Fruehauf Corp. v. United States

477 F.2d 568, 201 Ct. Cl. 366, 31 A.F.T.R.2d (RIA) 1126, 1973 U.S. Ct. Cl. LEXIS 190

• Court: United States Court of Claims
• Decided: April 13, 1973
• Docket: No. 91-70; No. 191-71
• Status: Published

Opinions

CoweN, Chief Judge,

delivered the opinion of the court;

These actions for the refund of income taxes present another of the perplexing questions that often arise with respect to the computation of interest under the provisions of the Internal Revenue Code. The cases were argued together because Count I of Fruehauf’s petition and Metro-Goldwyn-Mayer’s petition involve similar questions of law and fact. These issues relate to the assessment of interest on potential corporate tax deficiencies and the awarding of interest on corporate tax overpayments. Specifically, we are called upon to decide the proper methods by which to set off the overpay-ments against the interest due the Government and to determine when that interest becomes a liability for the purposes of the set-off. The issues which are common to both suits are considered in Part I hereof.

Count II of Fruehauf’s petition involves a separate and distinct issue from the claim asserted by Metro-Goldwyn-Mayer and is considered in Part II of this opinion.

I

At oral argument that parties presented a hypothetical statement of facts which they agree is sufficiently similar to the true facts to provide a basis for deciding the legal issues. The hypothetical facts so presented are as follows:¹

An Internal Eevenue Service audit of plaintiffs’ 1960 tax returns revealed a “potential” deficiency of $1,100,000. The audits also revealed a large net operating loss for 1963. The 1963 net operating loss was carried back to 1960, and the carryback not only extinguished the “potential” deficiency, but also created an overassessment of $500,000 for 1960.

There is no question that the Government is entitled to interest on the “potential” deficiency running from 1960 to the end of the loss year 1963. This interest amounts to $200,000 and specific statutory authority therefor is found in Sections 6601 (e) and (g) of the Internal Revenue Code of 1954. After assessing this interest, the Internal Eevenue Service applied $200,000 of the $500,000 overassessment in satisfaction of such interest due the Government even though the deficiency interest was not actually assessed until February 14,1969. Interest on the remaining $300,000 was allowed from September 1, 1963, the first day after the end of the applicable loss year, to February 14, 1969, when the interest due the Government was assessed.

By relating back the interest actually assessed in 1969 to 1963 in order to make the offset, the Service denied plaintiffs interest on the $200,000 for six years, i.e., from the loss year 1963 to 1969. Plaintiffs claim that statutory interest should be awarded on the $200,000 from the loss year to February 14, 1969, the date of the assessment of interest on the deficiency. We agree.

The resolution of this issue depends primarily upon the interpretation of Treasury Regulation § 301.6611-1.² This regulation prescribes, in part, that there can be no overpayment of tax until the entire tax liability, including interest, is satisfied:

§ 301.6611-1. Interest on overpayments.

(a) General rule. Except as otherwise provided, interest shall be allowed on any overpayment of any tax at the rate of 6 percent per annum from the date of overpayment of the tax.

(b) Date of overpayment. Except as provided in section 6401 (a), relating to assessment and collection after the expiration of the applicable period of limitation, there can be no overpayment of tax until the entire tax liability has been satisfied. Therefore, the dates of overpayment of any tax are the date of payment of the first amount which * * * is in excess of the tax liability (including any interest, addition to the tax, or additional amount) and the dates of payment of all amounts subsequently paid with respect to such tax liability. * * *

However, the regulation goes on to provide special rules in the cases of credits:

(h) Period for which interest allowable in case of credits—

(1) General rule. If an overpayment of tax is credited, interest shall be allowed from tbe date of overpayment to tbe dne date (as determined under subparagraph (2) of this paragraph) of tbe amount 'against which such overpayment is credited.

(2) Determination of due date— * * *

$ $ $ * $

(v) Assessed interest. In the case of a credit against assessed interest, the d/ae date is the date of the assessment of such interest. [Emphasis added.]

