Court of Claims.
*187 *188 *189 *190 *191 *192 *193 *194 Errett G. Smith, of Washington, D. C., for plaintiff.
J. W. Hussey, of Washington, D. C., and Sewall Key, Acting Asst. Atty. Gen. (Robert N. Anderson and Andrew D. Sharpe, both of Washington, D. C., on the brief), for defendant.
Before JONES, Chief Justice, and HOWELL, MADDEN, WHITAHER, and LITTLETON, Judges.
LITTLETON, Judge.
Plaintiff sues to recover $10,093.11 income tax plus certain interest, alleged to have been overpaid for 1938 and 1939 by reason of the failure of the defendant to allow deductions for certain nontrade and nonbusiness expenses which were not allowable at the time plaintiff's returns were audited but which plaintiff claims are allowable now by reason of Section 121(a) (2) of the Revenue Act of 1942, 56 Stat. 798, 26 U.S.C.A.Int.Rev.Acts, page 187. The defense is not only on the merits but also on the ground of a settlement agreement entered into by the parties at the time deficiencies were determined for the two years.
Plaintiff filed returns for 1938 and 1939 which disclosed net income in the respective amounts of $40,509.41 and $87,245.93, and tax liability in the respective amounts of $6,050.36 and $24,103.08. In the return for 1938 plaintiff claimed deductions of $12,959.39 for hurricane loss to landscaped trees, $19,444.10 for insurance premiums paid, and $3,000 for legal fees paid; and in the return for 1939 claimed deductions of $4,552.62 for legal fees paid. After an examination by a revenue agent substantially all of the deductions mentioned were recommended for disallowance with a resulting deficiency for each year. Plaintiff protested the proposed disallowance and thereafter conferences were held with plaintiff's representatives. A further investigation was made by a revenue agent. As a result of these discussions, the representatives of the Commissioner agreed to recommend for allowance a deduction in the amount of $8,000 for the hurricane loss in lieu of the $12,959.39 claimed by plaintiff. Plaintiff abandoned his contention that the other deductions claimed were allowable. The Commissioner's representatives also agreed to make an adjustment in plaintiff's favor on account of certain dividends. The result reached by the parties was an agreed net income for 1938 of $67,655.02 and for 1939 of $91,297.16.
Shortly thereafter, plaintiff's tax liability was recomputed for 1938 and 1939 on the income agreed to, showing deficiencies for each year. On May 5, 1941, the Commissioner's representative advised plaintiff that "your [plaintiff's] proposal for settlement" of the tax liability on the basis agreed upon had been accepted and enclosed a document, set out in finding 6, which provided for a waiver of the statutory restrictions on the assessment and collection of the tax and also provided inter alia that upon execution by plaintiff and approval by the Commissioner "the case shall not be reopened nor shall any claim for refund be filed or prosecuted respecting the taxes for the years above stated [1938 and 1939], in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations." Plaintiff signed the formal agreement May 6, 1941, and it was formally accepted on behalf of the Commissioner on the same day (findings 7 and 8). The deficiencies agreed upon were paid by plaintiff on June 2, 1941.
On November 19, 1942, after the enactment of the Revenue Act of 1942, which contained in Section 121 thereof provisions for the allowance of certain nonbusiness expenses as deductions and made such provisions retroactive for the years 1938 and 1939, plaintiff filed claims for refund for those years (findings 10 and 11), claiming that substantially the same deductions, except in the case of the hurricane loss, *195 which had been disallowed by the Commissioner, should now be allowed. On December 29, 1943, the claims were disallowed by the Commissioner on the ground that the execution by plaintiff of the document, set out in finding 6, and its acceptance by the Commissioner precluded the allowance of the claims for refund (finding 12). This suit followed.
While the defendant is now contesting the allowance sought both on the ground of the deductibility of the items in question under Section 121 of the Revenue Act of 1942, and on the finality of the agreement executed by the parties, we find it unnecessary to consider the first defense since we are of the opinion that plaintiff is precluded under the second defense from maintaining suit on these claims. At the time this agreement was made and executed there was a substantial controversy between plaintiff and the Commissioner as to the former's correct tax liability for 1938 and 1939. Prior to the time the document was executed, the Commissioner had disallowed not only the items involved in this suit but also another substantial item. After protest by plaintiff and conferences both in Washington and New York City, and after at least two investigations had been made by a revenue agent, the parties reached an agreement as to plaintiff's correct net income under the law as it then existed. Whether the agreement was reached as a result of a compromise, or as a result of concessions by both parties, is not important. The conclusion is inescapable from the evidence that there was a meeting of minds as to the final disposition of the case. When that occurred, the Commissioner recomputed plaintiff's tax liability and transmitted to plaintiff the settlement document wherein was set out a deficiency for each of the years. In transmitting that document to plaintiff at that time, the Commissioner stated that he was accepting plaintiff's "proposal for settlement," and also referred to the document as an "agreement" when executed by plaintiff and approved on his behalf. In returning the document after execution, plaintiff likewise referred to it as an "agreement." See finding 7.
We are convinced from the facts that the document which plaintiff executed and the Commissioner accepted was not a mere waiver of restrictions on assessment and collection of a deficiency of tax on usual Form 870, as plaintiff seems to urge. That form was used as a starting point but important additions and alterations were made in it to incorporate the full terms of the agreement. This was done "as a basis for closing the case." By that agreement the parties did much more than agree on the amount of plaintiff's tax liability, as is shown by the two paragraphs which were added to the stated form which they used as a vehicle to set up their agreement finally closing the case.
