Court Opinion

ID: 9452502
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:42:18.579476+00
Date Added: 2024-06-11T17:33:14.230272
License: Public Domain

FREEDMAN, Circuit Judge
(dissenting).
Judge FORMAN’s original opinion for the panel demonstrates that aside from *362the statute of limitations the government would be entitled by the express terms of the compromise agreement to recover from the taxpayer the full amount of the taxes assessed, with interest and costs, after crediting him with the amount of the payments received under the compromise agreement.
What concerns us now, however, is the claim made in the petition for rehearing, which led us to grant rehearing, first before the panel and then before the court en banc, that some of the assessments are barred by the statute of limitations. The income taxes here involved were assessed on March 12, 1954, for the years 1948, 1949 and 1950, in the amounts of $11,108.06, $8,078.70 and $3,120.10, respectively. The compromise agreement was signed by the taxpayer on November 10, 1955, and was accepted by the government on April 18, 1956. It provided for the installment payments by the taxpayer of the total sum of $15,-000 in compromise of his tax liability for the years 1948, 1949 and 1950. It provided also that in the event of default in payment of any installment of principal or interest due under the agreement, the taxpayer should have no right “to contest in court or otherwise the amount of the liability sought to be compromised, and that in the event of such default the Commissioner of Internal Revenue, at his option, (1) may proceed immediately by suit to collect the entire unpaid balance of the offer, or (2) may disregard the amount of such offer and apply all amounts previously paid thereunder against the amount of the liability sought to be compromised and may, without further notice of any kind, assess and/or collect by distraint or suit (the restrictions against assessment and/or collection being hereby specifically waived) the balance of such liability.” The compromise agreement contained a further provision that the taxpayer “hereby expressly waives: * * * The benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitations on assessment and/or collection for the period during which this offer is pending, or the period during which any installment remains unpaid, and for 1 year thereafter.”
Section 6501(a) of Title 26 prescribes a general limitation period for the assessment of taxes of three years after the filing of the return. Section 6501(c) (4) authorizes an extension by agreement of the period of limitations for assessment of taxes, but expressly limits this to agreements entered into “before the expiration of the time prescribed * * Further extensions must be made “before the expiration of the period previously agreed upon.” 1
The government has made no factual denial of the claim of the petition for rehearing that the assessments on March 12, 1954 for the 1948 and 1949 taxes were made after the statutory period of limitations had run, although it filed a memorandum in opposition to the petition for rehearing. It has called our attention to the statutory provisions which eliminate the statute of limitations if there was a fraudulent return made with intent to evade tax, or a wilful attempt to defeat or evade tax (§ 6501(c) (1), (2)), and which extend the statutory period of limitations to six years if there was an omission from gross income in excess of twenty-five per cent (§ 6501(e) (1) (A)). But it has interposed no facts which would indicate that these statutory provisions have any application here. Instead the government has argued that the defense of the statute of limitations comes too late because it was not *363properly alleged in the pleadings in the court below, as required by Rule 8(c).
The presentation of a new claim or defense for the first time on appeal ordinarily is not favored. But when all is said and done, “Rules of practice and procedure are devised to promote the ends of justice, not to defeat them.” Hormel v. Helvering, 312 U.S. 552, 557, 61 S.Ct. 719, 721, 85 L.Ed. 1037 (1941). While the statute of limitations is an affirmative defense and Rule 12(h) provides that affirmative defenses not pleaded are waived, Rule 15(a) provides that leave to amend the pleadings “shall be freely given when justice so requires.” As Judge Forman’s opinion shows, the case has come to us on summary judgment. The record reveals that early in the proceedings the government itself, over the taxpayer’s objection, obtained leave to amend its complaint by adding a new count alleging that the taxpayer induced the government’s acceptance of the compromise offer by means of fraudulent misrepresentations as to his financial condition. The defendant had opposed the amendment on the ground that the claim would be barred by the statute of limitations, but the court below allowed the amendment after pointing out that the defendant could assert the bar of the statute in the answer to the amended complaint.
So far as it is relevant to the problem before us, the answer to the amended complaint referred back to and incorporated the averments of the original answer. Paragraph 5 of the answer to the complaint “denied that the commencement of this suit was timely made.” This allegation clearly was made in response to the averment in the comparable paragraph of the complaint, which alleged that by the offer of compromise “the statute of limitations for the commencement of this suit was extended, and the commencement of this suit is therefore timely made.” In its Third Defense the answer expressly alleged: “The alleged right of action set forth in the Complaint did not accrue within the Statute of Limitations as extended by the Offer in Compromise dated November 9, 1955, nor within the time it was extended by the Contract which arose from the acceptance of the said Offer in Compromise.”
The taxpayer argues that these allegations adequately alleged the bar of the statute of limitations against the assessment of the taxes on March 12, 1954, for the years 1948 and 1949. It is clear, however, that the original denial was couched in terms which followed the allegation of the complaint and this in turn dealt with the extension by the compromise agreement of the time within which the suit for collection of the taxes might be brought. This is far different from be statutory period for the assessment of the taxes. The Third Defense, which has just been quoted, is more expansive, but read in the circumstances which show that the defense of the statute of limitations was not thereafter pressed, it is fairly treated as a mere amplification of the earlier allegation and not as a new assertion of the bar of the statute of limitations against the assessment of these taxes.
