
    MORRIS MOSKOWITZ v. THE UNITED STATES
    [No. 22-54.
    Decided January 18, 1961]
    
      
      Julius Kuschner for the plaintiff. Philip A. Brenner was on the briefs.
    
      Harold S. Larsen, with whom was Assistant Attorney Generad Charles K. Riee, for the defendant. James P, Garland and Lyle M. Turner were on the briefs.
   DtjRfee, Judge,

delivered the opinion of the court:

The plaintiff, an individual taxpayer, seeks to recover the difference between income taxes, interest, and penalties for the calendar years 1941, 1942, and 1943 paid under a deficiency assessment and an amount claimed to be an offer of settlement accepted by the Collector of Internal Eevenue. Briefly stated, the facts are these: following an examination of plaintiff’s income tax returns -for 1941, 1942, and 1943, by the Bureau of Internal Eevenue, he was informed, because of his failure to report certain items of income, of proposed additional taxes and penalties in excess of $77,000. On September 7, 1945, the taxpayer’s attorney personally delivered to an official of the Bureau of Internal Eevenue a letter (more fully set out in Finding 5) entitled “Offer of Settlement.” It contained plaintiff’s own computations of his additional tax liabilities, penalties, and interest for the years 1941, 1942, and 1943 and offered to pay $41,266.32 in full settlement of these items. A check for that amount was enclosed.

At the time of the tender of this offer of compromise and at the time of the receipt of the proceeds by the Collector, no statutory deficiency notices had been issued the taxpayer for the years 1941, 1942, and 1943. The check was received at the Office of the Collector of Internal Eevenue, Second District of New York, which office caused the check to be certified by the drawee bank on September 24, 1945. The following day it was deposited at the Federal Eeserve Bank to the credit of the Treasurer of the United States. However, instead of being recorded on the Collector’s books as an internal revenue collection, the proceeds of the check were entered in a special deposit account maintained for sums received or collected other than internal revenue collections, including sums offered by taxpayers in compromise of tax liabilities.

Several months later, the plaintiff’s attorney wrote to the Department of Justice advancing arguments to support his contention that the Government, by certifying, collecting and retaining the proceeds of the check as tendered, had accepted a settlement of plaintiff’s tax liabilities for the years in question. The Department of Justice did not agree that there had been a settlement and it pointed out that the proceeds of the check always had been and still were refundable upon demand. In February of 1949, the Commissioner of Internal Revenue notified the plaintiff that his offer of compromise had been considered and rejected. In April, plaintiff was informed of proposed adjustments in his tax liabilities and on November 13, 1950, after filing a waiver consenting to assessment of proposed deficiencies, he was assessed the sum of $79,920.77 for the years 1941, 1942 and 1943. That was the first assessment made in this matter.

Following the assessment, the Collector notified plaintiff that he was holding a Treasury check in the amount of $41,266.32 representing “a rejected offer in compromise submitted in lieu of an unpaid tax liability.” Plaintiff’s attorney replied stating that the check would not be accepted “for the reason that it was [his] understanding that such amount would be credited as of September 19, 1945, to the deficiencies assessed in November 1950.” The check was subsequently accepted under protest by the plaintiff, the defendant having computed or paid no interest on the principal amount. Thereafter, the plaintiff paid the amount of the deficiency assessment, interest, and penalties in full. Timely claims for refund were made, the plaintiff at the same time also stating the alternative claim which he makes in this suit, namely, that if the check tendered as an offer of settlement did not effect a compromise, he would be entitled to interest on the proceeds of the check for the period it was held by the defendant.

The plaintiff maintains that a compromise and settlement has the same practical effect as an accord and satisfaction. In this connection it quotes from the New York Court of Appeals opinion in Hudson v. Yonkers Fruit Co., 258 N.Y. 168, 179 N.E. 373 (1932), to the effect that an accord and satisfaction is arrived at where a conditional tender of payment is retained by the creditor. Silence while retaining the payment, it holds, amounts to an assent to the conditions, inferred in law. Since the payment in this case was tendered before any assessment was made, while the amount in question was unliquidated, plaintiff argues that the alleged acceptance of the settlement offer fully discharged all tax liabilities.

