UNITED STATES DISTRICT COURT WESTERN DISTRICT OF PENNSYLVANIA
September 20, 1954
Palph W. DAVIS and Louise M. Davis, Plaintiffs,
A. J. DUDLEY, Defendant
The opinion of the court was delivered by: MARSH
Plaintiffs, husband and wife, ask for a preliminary injunction to restrain defendant, the Director of Internal Revenue, from proceeding to assess, collect or distrain with respect to additions to their income taxes allegedly due under § 294(d) of the Code,
for the years 1950 and 1951.
Their complaint alleges that the director had issued a notice of assessment, demanded payment, and threatened proceedings in order to collect these penalties. They also allege that the Director's 'determination that there exist any proper additions to the tax under * * * Section 294 is incorrect', but aver, in the alternative, that if 'partially correct, such additions to tax constitute a deficiency within the meaning of * * * Sections 271 and 272,'
and 'no deficiency notice as specifically required' by § 272(a) has been issued. Hence it is alleged 'further assessment, collection or distraint procedures are illegal and * * * may be restrained.'
The defendant moved to dismiss the complaint 'upon the ground that this court is without jurisdiction because this is an action to enjoin collection of internal revenue taxes, the maintenance of which is prohibited by Section 3653(a) of the Internal Revenue Code.'
Defendant also submitted an affidavit which, inter alia, specifies that the disputed additions to plaintiffs' income taxes were imposed in December, 1953, under each of the three subdivisions of § 294(d). These subdivisions provide for imposition of penalties as follows: (1) subdivision 294(d)(2), for substantial underestimate of estimated taxes; (2) subdivision 294(d)(1)(A), for failure to file timely a declaration of estimated tax; (3) subdivision 294(d)(1)(B), for failure to pay within time prescribed any installment of declared estimated tax.
He argues that the penalties here involved should be collected in the manner of taxes similarly to the penalty imposed under § 291, and cites as authority United States v. Erie Forge Co., 3 Cir., 1951, 191 F.2d 627, certiorari denied 343 U.S. 930, 72 S. Ct. 759, 96 L. Ed. 1339.
In their brief plaintiffs agree that § 294(d) is the specific subsection under which the disputed additions to their taxes were imposed for each of the years in question. They also agree with defendant that the aggregate penalties assessed amounted to $ 4,381.28 for the year 1950; $ 7,869.94 for the year 1951, or a total of $ 12,251.22.
The principal question posed by the undisputed facts disclosed in the complaint and affidavit is: Do penalties imposed pursuant to each of the three subdivisions of § 294(d) constitute a deficiency within the meaning of § 271?
It is our opinion that they do, and absent the issuance of a deficiency notice authorized by § 272(a), further assessment and distraint proceedings for collection thereof would be unlawful and should be enjoined as provided in § 272(a).
At the outset it is to be observed that the statutory language employed in § 291 and § 293, construed and contrasted in United States v. Erie Forge Co., supra, which clearly prescribes the method and manner of collecting the penalties imposed by those sections, is omitted in the subdivisions of § 294(d). The intended manner of collecting the penalties imposed by these subdivisions is thus left somewhat in doubt.
However, since each subdivision provides that the penalty is to 'be added to the tax', each penalty 'can then be said to become a part of the tax': Newsom v. Commissioner, 22 T.C. 225. As a part of the tax, the unpaid total amount of the penalties imposed by these subdivisions is, we think, a deficiency within the meaning of § 271(a), because it comprises 'the amount determined by the Commissioner to be the correct amount of the tax due by the taxpayer over the amount of tax reported by him';
plus amounts assessed or collected without assessment.
In addition, the imposition of the delinquency penalties in subdivisions 294(d)(1)(A) and (B) depends exclusively upon the judgment of the Commissioner. Hence, in the absence of unequivocal language to the contrary, such as is contained in § 291, we think that this type of penalty should be construed as a deficiency in order that the judgment of the Commissioner may be tested by the Tax Court as a safeguard against erroneous assessments and compulsory payment pending final decision.
This construction, we believe, is simply an application of the general rule to the effect that penal statutes, such as these subdivisions, are to be interpreted liberally in favor of the taxpayer and strictly against the Government. Cf. Stephan v. Commissioner, 5 Cir., 1952, 197 F.2d 712.
A similar reason, inter alia, was declared by the Tax Court in Newsom v. Commissioner, supra, which held that a penalty determined pursuant to subdivision 294(d)(2) should be treated as a deficiency. Since the arguments advanced by the defendant have not persuaded us to disagree with the reasoning of Judge Opper, we are content to follow this decision.
Thus we conclude that the penalties imposed in this case pursuant to the subdivisions of § 294(d) should be collected in the manner prescribed for a deficiency.
One other matter invites attention. Obviously, two distinct types of penalty are involved in § 294(d). Subdivisions (d)(1)(A) and (B) impose delinquency penalties for 'failure to file declaration or pay installment of estimated tax'; as stated, their imposition depends upon the judgment of the Commissioner. On the other hand, subdivision (d)(2) imposes a penalty measured by the size of the underestimate and does not involve judgment.
However, it has not been intimated by either side that the method of collecting these two distinct types of penalty should differ, and we find it difficult to believe that Congress, without specifically saying so, intended that the manner of collecting the penalties imposed in connection with 'estimated tax' should not be uniform. Indeed, if it is correct to conclude that a penalty imposed by any subdivision of § 294(d) is a deficiency, it seems that it would logically follow that the deficiency procedure set out in § 272(a), including the limitations, and jurisdiction of the Tax Court, was intended.
For the foregoing reasons, if the averments of the complaint can be sustained by proof, we are of the opinion that this court has jurisdiction to issue the preliminary injunction prayed for, and the motion of the defendant to dismiss for lack of jurisdiction will be denied.