Appeal from the District Court of the United States for the District of New Jersey; Guy L. Fake, Judge.
Before MARIS, JONES, and GOODRICH, Circuit Judges.
The plaintiff, a New Jersey corporation, filed its income and excess profits tax returns for the years 1918 and 1919 under the Revenue Acts of 1917 and 1918, respectively, and paid the taxes due as shown thereon. Thereafter it applied to the Commissioner of Internal Revenue for a redetermination of its excess profits taxes for each of the two years upon the basis of the relief provisions contained in Section 210 of the Revenue Act of 1917, c. 63, 40 Stat. 300, 307, and Sections 327 and 328 of the Revenue Act of 1918, c. 18, 40 Stat. 1057, 1093.
Section 210 of the 1917 Act authorizes a special assessment of excess profits taxes in any case where the Secretary of the Treasury is unable to determine the taxpayer's invested capital (a material factor in the regularly prescribed method for the tax computation), and Section 327 of the 1918 Act authorizes a special assessment in several specified instances, among them being where the Commissioner is unable to determine the invested capital and where he "finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in Section 328". The corporations to which reference is thus made for comparison are "representative corporations engaged in a like or similar trade or business".
The Commissioner granted the taxpayer's application and, as a result of a special computation, determined an overassessment for each of the years in question in a substantial amount. The decision was communicated to the plaintiff by letter from the Commissioner dated April 7, 1923, and the amounts of the overassessments were refunded with interest.
By letter of March 25, 1924, the Commissioner advised the plaintiff that the redetermination of its profits tax liability was erroneous and that a recomputation of the taxes for 1918, under the relief provisions, and for 1919, under the ordinary provisions of the pertinent Revenue Acts, disclosed an additional tax liability for each year, for which assessments against the plaintiff were made immediately. Following the Commissioner's formal rejection of a claim for abatement of the additional assessments, the taxpayer petitioned the Board of Tax Appeals for a review of the Commissioner's decision. The Commissioner filed a plea in bar challenging the jurisdiction of the Board on the ground that the taxes in controversy had been assessed prior to the passage of the Revenue Act of 1924, 26 U.S.C.A. Int. Rev. Acts, page 1 et seq., which created the Board of Tax Appeals. The Board subsequently entered an order dismissing the petition for lack of jurisdiction. Cf., Blair v. Oesterlein Machine Co., 275 U.S. 220, 48 S. Ct. 87, 72 L. Ed. 249. The taxpayer did not petition for a court review of the Board's decision.
The plaintiff paid the additional assessments, using for such purpose, with the Commissioner's approval, a tax credit in favor of a wholly-owned subsidiary and a check to the order of the Collector for the balance. The plaintiff filed claims for refund of the additional taxes, to which the Commissioner responded, in due course, stating that a further computation of the plaintiff's tax liability for the year 1918 under the relief provisions of the Revenue Acts developed an overpayment of taxes by the plaintiff for that year but that the application for a special assessment for the year 1919 had been properly disallowed. Later, the overassessment for 1918, as latterly determined, was refunded to the plaintiff with interest and the claim for refund for 1919 was formally rejected.
The present action was instituted in the court below for the recovery of the net amount of profits taxes paid by the plaintiff for the years 1918 and 1919, over and above the Commissioner's original special assessments. On cross-motions for summary judgment (Rule 56, Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c), the court below entered judgment for the defendants (the personal representatives of the deceased Collector) from which judgment the plaintiff appeals.
The appellant contends (1) that the Commissioner's original determination of the plaintiff's tax liability for the years in question on the basis of the special assessment was the exercise of a final administrative discretion not subject to reopening by the Commissioner, (2) that the Commissioner's subsequent action in assessing additional taxes for years for which refunds had been determined and paid, without disclosing to the taxpayer the grounds for the additional assessments or affording it an opportunity for contesting the same, requires a construction of the Revenue Acts in a manner violative of the Fifth Amendment to the Federal Constitution by depriving the plaintiff of property without due process of law, and (3) that the plaintiff is entitled to recover the entire amount of the additional assessments notwithstanding that they were paid partly by tax credit and partly by cash. As it is our opinion that the plaintiff is not entitled to any recovery, it is unnecessary to consider the last contention.
