Before KALODNER, STALEY and HASTIE, Circuit Judges.
The problem raised by these appeals is that of determining the taxable year or years in which interest may be deducted for federal income tax purposes, where the books of the taxpayer are maintained on the accrual basis and the obligation with respect to which the interest is payable is contested.
The facts are not in dispute.
The taxpayer is the executrix of the estate of John W. Hubbard, deceased. She instituted an action for refund of federal income taxes paid by the estate for the taxable years ending on May 31, in 1949, 1950 and 1951. The claim was based upon the right to deductions in those years for interest alleged to have accrued with respect to a deficiency in the federal estate tax.
Taxpayer's decedent died on June 3, 1947. The books of the estate were kept on the accrual method of accounting. On September 2, 1948, a federal estate tax return was filed and the tax shown to be due thereon was paid. Following a request of September 17, 1948, for early determination of the estate tax liability, an internal revenue agent, on or about May 15, 1949, commenced his examination. On July 21, 1950, a 30-day letter and a copy of the examining agent's report were mailed to taxpayer proposing an estate tax deficiency slightly in excess of $2,300,000. On August 4, 1950, a check in the amount of $1,500,000 was delivered by taxpayer to the Collector of Internal Revenue for deposit in his suspense account in respect of the asserted deficiency. Accompanying this check was a letter which read, in part, as follows:
"The undersigned, executrices of the above estate, enclose herewith our check for $1,500,000 payable to your order. Please deposit the proceeds of this check in your 9-D account. This payment is made in respect of the proposed deficiency in the estate tax of the above decedent which exceeds $2,900,000 exclusive of credit for state, inheritance and estate taxes.
"Neither this letter nor the payment made herewith shall be construed as a consent on behalf of the above estate to the assessment of the proposed deficiency.
"Will you please stamp the enclosed carbon copy of this letter and return it to us together with your receipt for this payment."
On August 28, 1950, a protest was filed with the Internal Revenue Agent in Charge wherein exception was taken to some of the adjustments and the deficiency proposed by the examining agent.
In the absence of an agreement with the Internal Revenue Agent in Charge as to the estate's federal estate tax liability, the case was transferred to the Technical Staff. On July 9, 1951, an offer was made on behalf of the Estate to settle the asserted federal tax liability on the basis of a deficiency of $1,524,485.60, less a credit of $29,445.62 for Canadian Succession Tax when proved, or a net deficiency of $1,495,039.98. On July 18, 1951, the foregoing offer was accepted on behalf of the Commissioner of Internal Revenue. On August 24, 1951, the Collector assessed the agreed deficiency together with interest, in the amount of $172,175.36, and credited the deposit made on August 4, 1950.*fn1 The balance shown to be due was paid on September 6, 1951.
In computing net income in the estate's fiduciary income tax returns for the taxable years ending on May 31, in 1949, 1950 and 1951, no deduction was asserted on account of accrued interest with respect to any deficiency in the federal estate tax. There is no dispute that interest on such obligation is deductible. However, in the action below, taxpayer asserted that the interest on the estate tax deficiency accrued ratably throughout the three taxable years, or, in the alternative, that it accrued entirely in the taxable year ending May 31, 1951, because of the $1,500,000 remittance for deposit in the Collector of Internal Revenue's "suspense account" on August 4, 1950.
The District Court*fn2 ruled against taxpayer's contention that the interest accrued ratably in the three taxable years involved, but it allowed a refund for the taxable year ending May 31, 1951, holding that the entire amount of interest was deductible in that year since the remittance of August 4, 1950, constituted a payment.
Both the taxpayer and the United States appealed, the former at our appeal No. 12,399 and the ...