I would therefore hold that the affirmative defense of the statute of limitations was not adequately pleaded by the defendant. Nevertheless, in the present circumstances I believe that the interests of justice would be served by affording the taxpayer an opportunity to seek an amendment of its answer in the court below.2 • The court below would have the facilities for the determination of any factual controversy regarding the existence of any barriers to the claim of the statute of limitations, either because of earlier compromise agreements whose existence was the subject of some speculation at bar, or for any other proper reason that may be presented. *364It would exercise its enlightened and informed discretion, and unless there appears clear reason to the contrary, I believe it should, in the interests of justice, allow the amendment. In that case, either on renewed motions for summary judgment or on trial, it could readily determine whether any of the assessments are barred by the statute of limitations and what claims nevertheless are still enforceable by the government either as the balance due on the compromise agreement or on assessments validly made within the period of the statute of limitations and now the subject of appropriate action.
Of course, if the statute of limitations had not run, or was no longer available to the taxpayer because of the waiver contained in the compromise agreement, amendment of the pleading would be useless. It is therefore necessary to consider the significant element of the right of the government to assess taxes for the years 1948 and 1949, beyond the three year period fixed by the statute, absent the exceptional circumstances which would either eliminate any applicable statute or prolong the period from three to six years. It seems from the face of the record that in two of the three years involved in the present suit taxes were assessed after the statutory period to do so had expired. Such assessment, it seems to me, could not be validated retroactively by the compromise agreement. Congress has expressly commanded in § 6501(c) (4) that waivers of the statute of limitations are effective only if entered into “before the expiration of the time prescribed * * * for the assessment of any tax.” The provision on its face is mandatory and the legislative history emphasizes that Congress intended to forbid assessment or collection of taxes after the running of the statutory period. The House version of § 276(b) of the Revenue Act of 1928, which first dealt explicitly with the subject (now § 6501(c) (4)), expressly provided for waiver of the statute of limitations, “Where before or after the expiration of the time prescribed * * * for the assessment of the tax, [the parties] * * * have consented in writing to its assessment after such time. * * * ”3 The Senate Committee on Finance, however, disapproved of this provision. It reported: “In the interest of keeping cases closed after the running of the statute of limitations, the committee has stricken out the provisions in the House bill which make waivers in the case of taxes for 1928 and future years valid when they have been executed after the limitation period has expired.” S.Rep. No. 960, 70th Cong., 1st Sess., 31 (1928). The Senate adopted its Committee’s proposed amendment to the bill and struck out the words “or after.” The House receded and accepted the Senate’s amendments.4 Other sections of the same enactment make it clear that this provision is part of a fabric of revenue legislation by which Congress sought to confer repose on taxpayers after the statute of limitations had run.5
In the light of this settled policy, I do not believe that the statutory prescription that a waiver of the statute of limitations must be made before the statute has expired may be obliterated by the simple device of including it as part of a compromise agreement under § 7122. The authority which Congress gave to the secretary or his delegate to enter into compromises of civil or criminal cases does not authorize him to assess or collect taxes after the statutory period has *365run. He may not, therefore, confer on himself by the agreement the right to do so.6 Indeed, a payment made after an untimely assessment is treated by the •Internal Revenue Code as an “overpayment” 7 which the taxpayer may recover by suit for refund.8
The compromise agreement is valid. Such an agreement swallows up all possible claims, including those for which there is no statute of limitations as well as those for which there are varying periods of limitations. It is authorized by § 7122 and is supported by the consideration that the controversy which it settles might include circumstances extending or even eliminating entirely the statute of limitations. A compromise agreement obligates a taxpayer to the payments required thereunder even though it may later turn out that the claim which the government had made against him was barred by the statute of limitations. This is far different, however, from a provision in a compromise agreement which, beyond the obligation to make the payments therein provided, undertakes in addition to waive the bar of a statute of limitations which has already run against the assessment or collection of the tax. The compromise provision is in harmony with § 7122. The provision waiving the statute of limitations flouts the prohibition of § 6501 (c) (4) and is not necessary to the effectiveness of § 7122. A recognition of this distinction will preserve the right of the taxpayer and the government to compromise possible liability without thereby uprooting the settled Congressional policy of repose from assessment or collection of taxes after the statutory time has run. In Staten Island Hygeia Ice «fe Cold Storage Co. v. United States, 85 F.2d 68 (2 Cir. 1936) the taxpayer in a suit for refund sought to avoid a compromise agreement and recover some of the payments made under it. The Court of Appeals rejected the taxpayer’s argument that the agreement was unenforceable because it was executed at a time when the collection of the compromised tax was barred by the statute of limitations. In the Staten Island case the taxpayer sought to invalidate the compromise agreement. Here the government does not seek recovery of the balance due under the compromise agreement. Instead it sues for the full amount of the taxes assessed even though they had already been compromised by the agreement. Those assessments which at that time were already barred by the statute of limitations may not be revived by the agreement, whether cast in the form of an express waiver of the statute of limitations or as a penalty in the event of default in the payment of the installments fixed in the agreement.
I would therefore vacate the summary judgment and remand the cause to the court below with direction to consider and act upon an application by the defendant for leave to amend his answer to the amended complaint by expressly pleading the bar of the statute of limitations to the assessment of taxes for the years 1948 and 1949; the cause thereafter to proceed according to law.
I am authorized to state that Chief Judge STALEY and Circuit Judge BIGGS concur in the views expressed in this dissent.

