Court Opinion

ID: 8595554
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:02:42.313944+00
Date Added: 2024-06-11T16:54:54.244577
License: Public Domain

Kunzig, Judge,
dissenting:
In this cabaret excise tax refund suit the majority overturns the recommended decision of Trial Judge Bernhardt and denies plaintiff a recovery for taxes paid to defendant despite the fact that plaintiff was never liable to defendant for the taxes. The primary basis for the majority’s holding is that plaintiff paid the tax as a “volunteer” on behalf of Summertime Cafe, Inc., and produced insufficient facts to warrant his recovery on an implied in fact contract because he did not make the tax payments under duress. I agree that plaintiff is not entitled to recover on an implied in fact contract theory in the instant case. However, I differ with the majority on a second phase of the case and would adopt Trial Judge Bernhardt’s recommendation that plaintiff has established a right to recover based on section 7422(b) of the Internal Revenue Code of 1954.1
According to the majority, in order to maintain an action for the refund of taxes, the plaintiff must “be the taxpayer who has overpaid his own taxes.” The court cites Economy Plumbing and Heating Co. v. United States, 200 Ct. Cl. 31, 470 F. 2d 585 (1972) for this proposition. Undoubtedly, “persons who are not taxpayers * * * within the system” have no standing to maintain a refund suit. Economy Plumbing, supra, 200 Ct. Cl. at 37, 470 F. 2d at 589. However, the majority opinion in the instant case conveniently ignores a crucial determination by the trial judge:
In contrast to Economy Plumbing, the present plaintiff is clearly within the administrative system defined by the court because he was assessed a tax deficiency as a tax*426payer, had. been formally audited as a taxpayer, paid the tax as a taxpayer, and filed and was denied his refund claim as a taxpayer.
Having treated plaintiff as a taxpayer at each stage of the administrative process, defendant should not now be heard to say that plaintiff is an “outside third party.”
Defendant’s “nontaxpayer” argument appears even more tenuous when one considers the fact that until the final stages of the administrative process plaintiff appeared fro se. Further, the record is totally silent as to any attempts by defendant to recover the tax from the proper party, Summertime Cafe, Inc. I would hold, as did the trial judge, that plaintiff has standing to maintain the present action as a taxpayer.
Clearly, if plaintiff is entitled to bring the instant action as a taxpayer it is irrelevant that he did not pay the tax under duress. § 7422 (b), sufra.
Moreover, although plaintiff camiot recover if 'he was a volunteer, Fidelity & Casualty Co. v. United States, 203 Ct. Cl. 486, 497, 490 F. 2d 960, 967 (1974), he need only prove “some element which would remove [him] * * * from the fatal category of pure volunteer.” J. C. Pitman, & Sons, Inc. v. United States, 161 Ct. Cl. 701, 706, 317 F. 2d 366, 369 (1963). In the case at bar the trial judge correctly found that plaintiff established such an element by showing that both he and defendant operated under a mutual mistake of fact as to the contents of plaintiff’s contract to sell Summertime Cafe, Inc. Both parties believed that it provided for a sale of assets (in which case plaintiff would have been liable for the cabaret tax) when in fact it provided for a sale of stock (and plaintiff was not liable for the tax). Therefore, plaintiff was not a volunteer and is able to bring the present action.
Plaintiff had standing as a taxpayer. He was not a volunteer. Accordingly, all plaintiff needed to show in the instant case was that a tax was wrongfully collected from him, a proper refund claim was submitted which was denied by the Internal Eevenue Service and a timely action was brought in the present suit. From the record it is apparent that plaintiff has met such prerequisites. I would, therefore, hold for plaintiff.
*427FINDINGS OF FACT
1. The plaintiff, Francis Collins, currently resides at 14 Summit Avenue, Cbelsea, Massachusetts. Until 1973, Mr. Collins resided at 54 Eliot Eoad, Eevere, Massachusetts.