& $

The Government recognizes that the proper interpretation of the regulation is crucial to the decision in this case and argues that the term “entire tax liability,” as used in section (b) thereof, includes interest, whether assessed or unassessed. Thus, it maintains that the interest on the potential deficiency was a liability at the end of the loss year 1963, even though the interest was not assessed until February 14, 1969. If such a construction of section (b) is adopted, it would conflict with section (h) (2) (v) or render the latter section meaningless. In this case, the date of the overpayments by plaintiffs (the day following the last day of the loss year) was September 1, 1963, and section (h) provides that interest on the overpayments shall be allowed to the due date of the amounts against which they are credited. To find the due date, we turn to section (h)(2) (v), which states unequivocally that it is the date the interest is assessed which, in this case, was February 14, 1969. It is our conclusion, therefore, that until the due date of the interest (the date of the assessment of the interest), there is no tax liability as that term is used in the pertinent regulation. This construction of the regulation enables us to read section (b) in harmony with section (h) (2) (v) and thus avoid the conflict that would exist if defendant’s view is accepted.

Prior to assessment, the liability for deficiency interest was only a contingency. A contingent liability is not the same as the “potential” liability which resulted from the determination of the basic tax deficiency for the year 1960. The 1960 deficiency was “potential” only because there was an immediate offsetting carryback loss for 1963. The liability was determined and fixed as of the filing of the 1960 return and as we have said, the Government is entitled to interest on such deficiencies from the due date (which is the date of the filing of the 1960 tax returns) until the end of the loss year. Therefore, it is inherent in the statutory scheme that the due date determines and fixes the liability for both tax and interest.

It was the “current” liability concept that was decisive in Northern Natural Gas Co. v. United States, 173 Ct. Cl. 881, 351 F. 2d 310 (1965). In that case, the Internal Revenue Service was restricted from assessing the interest on potential deficiencies pending a determination by the Tax Court of the basic tax due. The parties finally stipulated a settlement in 1961, and the Service tried to relate the satisfaction of the deficiency interest back to 1952, thus avoiding interest on a like amount of overpayment during that time interval. In rejecting the Government’s contention, the court stated:

[P]laintiff “knew” in 1952 * * * that it would most likely be liable for some amount [of interest] regardless of section 722 [relief]. However, there was no “current” liability because the Commissioner was restricted from assessing any deficiency during the Tax Court proceeding * * *, and also, because the potential deficiency is based on the “corrected” deficiency which was not determined until 1961. It would not be proper for us, on these facts, to mahe am, ex post facto credit of the 1952 remittance against the potential deficiency interest item which was finalized by the Tax Court decision on December 6, 1961. Accordingly, we find that the interest on the potential deficiencies should be deducted from plaintiff’s total overpayment of taxes and interest as determined in 1961, rather than from the 1952 remittance. [173 Ct. Cl. at 892. Emphasis added and footnote omitted.]

The instant cases are even stronger for plaintiffs because of the statute and regulation before us. Since there was no interest liability until February 14, 1969, there remained outstanding a net overassessment of $500,000 from 1963 until 1969, which is permitted to draw interest under the provisions of Section 6611 of the Code.

Defendant’s cross-motions rely primarily upon Rev. Proc. 60-17, 1960-2 cum. bull. 942. This revenue procedure is entitled “Guides and instructions to be followed with respect to the computation of restricted interest under the Internal Revenue Codes of 1954 and 1939.” In its brief, defendant quotes tibe following from the procedure:

Any part of 'an overpayment attributable to a carryback loss which is extinguished by a general adjustments deficiency * * * * No interest allowable (In effect, interest is allowed, by terminating interest on the deficiency on the last day of the loss year.)³

The defendant asserts that the quoted procedure is appropriate for application under the facts of this case and plaintiffs agree. They concede that they are not entitled to any interest on that portion of the overassessment attributable to the carryback loss that extinguished tibe potential deficiency of 1960. As previously stated, plaintiffs have also stipulated that the Government is entitled to interest on the potential deficiency running to the last day of the loss year, which was August 31,1963. Therefore, the quoted procedure does not affect the real issue in these cases.

Although it is not quoted in defendant’s brief, there is another section of Rev. Proc. 60-17 which does support defendant’s position. It is set forth in a table appearing in Section 3 (4) of Rev. Proc. 60-17.⁴ This portion of the revenue procedure states that when 'an overpayment is applied as a credit to imp aid interest due for the same year and for the same type of tax, no interest is allowable. It also states that when the overpayment is applied as a credit to unpaid interest due for another year or another type of tax, interest Should be computed from the date of the overpayment to the date of the assessment of the amount to which the credit is applied. We believe that this is the revenue procedure upon which defendant bases its argument. It is defendant’s contention that the section of the regulation, upon which plaintiffs rely, relates only to the crediting of overpayments and amounts due for different years and not to the determination of an overpayment for a single year. However, we find nothing in Section 6611 (b) of the Code or in Treasury Regulation 301.6611-1 which authorizes such a distinction. On the contrary, this part of Rev. Proc. 60-17 is at variance with the regulation and is therefore entitled to little or no weight. There is no doubt that the regulation takes precedence over the revenue procedure, and this is acknowledged by the following statement which appears on the first page of the introduction of each Cumulative Bulletin:

Revenue Rulings and Revenue Procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other oases, and may be cited 'and relied upon for that purpose. * * *

The Government also argues that section 6611 and the pertinent regulation must be interpreted in accordance with defendant’s position in order to carry out the purpose of Section 87 of the Technical Amendments Act of 1958, 72 Stat. 1606. We find no such purpose in our examination of the statute or its legislative history and conclude that the regulation, as we have construed it, fully complies with the intent of Congress. The evil at which the statute was aimed was the disparate running of interest on overpayments and underpayments, and the remedy provided by the Act was termination of the interest on both during any period of time to the extent that they offset each other. The problems associated with the prior law are described in the following portion of the general statement in the Senate Committee Report:

Section 87 — Correlation of interest where overpayment of tax is credited against widerpayment of tax

(a) General correlation of interest. — Under present law situations can arise where, even though underpayments and overpayments offset each other, the Internal Revenue Service collects more interest than it pays or the taxpayer is entitled to more interest than he owes the Government. Section 6611(b) (1) of the code provides, for example, that interest on an overpayment which is credited against an additional assessment is to be allowed from the date of the overpayment to the date of the assessment. However, interest on an additional assessment which is offset against an overpayment nms from the due date of the return wntil the credit is scheduled, which may ~be long after the date the interest on the overpayment is cut off by the assessment of the additional amount. In such cases, although the underpayment 'and overpayment offset each other, the Internal Eevenue Service collects more interest than it pays. On the other hand, where a taxpayer agrees to a determination and signs a waiver of the restrictions on an assessment, interest on an overpayment may run during the period between the '30th day after the waiver and the issuance of notice and demand while interest on an offsetting deficiency may be suspended. In such a case it is the taxpayer who is entitled to more interest than he owes even though the overpayment an'd underpayment offset each other.

The House bill eliminates these erratic differences of present lana by terminating the interest both as to the overpayment and umderpayment during any period of time to the extent they of set each other * * *. [Emphasis added.] [1958-3 cum. bull. 922, 1020-1021.] [S. Rep. No. 1983, 85th Cong., 2d Sess., pp. 97-100 (1958).]

The technical explanation in the Senate Report further explains the purpose of the Act:

* * * Interest on a credited overpayment would in either case now run only from the date of the overpayment to the original due date of the amount against which it is credited. Thus, if it is credited against an underpayment antedating the overpayment, no interest would run on the overpayment at all. Since interest would otherwise run on the overpayment from the date of overpayment to the date of refund, interest on the underpayment will stop running as of the date of the overpayment; that is, when the mutuality of indebtedness arises. Similarly, in the case of an overpayment which antedates the due date of an umderpayment, interest will rum, on the overpayment only until such d/ue date, that is, when the mutncduy of indebtedness arises. [1958-3 cum. bull. 922, 1156.] [Emphasis added.] [S. Rep. No. 1983, 85th Cong., 2d Sess., pp. 234-235 (1958).]

From the foregoing, it seems clear that the real purpose of Section 87 of the Technical Amendments Act of 1958 was to eliminate the running of interest during the time there is a mutuality of indebtedness — a deficiency which is offset by an overpayment in the same amount. In this case, there was no liability for the interest on the potential deficiency and consequently no mutuality of indebtedness until that interest was assessed. The date of the overassessment (overpayment) was September 1,1963. It antedated the due date of the deficiency interest, which was February 14,1969, and therefore plaintiffs are entitled to interest on the overpayment until the latter date.

We recognize that a different result was reached in Citadel Industries, Inc. v. United States, 314 F. Supp. 245 (S.D.N.Y. 1970), a case relied upon by defendant. However, that case was decided under the provisions of the 1939 Internal Revenue Code, and there was no regulation under the 1939 Code fixing the due date of assessed interest against which an overpayment is credited. The existence of such a regulation and its application to these cases distinguishes that case from our holding today. For that reason, we do not regard the Citadel case as being in conflict with this decision.