. Section 6501(c) (4) provides: “Where, before the expiration of the time prescribed in this section for the assessment of any tax * » * both the Secretary or his delegate and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.”

. 28 U.S.C. § 2106 authorizes us to “remand the cause and * * * require such further proceedings to be had as may be just under the circumstances.” See also Cahill v. New York, N. H. & H. R.R. Co., 351 U.S. 183, 76 S.Ct. 758, 100 L.Ed. 1075 (1956).

. H.R. 1, 70th Cong., 1st Sess., § 276(b); see also H.R. Rep. No. 2, 70th Cong., 1st Sess., 29 (1927). Compare, 1 Report of the Joint Committee on Internal Revenue Taxation, 16-17, 71-72 (1927).

. The conference report reads: “Amendments Nos. 131, 132, 133 and 134: The House bill provided that waivers filed after the expiration of the period of limitation, in the case of income taxes imposed by the new law, should be valid. The Senate amendments eliminate this provision; and the House recedes.” H.R. Rep. No. 1882, 70th Cong., 1st Sess., 18 (1928).

. See § 607 (now § 6401(a)); § 506, amending § 278(c) and (d) of the Revenue Act of 1926.

. Compare Botany Worsted Mills v. United States, 278 U.S. 282, 49 S.Ct. 129, 73 L.Ed. 379 (1929) and Uinta Livestock Corp. v. United States, 355 F.2d 761 (10th Cir. 1966) holding settlements valid only if procedure and substance are within § 7122.

. The 1939 Code, § 3770(a) (2) provided: “Any tax (or any interest, penalty, additional amount, or addition to such tax) assessed or paid after the expiration of the period of limitation properly applicable thereto shall be considered an overpayment and shall be credited or refunded to the taxpayer if claim therefor is filed within the period of limitation for filing such claim.” The 1954 Code, § 6401(a) contains a substantially similar provision.

. Los Angeles Shipbuilding & Drydock Corp. v. United States, 289 F.2d 222, 231-232 (9 Cir. 1961); see McEachern v. Bose, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46 (1937), construing § 607 of the 1928 Act.