2. In December of 1963, Mr. Collins purchased Summertime Cafe, Inc., a Massachusetts corporation. In connection with the purchase, Mr. Collins retained a Boston attorney.
3. The principal asset of Summertime Cafe, Inc., which operated the Candy Lounge, was a seasonal liquor license. The Candy Lounge, which was operated from April 1 to November 30 during each of the years in issue, was a nightclub which offered alcoholic beverages for purchase and provided band entertainment.
4. By an agreement dated August 3,1965, Mr. Collins sold the stock of 'Summertime Cafe, Inc., to Mr. Harold Loew for $14,000 in cash plus an amount equal to the wholesale price of the liquor inventory at the time of closing, all deposits with public utilities, and cash on hand, subject to the adjustments for taxes described in finding 19, infra.
5. Subsequent to sale of Summertime Cafe, Inc., Mr. Collins’ only contact with the corporation or the purchaser of the corporation was as an occasional patron of the nightclub.
6. In the spring of 1968, Mr. Collins was contacted by Eevenue Agent D. E. Harrington, who was conducting an audit of 'Summertime Cafe, Ine.’s federal income tax returns for the years 1964 and 1965. In connection with this audit, Mr. Harrington had five conferences with Mr. Collins at his home.
7. The main item under investigation by Mr. Harrington was the band expense deduction claimed by Summertime Cafe, Inc., on its 1964 and 1965 federal income tax returns. Although Mr. Collins had turned the books of the corporation over to the purchasers in 1965, he had retained the individual bills and receipts for each band payment and made them available to Mr. Harrington for use in his audit.
8. After a review of the band receipts, which were largely handwritten by Mr. Collins and signed by the individual band leaders, Mr. Harrington told Mr. Collins that the claimed deductions for band expenses were doubtful and *428that, if band entertainment had been provided, a cabaret tax would then be due.
9. The cabaret tax referred to by Mr. Harrington was an excise tax in force during 1984 and 1965. The tax was based on gross receipts during the period in which band entertainment was provided. If the band expenses were allowed, the corresponding cabaret tax would automatically arise.
10. During the course of the audit of Summertime Cafe, Inc.’s, 1964 and 1965 federal income tax returns, Mr. Harrington requested from Mr. Collins retained copies of his personal federal income tax returns.
11. As the result of Mr. Harrington’s audit, deficiencies in federal income taxes for the years 1964 and 1965 were proposed against both Summertime Cafe, Inc., and Mr. Collins in audit reports mailed under cover letters dated May 22, 1969. The audit report for Summertime Cafe, Inc., was mailed to the corporation in care of Francis Collins. The proposed deficiency was mainly based on the disallowance of band expense deductions claimed for the years 1964 and 1965 and the proposal of a 5 percent negligence penalty.
The deficiency proposed against Mr. Collins resulted from the inclusion in his income of the amounts disallowed as band expense deductions to the corporation, on the ground that Mr. Collins, as the sole shareholder of the corporation, received a constructive dividend in those amounts. In addition, for the year 1964, Mr. Collins was determined to have additional tip income in the amount of $135.
12. After the issuance of a revenue agent’s report and a letter from the Internal Kevenue 'Service containing an explanation of appeal rights, a district conference may be requested. If, and only if, a conference is requested, the case is assigned to a district conferee. If agreement is not reached at the district conference level, an appellate conference may be requested or a notice of deficiency may be issued to allow the filing of a petition in the United States Tax Court.
13. As the result of a request by Mr. Collins, four district conferences were held between Mr. Collins and John MacDonald, District Conferee, Internal Eevenue Service, who *429bad been assigned to the cases of Summertime Cafe, Inc., and Francis Collins in June 1969.
14. In .preparation for his conferences with Mr. Collins, Mr. MacDonald received the case file and conducted legal research in the area of substantiation of band expenses.