II

Plaintiff Fruehauf Corporation in Count II of its petition raises 'a second issue based on the same facts as its Count I claim. The Count II cause of action is peculiar to the specific facts of Fruehauf’s refund claim and accordingly has no bearing on the claim of plaintiff Metro-Goldwyn-Mayer, Inc. The detailed facts underlying both counts of the Fruehauf petition are set forth in Appendix A, infra.

Briefly stated, the facts relevant to Fruehauf’s Count II are as follows. After the Internal Revenue Service asserted deficiencies against Fruehauf with respect to its corporate income taxes for the years 1954, 1955, and 1956, the Tax Court determined that Fruehauf had underpaid its taxes for 1954 and 1956, but because of a net operating loss carryback from 1958 (in the amount of $4,270,636.94) Fruehauf had overpaid its taxes for 1955 in the amount of $1,711,087.39. That net amount of overpayment was determined by applying the total amount of the carryback from 1958 against Fruehauf’s potential deficiency for 1955 in the amount of $2,559,549.55. After the judgment of the Tax Court became final, the irs, on December 9, 1966, assessed deficiency interest against Fruehauf for its 1954 and 1956 underpayments, and for its potential deficiency for the year 1955. The deficiency interest for 1955, totaling $389,591.01, was mainly computed from the due date of Fruehauf’s 1955 return until the last day of the 1958 loss year. Thereafter, the ies applied Fruehauf’s overpayment for 1955 'as determined by the Tax Court ($1,711,087.89), first against its deficiency interest for 1955 ($389,591.01), and the remainder against Fruehauf’s underpayment for 1954.

The essence of Fruehauf’s Count II argument is that the ies unlawfully collected $889,591.01 in excess of Fruehauf’s net tax liabilities for the years 1954, 1955, and 1956. This occurred, in Fruehauf’s view, when the xrs applied $389,-591.01 of the $1,711,087.39 overpayment for 1955 determined by the Tax Court against the $389,591.01 of deficiency interest assessed for 1955, prior to crediting the balance of the overpayment against Fruehauf’s deficiencies for 1954 and 1956. Fruehauf contends that under Section 6215(a) of the 1954 Code the defendant is precluded from assessing or collecting any part of a tax deficiency disallowed by the final decision of the Tax Court; the taxpayer also says that under Section 6402(a) of the Code, the defendant is authorized to credit any overpayment of tax against any tax liability of the same taxpayer. Fruehauf points out that under the final decision of the Tax Court, Fruehauf had made an overpayment for 1955 in the amount of $1,711,087.39, and underpayments for 1954 and 1956 in the amounts of $1,651,654.58 and $3,176,489.25, respectively. Consequently, Fruehauf argues that under the pertinent Code provisions the defendant could have and should have applied the entire overpayment determined by the Tax Court for 1955 against the underpayments, also determined by the Tax Court for 1954 and 1956, without attempting to reduce the amount of overpayment in the amount of any other purported liabilities of Fruehauf for 1955. In effect, Fruehauf is contending that the net overpayment determined by the Tax Court for 1955 is the final balance of Fruehauf’s liabilities for that year, and the defendant is bound by the Tax Court’s decision. Thus, Fruehauf argues that the Government disregarded the pertinent Code provisions as well as the decision of the Tax Court and unlawfully collected from Fruehauf $389,591.01 in excess of Fruehauf’s true tax liabilities for 1954,1955, and 1956. Whereas in Count I Fruehauf is seeking to recover the interest ($185,568.07) that the $389,591.01 of overpayment would have earned between January 1, 1959 and December 9, 1966, Fruehauf in Count II seeks to recover the principal amount of $389,591.01 which it claims the ms illegally credited against the net 1955 overpayment determined by the Tax Court.

It is the contention of the Government that notwithstanding the merits of Fruehauf’s Count II claim (which the defendant disputes), Fruehauf’s recovery is precluded because that portion of its claim was never presented to the Internal Revenue Service in any formal or informal claim for refund prior to the commencement of the suit in this court. Thus, the defendant has timely raised as an affirmative defense to Fruehauf’s Count II claim the so-called substantial variance rule. We have concluded, after a careful examination of Fruehauf’s refund claims filed with the Service for the years 1954, 1955, and 1956, that the Government’s contention is correct and that the arguments Fruehauf now makes with respect to Count II were never even suggested in any of its refund claim documents.

