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United States District Court, Northern District of Illinois, E.D

May 28, 1953


The opinion of the court was delivered by: LA Buy, District Judge.

The above cause has been submitted to the court on stipulated facts.

The taxpayer in the instant case pursuant to Section 1346(a)(1), 28 U.S.C. seeks to recover the amount of $3808.32 statutory interest which he alleges was erroneously assessed and collected on an excess profits tax which he paid for the year June 30, 1944.

The taxpayer filed its tax return for the taxable year 1944 and paid the sum of $952,782.82 in four equal installments on September, 1944, December 1944, March 1945 and June 1945. On July 15, 1947 the Collector determined that the taxpayer was entitled to an overassessment refund of $65,557.61 and this sum, together with interest of $8951.17 from June 15, 1945 to July 15, 1947 was paid to the taxpayer. Thereafter, on February 27, 1948 the Bureau determined that the taxpayer owed $987,735.25 for the same taxable year, or a deficiency of $100,510.04, which was paid together with interest in the amount of $19,577.47 from September 15, 1944, the date of the first quarterly installment to the date of the payment of the redetermined deficiency.

Section 292(a) of the Internal Revenue Code, 26 U.S.C.A. § 292(a), provides that where a tax is paid in installments, any subsequently determined deficiency shall be deemed to have become deficient for interest purposes from the date of the first quarterly installment due and payable; in the instant case September 1944. Section 3771 of the Internal Revenue Code, 26 U.S.C.A. § 3771, provides that interest on a refund shall be allowed from the date of the overpayment to a date preceding the date of the refund check by not more than thirty days. The date of the overpayment where the tax is payable in installments is the last quarterly payment of the tax; in the instant case June 1945.

It is the contention of the taxpayer that the net effect of the double examination for the same tax year was a determination of a deficiency of $34,952.93, or the difference between the gross deficiency of $100,510.04 found due on February 27, 1948 and the $65,557.61 overassessment refund made on July 15, 1947; that the net interest charges assessed against the taxpayer was the difference between the sum of $8,951.17 which the taxpayer received on the overassessment refund and the $19,577.47 it paid on the determined deficiency, or the net sum of $10,526.30; that if the single net deficiency had been assessed on the date of final examination, the interest charges, including the interest on the refund, would only have been approximately $7500; that the excess interest charge of $3808.32 is the amount of interest for nine months from September 1944 to June 1945 on the $65,557.61 and is therefore caused by the double examination for the one taxable year and should be refunded to the taxpayer.

The issue is whether the overpayment interest provisions of Section 3771 of the Internal Revenue Code should be read into and interrelated with the deficiency interest provisions of Section 292(a) of the Internal Revenue Code in determining the correct deficiency interest liability of the instant taxpayer under Section 292(a). The taxpayer urges that the two sections should be read together since there is both an overpayment and a deficiency for the same taxable year and a single transaction may not be broken into various elements in order to avoid or create a tax. The government opposes this argument stating that if Congress had desired to treat these two sections together it would have said so; that the interrelation of the two statutory sections which are separate, unambiguous and independent is for legislative consideration; and that the equities alluded to by the taxpayer must be weighed against the problems of administering the deficiency and overpayment interest provisions of the Code.

Only one reported case has been found wherein a similar issue was considered. In Babcock & Wilcox Co. v. Pedrick, D.C.N.Y., 1951, 98 F. Supp. 548, 551, Judge Holtzoff determined the problem as follows:

    "The second question presented in this
  litigation involves the method of computing
  interest. The Commissioner's action resulted in
  an additional assessment of income taxes and a
  credit for an over-payment of excess profits
  taxes. The Commissioner imposed an interest
  charge on the first item and allowed a credit of
  interest on the second. The interest charged
  against the plaintiff is, however, greater than
  the amount allowed to him on the over-assessment.
  This result was due to the fact that interest on
  deficiencies is calculated from the date
  prescribed for the payment of the tax to the date
  of the assessment of the deficiency, or to the
  thirtieth day after the filing of a waiver, which
  was done in this case, Sec. 292(a); while
  interest allowed to the taxpayer on an
  over-assessment is calculated from the date of
  the over-payment to the date of the additional
  assessment against which the credit is taken,
  Sec. 3771(a). In this instance the difference
  between the two methods of computing interest
  resulted in a charge of interest against the
  plaintiff in a greater amount than that credited
  to him. In this action the plaintiff also seeks
  to recover this excess.

    "The Court is of the opinion that in respect to
  interest the plaintiff's position is well
  founded. Obviously, although the Commissioner's
  audit of the returns resulted in what is
  technically called `an assessment of a
  deficiency' in respect to income taxes, and an
  allowance of over-payments in respect to excess
  profits taxes, in essence the Commissioner's
  action involved solely a re-distribution of the
  tax liability as between income tax and excess
  profits tax, since the aggregate amount of the
  taxes was not changed. Actually there is no
  deficiency and no over-payment, but merely a
  reallocation of items within the total amount of
  the taxes, which remains unchanged. No money
  changed hands. The Government was not deprived of
  the use of any money. To charge the taxpayer with
  additional interest under the circumstances is
  obviously unfair and unequitable. The Government
  does not dispute the fact that an injustice
  results from the application of the interest
  provisions in this situation, but suggests that
  the remedy is with the Congress. The Court
  disagrees. Tax laws are no exception to the
  principle that all statutes must receive a
  reasonable and sensible construction and one that
  does not lead to unjust or absurd results. `The
  letter killeth, but the spirit giveth life'. The
  action of the Commissioner should be construed as
  not levying a deficiency or allowing a refund of
  an over-payment, but merely as an allocation of
  items within the aggregate tax liability. Under
  the circumstances no interest is payable to
  either party."

The court is of the opinion that the above reasoning should be applied in the instant case. It appears that while a credit was given for the interest the taxpayer received on the refund, the money it actually received was only to the date of
its last quarterly installment of June 1945. Included in the deficiency assessed was the sum of $65,000 on which the government collected interest from September 1944 to June 1945; thus interest is being collected for the nine-month period from September 1944 to June 1945 on the $65,000 which sum the taxpayer neither owed nor had at that time. This being an overassessment and a deficiency in a single taxable year, the court is of the opinion that the taxpayer should not be charged interest for a deficiency which includes the overassessment and should only be charged on the net deficiency as if only one examination of the return had been made.

The court adopts the stipulation of the parties as its Findings of Fact and the above memoranda as its Conclusions of Law. Counsel are requested to present an appropriate judgment order within thirty days from date hereof.


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