15. During the first conference, which took place in July of 1969, Mr. MacDonald raised the question of whether Mr. Collins had sold the stock or the assets of Summertime Cafe, Inc., in 1965 and explained that if the assets had been sold, Mr. Collins might be liable for the corporate taxes. However, as Mr. MacDonald explained, if the stock of the corporation had been sold, the continuing corporation rather than Mr. Collins would be liable for the tax deficiencies, although the purchasers might look to Mr. Collins for reimbursement if the sale contract contained a warranty clause. After making this explanation, Mr. MacDonald requested a copy of the sale contract from Mr. Collins so that a determination as to the nature of the sale could be made.
Mr. Collins appeared to Mr. MacDonald to understand the explanation given and neither asked questions nor requested any further explanations. Since Mr. Collins appeared to understand the explanation, Mr. MacDonald felt that it was unnecessary to repeat the request.
16. In response to Mr. MacDonald’s explanation and request for a copy of the sale contract, Mr. Collins became visibly agitated and stated that he didn’t want to discuss the sale and that he would pay the taxes. Thereafter, Mr. MacDonald considered Mr. Collins to be, and treated him as, a volunteer.
17. During the discussion of the question of Mr. Collins’ personal liability, Mr. MacDonald did not state that Mr. Collins was liable for the corporation’s taxes as a transferee or in any other capacity.
18. Although Mr. Collins could have obtained a copy of the sale contract at any time, he never produced the document in response to Mr. MacDonald’s request and never tried to give a copy of the document to Mr. Harrington.
19. The sale was in fact a sale of stock and the contract does in fact contain a warranty clause stating that all taxes of the corporation other than then-current taxes would be *430paid in full and that all required income reports would be filed by the time of purchase. Further, taxes for the current year (1965) were to be prorated between the buyer and seller and a corresponding adjustment made to the sale price of the corporation. Later arising tax liabilities were to be handled as follows:
if, at any time, subsequent to the consummation of this purchase and sale, it shall be finally determined by the taxing authorities that the aforementioned adjustment of taxes was incorrect, then a readjustment between the 'SELLER and the BUYER, shall be made.
Section 9 of the contract, which is ambiguously and ungrammatically worded, purports to limit the seller’s warranty to a period of 90 days following the consummation of the contract, and creates a question as to whether that period would apply to taxes for the current year. However, that uncertainty is not relevant to the present issue of plaintiff’s tax liability vis-a-vis the defendant, but relates only to plaintiff’s liability to reimburse the corporation for any taxes it would be required to pay.
20. In cases involving transferee liability (the liability of a transferee of assets for taxes owed by the transferor en tity), the transferor’s tax liabilities are assessed against the transferee. In processing a transferee case, special forms and reports are required to be prepared and submitted by the revenue agent handling the case. Mr. MacDonald was familiar with the procedures required in transferee cases and followed these procedures on an average of three times per year in various cases assigned to him. It was his practice to follow these procedures in all cases involving transferee liability whether or not liability as a transferee is contested. In the processing of this case, none of the special procedures were followed and no transferee reports or transferee statements were prepared by Mr. MacDonald.
21. As the result of legal research conducted prior to these conferences, Mr. MacDonald had concluded that the band expense deductions claimed by Summertime Cafe, Inc., would be allowable if certain infomation were provided by Mr. Collins. Mr. MacDonald requested from Mr. Collins the receipts signed by the various band leaders and other specific information relating to the provision of live enter*431tainment. On the basis of tibe receipts and other information provided by Mr. Collins, Mr. MacDonald concluded that the band expenses were allowable as deductions. Mr. MacDonald also concluded that with respect to the separate case of Mr. Collins individually, the only adjustment would be the additional tip income resulting in a deficiency of under $30.