The power of the Commissioner of Internal Revenue to make a special assessment of excess profits taxes under the relief provisions of the Revenue Act of 1918 is discretionary in the Commissioner. And, no court may review his exercise of the discretion, at least not in the absence of fraud or other irregularities. Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 559, 562, 48 S. Ct. 587, 72 L. Ed. 985; Heiner v. Diamond Alkali Co., 288 U.S. 502, 505, 506, 53 S. Ct. 413, 77 L. Ed. 921. This is so whether the matter assailed be the Commissioner's grant or denial of a special assessment or the correctness of his computation as the result of such assessment. Welch v. Obispo Oil Co., 301 U.S. 190, 194, 57 S. Ct. 684, 81 L. Ed. 1033. What is true with respect to the power conferred by the relief provisions of Sections 327 and 328 of the Act of 1918 is likewise true of the cognate provision in the Revenue Act of 1917 ( § 210). Duquesne Steel Foundry Co. v. Commissioner, 3 Cir., 41 F.2d 995, affirmed per curiam by the Supreme Court 283 U.S. 799, 51 S. Ct. 491, 75 L. Ed. 1422; Joseph Joseph & Bros. Co. v. United States, 6 Cir., 71 F.2d 389, certiorari denied 293 U.S. 600, 55 S. Ct. 117, 79 L. Ed. 693. Section 210 of the Revenue Act of 1917 is similar in its intended purpose to Sections 327 and 328 of the Revenue Act of 1918 which "were intended to broaden the powers of relief first conferred by section 210" of the earlier act which had been liberally construed by the Treasury.See Williamsport Wire Rope Co. v. United States, supra, 277 U.S. at page 558, 48 S. Ct. at page 588, 72 L. Ed. 985, and footnote 3.
All of this the appellant ostensibly concedes but contends that, once the Commissioner grants a special assessment and determines an overassessment which is refunded to the taxpayer, his power thereby becomes functus officio, and that, notwithstanding that the statute of limitations has not run and that no formal compromise or closing agreement with respect to the taxpayer's liability has been entered into, the Commissioner may not thenceforth reopen the assessment to correct an error then evident to him. According to the appellant's argument, any loss of taxes to the government through a mistake of the Commissioner in computing a special assessment of the profits tax under his discretionary power inures irrevocably to the taxpayer and confers upon it a vested right to the unwarranted as well as to the warranted portion of the refund.
If the appellant's contention were to be adopted as a correct statement of the law, its tendency would be to discourage the Commissioner's exercise of his discretion in a manner favorable to the supplicating taxpayer. It is only reasonable to suppose that, when confronted with the situation which the appellant's argument would induce, the Commissioner would become reluctant to grant a special assessment in any but the clearest cases (his discretion in any event not being reviewable, cases cited ante) and even then, where a special assessment was granted, he would be inclined to postpone final action on his computation until the possibility of error seemed no longer to exist. Thus, the appellant, for the service of its own ends, would risk the attainment in general of that measure of prompt relief against hardship from the profits tax which the statutory provisions were designed to afford. The contention is the more unconscionable in the appellant's case where, as a result of the Commissioner's grant of a special assessment, the appellant has actually received an ultimate refund of roundly $320,000 on account of its 1918 profits taxes while its 1919 profits taxes were permitted to stand as correctly returned originally by the appellant under the general provisions of the Revenue Act.
But, more directly dispositive of the appellant's claim is the fact that it lacks legal justification. The Commissioner's power to make a corrected computation of the appellant's liability for profits taxes for the years in question continued so long as the statute of limitations with respect to the particular tax liability had not run and a formal compromise or closing agreement thereon had not been entered into between the taxpayer and the Commissioner with the approval of the Secretary of the Treasury. This rule has been applied a number of times. Page v. Lafayette Worsted Co., 1 Cir., 66 F.2d 339, 341, certiorari denied 290 U.S. 692, 54 S. Ct. 127, 78 L. Ed. 596; Taft Woolen Co. v. United States, Ct. Cl., 38 F.2d 704, certiorari denied on the point germane here 281 U.S. 717, 50 S. Ct. 465, 74 L. Ed. 1137, affirmed on other grounds 282 U.S. 409, 51 S. Ct. 186, 75 L. Ed. 415; Oak Worsted Mills v. United States, Ct. Cl., 36 F.2d 529, new trial denied, Ct. Cl., 38 F.2d 699, certiorari denied on the point here involved 281 U.S. 717, 50 S. Ct. 465, 74 L. Ed. 1136, affirmed on other grounds 282 U.S. 409, 51 S. Ct. 186, 75 L. Ed. 415; Austin Co. v. Commissioner of Internal Revenue, 6 Cir., 35 F.2d 910, 912, certiorari denied 281 U.S. 735, 50 S. Ct. 249, 74 L. Ed. 1150. Each of the foregoing cases was concerned with a reassessment by the Commissioner of excess profits taxes under the statutory relief ...