed the restriction which would otherwise prevent such an application for an injunction being made at all.
My associates state that the usual requirement of a court of equity of payment as a condition precedent to an injunction would defeat the purpose of Congress in setting up the Board of Tax Appeals and in requiring the Commissioner to refrain from making a deficiency assessment until the expiration of 60 days after notice to the taxpayer, and thereafter if an appeal is taken to the Board, until a decision thereof. We agree that in default of notice the assessment is premature and void because no opportunity has been given the taxpayer to contest the assessment before it was made. Congress, anticipating such a situation, removed the statutory prohibition against an application to a court for an injunction. It is said that if the tax*166payer is compelled to pay the amount he concedes to be due as a condition of granting an injunction which will give him an opportunity to contest the position he disputes and desires to litigate before the Board of Tax Appeals, it will in some way frustrate the purpose of Congress in permitting the equitable action to be brought. In considering that question it should be noted that the tax is due at the time of the original return, that the taxpayer in assessing his own tax has been too liberal with himself, and that the Commissioner has found that this liberality in the case at bar amounted to half a million dollars. If this tax, or any part of it, is justly due, what reason is there for abrogating the general equitable rule requiring payment of the amount justly due as a condition of obtaining an injunction restraining the collection of the balance claimed to be excessive and unjust? Using round numbers, the taxpayer says in its brief that its consent to the making of the additional $500,000 assessment (the first deficiency) was by way of compromise, and that the amount of $300,000 was all that was then justly due, and that this amount was paid by paying the second deficiency assessment. Thus, in effect, the taxpayer now asserts in his brief that which- it did not allege in his complaint, that the first assessment was excessive as to the amount of $200,000, and that the sum of $300,000 was and is justly and equitably due and has ■been paid.
I readily concede that if the taxpayer had alleged these facts in his complaint he would have stated a prima facie case for an injunction subject to the finding of the court as to what was clearly and justly due and the requirement of a payment thereof as a condition to an injunction pending further proceedings by the Commissioner to assess a valid tax. The amount required by the court as a condition precedent to the injunction is to be subsequently increased or decreased by the Commissioner according to his judgment under the applicable rules and law.
But as I understand my associates, they hold that the question as to whether or not a portion or all of the first deficiency tax was justly due is wholly immaterial to the right to an injunction particularly when the taxpayer seeking the injunction stands mute as to the justice of all or a portion of the tax and merely alleges that the assessment was premature and therefore is illegal and void because beyond the power of the Commissioner.
The question is: Can the taxpayer enjoin the collection of the whole assessment ($500,000) without paying any part of it, and without alleging facts showing the tax or any part of it to be unjust, although Congress has fixed the percentage of income to be paid as a tax and has fixed his obligation to pay the tax as of the date of the return, and has fixed the net income of the taxpayer as the basis of the tax? I use the round numbers, $500,000 and $300,-000, used by the taxpayer in its brief, by way-of illustration to show that it would not be oppressive or inequitable to require a taxpayer to pay the portion of the tax which he concedes to be just ($300,000) as a condition precedent to an injunction, the avowed purpose of which is to give the taxpayer an opportunity to contest the disputed portion amounting to $200,000.
My associates refer in the main opinion to the fixing of the amount which should be paid by the taxpayer as a condition precedent to the issuance of an injunction as though it were an assumption on the part of the court of the power to assess the tax. This I believe is an erroneous view of the duty of the court. It is uniformly held that the court has no power to assess or fix the tax and an order of the trial court conflicting with that view has recently been reversed by the Supreme Court in Rowley v. Chicago & N. W. Ry. Co., 293 U.S. 102, 55 S.Ct. 55, 59, 79 L.Ed. 222. There the court said: “The trial court was not called upon, and it was no part of the judicial function, to determine the base or amount of the tax that in its view might legally be exacted as a result of the assessment in question. State R. R. Tax Cases, 92 U.S. 575, 614, 615, 23 L.Ed. 663; Thompson v. Allen County, 115 U.S. 550, 6 S.Ct. 140, 29 L.Ed. 472. Cf. Central Kentucky Nat. Gas Co. v. Railroad Commission, 290 U.S. 264, 271, et seq., 54 S.Ct. 154, 78 L.Ed. 307. If that assessment were illegal, the State, notwithstanding any adjudication against its validity as repugnant to the Federal Constitution, should have been left free again to value the property.”
The rule is equally well established that the taxpayer must pay the amount of tax justly due as a condition of obtaining an injunction, and that the trial court may in its decree enjoining the collection of the tax, fix a higher amount to be paid as condition for the granting of the injunction if *167in its judgment a greater amount is equitably due. The court does not fix the tax or purport to do so. It merely fixes the terms upon which it will enjoin the invalid tax leaving the state or the assessing officers free to determine the amount of the tax according to the controlling statutes.
My associates state that the fact that the government is barred from the collection of this tax by statute of limitation has no bearing upon the question involved. In my judgment it emphasizes the wisdom of the equitable rule and makes its application more necessary. A chancellor does not shut his eyes to the actualities.