22. As Mr. MacDonald had explained to Mr. Collins at their first conference, if the band expenses were allowable as deductions, excise (cabaret) taxes would automatically become due. At the last conference with Mr. Collins, Mr. MacDonald computed the cabaret taxes due from the corporation and discussed the imposition of a penalty for failure to file the required cabaret tax returns. Subsequently, cabaret tax returns were prepared by Mr. MacDonald and sent to Mr. Collins.
23. When dealing with individuals who are not represented by counsel, it was Mr. MacDonald’s practice to provide to the individual certain assistance which would normally be provided by counsel. In this case, for example, Mr. MacDonald explained to Mr. Collins the tax consequences of the various types of sale, offered to examine the sale document to make a determination as to Mr. Collins’ liability, and suggested the type of evidence necessary to substantiate the corporate expenses in issue.
24. Mr. Collins testified that he would not have continued with the conferences with Mr. MacDonald if he had been unwilling to pay the taxes and that he did not indicate to Mr. MacDonald in any way that he was unwilling to pay the taxes under consideration. After his last conference with Mr. Harrington, Mr. Collins believed that the final figure might be as low as $1,000 and he “figured it’s easier to pay than to fight it.”
25. At this point, Mr. Collins retained Peter Sang as counsel to represent him with respect to the tax adjustments in issue. From that point on, further discussions with Mr. MacDonald concerning substantive matters with respect to Mr. Collins’ personal taxes and the corporate tax matters were handled solely by Mr. Sang.
26. Approximately a week after their last conference, Mr. Collins telephoned Mr. MacDonald to inform him that he *432(Mr. Collins) had retained counsel. Mr. MacDonald requested and received from Collins a signed power of attorney form, dated August'26,1969.
27. After the power of attorney form had been submitted, Mr. MacDonald and Mr. Sang discussed the proposed imposition of a penalty for late filing of the cabaret tax returns. As the result of this discussion, an affidavit signed by Mr. Collins and Mr. Sang was received by Mr. MacDonald. The affidavit contained Mr. Collins’ explanation of the failure to file the required carabet tax returns and concluded with the following paragraph:
Collins now knows and he admits that cabaret taxes were due for 1964 and 1965 and must now be paid. Based upon the circumstances surrounding his entrance into the nightclub business and his record of having filed all necessary employment forms, it is felt that there should be no imposition of any penalty for late filing. Upon learning of the fact that cabaret taxes are due, Collins has been willing to pay these taxes plus interest.
Based on the contents of this affidavit, Mr. MacDonald recommended that the penalties not be imposed.
28. Subsequent to receipt of the affidavit, on or about September 12, 1969, Mr. Collins submitted the executed cabaret tax returns and paid the following proposed tax liabilities of Summertime Cafe, Inc.:

Cabaret Tax

Quarters ending:
June 30, 1964. $700. 00
Sept. 30, 1964. 700. 00
Dec. 31, 1964. 469. 00
$1, 869. 00
June 30, 1965. 907. 00
Sept. 30, 1965 605. 00
Income Tax 1965 (tax and penalties) 367. 85
1, 512. 00
367. 85
$3, 748. 85
29.Mr. MacDonald did not discuss this case with Mr. Harrington, the original revenue agent, at any time. Mr. Harrington died in the summer of 1973, about the time that the plaintiff filed the petition in this case.
*43330. On March. 27,1971, Mr. Oollins filed claims for refund of the corporate taxes listed in finding 28, supra. 'Statutory-notices of the disallowance of these claims were issued on February 3,1973.
ultimate RINDING OE FACT
Based on all the relevant evidence presented in this case, Mr. Collins’ payment of the proposed tax deficiencies of Summertime Cafe, Inc., was voluntary and was not induced by duress exerted by agents of the Internal Bevenue Service.
CONCLUSION OE LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that judgment is entered for the defendant and plaintiff’s petition is dismissed.

 A taxpayer may bring an action for a refund “whether or not such tax * * • has been paid under protest or duress.*' § 7422(b), Int. Rev. Code of 1954.