MARIS, District Judge.
This is a suit by the Secretary of Banking of the Commonwealth of Pennsylvania, as receiver of the Northwestern Trust Company, against the United States for the refund of income tax alleged to have been erroneously paid to the United States for the years 1928 and 1929.
The Northwestern Trust Company, hereinafter referred to as the Trust Company, which had been engaged in the business of banking and in the performance of trust functions in Philadelphia prior to July 17, 1931, on that date ceased business and was taken possession of by the Secretary of Banking of the Commonwealth of Pennsylvania, who proceeded to liquidate its assets. The present plaintiff became Secretary of Banking on January 15, 1935, at which time he took over the assets of the Trust Company and became its receiver.
In 1928 and prior years the Trust Company kept its books of account and made its income tax returns on a cash receipts and disbursements basis except as to the item of interest, which it reported, in its income tax returns on the accrual basis. The interest items for prior years had been set up in a reserve account which at the beginning of 1928 exceeded the amount actually paid out by the Trust Company by the sum of $254,584.31. This amount had, however, been claimed by the Trust Company as an income tax deduction in years prior to 1928 and allowed as such by the Commissioner of Internal Revenue. For 1928 it deducted from its income tax return interest added to the reserve account in the amount of $376,650.68, although it actually paid out as interest only $211,037.91. It is this last amount which the petitioner now contends is deductible for 1928 and which the Government denies is deductible for that year.
The Trust Company filed its income tax return for the year 1928 with the collector of internal revenue at Philadelphia and paid the collector the tax disclosed thereby amounting to $20,109.52. On February 13, 1931 the Commissioner of Internal Revenue assessed against the Trust Company additional income tax for the year 1928 in the amount of $18,524.94, plus interest of $2,003.60 totaling $20,528.54. This amount was paid March 21, 1931, by check to the collector of internal revenue in the amount of $10,562.72 and the balance of $9,965.82 by the application of a refund due for the year 1929 to that amount. Thereafter petitioner filed his claim for the refund of additional income taxes paid for the year 1928, which claim was rejected by the Commissioner. The claim did not set forth as one of the reasons for refund that the said interest item of $211,037.91 had been erroneously dissallowed. As a matter of fact the Commissioner did not disallow this interest deduction until after the claim for refund was filed, and at the time it was filed the item had been tentatively allowed by him.
The Trust Company in its income tax return for 1929 failed to deduct from its gross income the sum of $130,919.25 fraudulently loaned by its officers to the Coraza Cigar Company. On August 30, 1932, petitioner filed a claim for refund for the entire amount of taxes paid by the Trust Company for 1929, basing said claim on the contention that said item of $130,919.25 should be deducted in computing net income for that year. The Commissioner of Internal Revenue refused and disallowed said claim for refund on the ground that it was barred by the statute of limitations as not having been filed within two years from the time of the payment of that portion of the 1929 tax which had not previously been refunded by way of credit on the additional tax for 1928 as above set forth. The Trust Company's income tax for 1929 was paid in four installments as follows:
March 15, 1930 $ 4,248.58
June 14, 1930 4,248.58
September 15, 1930 4,248.57
December 16, 1930 4,248.57
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