In language which we think is too clear to be misunderstood and which would be rendered meaningless if plaintiff's interpretation were to prevail, the agreement states: "If this proposal is accepted by or on behalf of the Commissioner, the case shall not be reopened nor shall any claim for refund be filed or prosecuted respecting the taxes for the years above stated, in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations." There is no contention that there was any fraud, malfeasance, concealment, misrepresentation, or mistake in calculation. How this could be interpreted other than to preclude plaintiff from filing a claim for refund or prosecuting this suit is difficult to understand.
Plaintiff says, however, that the agreement is lacking in mutuality for the reason that the Commissioner was left free to reopen the case and assess further deficiencies. We do not so interpret the document. It is true, as will be noted from the document set out in finding 6, that on the prescribed Form 870 there was a provision which expressly stated that the execution of the agreement "does not * * * preclude the assertion of a further deficiency in the manner provided by law should it subsequently be determined that additional tax is due," but when the parties prepared and executed the agreement here involved that provision was stricken. A reasonable interpretation of *196 the entire document is that what the parties sought to do was to close the case in such a manner that it could not be reopened either for a refund or for the assessment of deficiencies except in the case of fraud, malfeasance, etc. We see no reason for interpreting the document otherwise. That a closing agreement under Section 3760 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, ยง 3760, might have been entered into is not conclusive on the question whether the results which the parties desired to accomplish could not as well have been accomplished through the agreement which they here executed.
The case of Botany Worsted Mills v. United States, 278 U.S. 282, 49 S. Ct. 129, 132, 73 L. Ed. 379, upon which plaintiff relies, involved an agreement of settlement which the Court held did not preclude the reopening of the case upon a claim for refund. However, that case is easily distinguishable from the case at bar. In the Botany Worsted case the agreement was informal and oral in character and was agreed to only by subordinate officials in the Internal Revenue Bureau. There was no formal approval by or for the Commissioner. Many of the elements in the formal agreement involved in this case were lacking in that case. Moreover, we do not understand that case to hold, as plaintiff contends, that under no circumstances will a closing agreement be held binding unless executed in accordance with Section 3760 of the Internal Revenue Code (and a prior similar statute). In discussing the finality of such agreements the Court said:
"And, without determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel, it suffices to say that here the findings disclose no adequate ground for any claim of estoppel by the United States. [Emphasis supplied.]"
At the time the agreement in this case was executed the statute had not run on the collection of further deficiencies, but when the claims for refund were filed the statute had run. It would obviously be inequitable to allow the plaintiff to renounce the agreement when the Commissioner cannot be placed in the same position he was when the agreement was executed. A clear case for the application of the doctrine of equitable estoppel exists and should be applied. Cf. R. H. Stearns Co. v. United States, 291 U.S. 54, 54 S. Ct. 325, 78 L.Ed 647.
The same result was reached in Baldwin v. Higgins, decided by the United States District Court for the Southern District of New York, June 23, 1937 [not officially reported but set out in American Federal Tax Reports, Vol. 19, page 1341] and affirmed by the Circuit Court of Appeals for the Second Circuit, 100 F.2d 405. A similar modified Form 870 was involved though an even stronger case there existed for the taxpayer for the reason that the portion of the form with respect to the assertion of a further deficiency which was stricken in the case at bar was not stricken in that case. In that case the Court stated:
"The waiver and consent agreement (Form 870, Exhibit `G') is a binding contract and it was accepted and acted upon by the Commissioner. (R. H. Stearns v. United States, 291 U.S. 54, 61, 62, 54 S. Ct. 325, 78 L. Ed. 647; Backus v. United States, Ct.Cl., 59 F.2d 242; Walker v. Alamo Foods Co., 5 Cir., 16 F.2d 694)."
Some support for plaintiff's position is found in Joyce v. Gentsch, 6 Cir., 141 F.2d 891, 895, where a similar Form 870 was involved and plaintiff was allowed to reopen the case. However, in that case the portion stricken from the form in this case was not stricken, and the Court in its opinion stated: "The right to assess a further deficiency was expressly reserved."
In Ross v. United States, Ct.Cl., 75 F. Supp. 725, we held that where a taxpayer files a petition with the Tax Court and a judgment thereon becomes final, he cannot thereafter file a claim for refund and obtain the benefit of the retroactive statute with which we are concerned even though the statute has not run on the filing of a claim for refund. In this case instead of filing a petition with the Tax Court, plaintiff waived his right to go to the Tax Court consented to the assessment of the deficiencies, and in effect entered into an agreement which effected a finality similar to that which would have obtained had he *197 gone to the Tax Court. We can find no reason that would support the conclusion that Section 121, supra, was intended to apply in a case such as this.
In view of the foregoing, we find it unnecessary to consider whether the so-called nonbusiness expenses claimed by plaintiff are deductible. We have, however, made findings with respect to their general nature since these were the expenses which were likewise in controversy before the formal settlement agreement was executed and illustrate the many ramifications of plaintiff's activities which were before the Commissioner at that time. Plaintiff's contention that the Commissioner in his consideration of the claims for refund conceded that the items were deductible under Section 121 of the Revenue Act of 1942 is without merit. On the contrary, after the claims were filed, the Commissioner gave plaintiff notice that he would contest the claims not only on the basis of the agreement but also on their merits, and that was done.
Plaintiff is not entitled to recover and the petition is dismissed. It is so ordered.
HOWELL, MADDEN, and WHITAKer, Judges, and JONES, Chief Justice, concur.