Fruehauf filed with the ms timely claims for refund for each of the years ending December 31,1954,1955, and 1956. Each of the claims presented in detail the common set of facts that form the basis of the claims presented in Counts I and II of the petition herein. Each of the claims also stated at considerable length the legal basis for recovery presented by Count I of the petition. The amount of the refund requested in each of the claims was $185,278.92 (“Plus interest and such greater amount as is refundable by law”) which is very close to the $185,568.07 sued for in Count I. As previously stated, however, the argument presented here with respect to Count II, as outlined above, was never presented or suggested in any of the claim documents. Therefore, it must be concluded that the Internal Revenue Service had no notice of the contentions raised in Count II until Fruehauf’s petition was filed in this court on March 12, 1970.

We have frequently held that a ground for refund may not be asserted in a tax refund suit in this court that is at variance with the grounds for refund presented to the irs. Commercial Solvents Corp. v. United States, 192 Ct. Cl 339, 347, 427 F. 2d 749, 753-754, cert. denied, 400 U.S. 943 (1970); Union Pac. R.R. v. United States, 182 Ct. Cl. 103, 108-109, 389 F. 2d 437, 442 (1968) and cases cited therein. The scope of the variance rule and the reasons underlying it have been set forth at considerable length in the cases cited and need not be reiterated here. It is sufficient to say that the rule is designed to prevent surprise, to give the Internal Revenue Service notice of the claim so as to permit an administrative investigation thereof, and to allow the 'Service the opportunity to correct errors and limit the scope of ensuing litigation. Those objectives would be frustrated were we to allow Fruehauf to proceed on the merits of its Count II contentions.

Fruehauf’s Count II claim is not aided by a showing that all the facts material thereto were made available to the Internal Eevenue Service in the several refund claims. The same facts underlie Count I, and the Service does not have the burden of divining all possible grounds for refund a taxpayer might assert on a given set of facts. Union Pac. R.R., supra, 182 Ct. Cl. at 113, 389 F. 2d at 445.

The amount of the refund requested in Count II, $389,591.01 plus interest, is, as previously noted, substantially in excess of the amount requested in the refund claim documents. The notation in the claims “Plus * * * such greater amount as is refundable by law” adds nothing to indicate the grounds on which the claim is made.

In all essential respects, Fruehauf’s claim for refund with respect to Count II is as fatally deficient as the second and third counts of the taxpayer’s amended petition in Commercial Solvents Corp., supra. Fruehauf did not provide the Internal Eevenue Service with timely notice of the ground for refund now asserted in Count II, and its petition must be dismissed with respect to Count II. In view of this disposition of that portion of Fruehauf’s claim, it is unnecessary to reach the merits thereof.

Ill

For the reasons stated in the foregoing opinion, Fruehauf’s motion for summary judgment on the claim asserted in Count I of its petition in Docket No. 91-70 and Metro-Goldwyn-Mayer’s motion for summary judgment on its claim in Docket No. 191-71 are granted, and defendant’s cross motions for summary judgment are denied. The cases are remanded to the trial commissioner for determination of the amount of recovery pursuant to Buie 131 (c).

Fruehauf’s motion for summary judgment on the claim asserted in Count II of its petition in Docket No. 91-70 is denied; defendant’s cross motion On Count II of the petition in that case is granted, and Count II of the petition is dismissed.

1 The actual facts pertaining to each plaintiff are set out In the appendices.

2 Regulation § 301.6611 Is based on Section 6611 of the Internal Revenue Code of 1964, which states In pertinent part:

Ҥ 6611. INTEREST ON OVERPAYMENTS

“(a) bate. — Interest shall be allowed and paid upon any overpayment In respect of any Internal revenue tax at the rate of 6 percent per annum.

“ (b) period. — Such Interest shall be allowed and paid as follows :

“(1) credits. — In the case of a credit, from the date of the overpayment to the due date of the amount against which the credit is taken.”

Prior to the Technical Amendments Act of 1958 (P.L. 85-866, 72 Stat. 1606, § 83) § 6611(b) (1) read as follows :

“(1) credits. — In the case of a credit, from the date of the overpayment to the due date of the amount against which the credit is taken, hat if the amount against which the credit is taken is an additional assessment, then to the date of the assessment of that amount.” [Deleted portion italicized.]

3 Defendant’s brief In No. 191-71 at 12; the quotation is from a table appearing in § 4,(3) (b) of the Rev. Proc., 1960-2 cum. bull. 942, 957.

4 1960-2 CUM. BULL. 942, 951.