It appears that the plaintiff has overlooked section 3761 of the Internal Revenue Code of 1939,26 U.S.C. § 3761 (1952 Ed.). That provision permits the Commissioner of Internal Revenue, with the approval of the Secretary, Under Secretary, or Assistant Secretary of the Treasury to compromise civil tax matters. It also provides for the filing of a public record of the details of the compromise settlement. In Botany Worsted Mills v. United States, 278 U.S. 282 (1929), the Court concluded that Revised Statute 3229, the predecessor of section 3761 of the Code, provided the exclusive procedure by which a tax could be compromised. It stated the belief that the Congress did not intend to entrust the final decision on such matters to subordinate Internal Revenue Bureau officials. We think section 3761 sets forth the only machinery for compromising a tax whether or not there has been an assessment or judgment rendering the amount certain.

In view, therefore, of the statutory prescription of an exclusive method for compromising tax liabilities, any theory founded on general concepts of accord and satisfaction cannot be utilized to impute a compromise settlement to the agents of the Government. But even if this statutory hurdle did not block plaintiff’s way, as a matter of fact, we do not think that the actions of the Government are consistent with the theory of an acceptance of the offer. The action of the Collector in depositing plaintiff’s check in a special account to the credit of the Treasurer was an insignificant, mechanical act dictated by section 3971 of the Code, 26 U.S.C. § 3971 (1952 Ed.) and the regulations promulgated thereunder. That Code section provides that sums offered in compromise under section 3761 are not to be deposited in the same fashion as ordinary internal revenue collections. The regulations prescribe the deposit of compromise offers in special deposit accounts pending a decision as to whether or not the offer will be accepted. We do not think that the action of the Collector, taken pursuant to and in conformity with the statute and regulations, can be interpreted as the acceptance of an offer, even if he had the power to so accept.

Furthermore, the letter entitled “Offer of Settlement” stated that the offer was tendered soliciting the Commissioner’s “favorable consideration.” The Department of Justice, responding to plaintiff’s first inquiry about the position it would take on the offer, denied that it had yet taken any action on the offer and informed the plaintiff’s attorney that the proceeds of the check could be recovered by the plaintiff at any time he desired. On subsequent occasions the Bureau of Internal Revenue rejected plaintiff’s position that a settlement had been effected. Plaintiff’s final refusal to accept the offer to refund the proceeds of the check was based, not on its earlier position that a settlement had been reached, but rather on its claimed understanding that the check would be applied as a credit against the deficiencies assessed in November 1950. Moreover, we find no indication in the record that the defendant at any time encouraged the plaintiff to believe it would take favorable action on the offer. Under the facts before us there is no basis for claiming that the Government was estopped from assessing a tax deficiency any more than there is for claiming that a compromise within the meaning of the Code became effective.

Nor do we ascribe any greater significance to the Collector’s procuring certification of the check in view of the prompt and clear statement to the plaintiff that the proceeds were refundable. We think the Collector was free to implement the regulations in the fashion he considered best without having his actions construed as official sanction of compromise offers.

Because of the ready refundability of the proceeds, had plaintiff so desired, we do not feel that the certification of the check adds any force to the alternative claim for interest on the proceeds. Plaintiff was under no obligation to leave the proceeds in the hands of the Collector, notwithstanding the certification. He could Have freed the money and put it to work for him at any time.

Plaintiff’s petition and briefs do not refer us to any provision of law which would authorize the computation and payment of interest on the proceeds of the check returned by the Collector. There is, of course, the provision for the payment of interest contained in section 3771 of the Code, 26 U.S.C. § 3771 (1952 Ed.). However, that interest is payable on overpayments of an internal revenue tax. If the check deposited and held by the Collector did not represent an overpayment, the plaintiff has no right to interest under section 3771.

We do not see how the tendered check can be considered an overpayment. Our reason for so saying is not merely the absence of any tax liability at the time of the payment. That fact alone cannot negate an overpayment and section 3770(c) of the Code, 26 U.S.C. § 3770(c) (1952 Ed.), so specifies. However, in Rosenman v. United States, 323 U.S. 658 (1944) where the Supreme Court was faced with the question of when the period of limitations on refund claims begins to run, the Court said that prior to a deficiency assessment there were no taxes erroneously or illegally assessed or collected on which a claim for refund could be based. The view of the Court was that payments made to avoid the accrual of interest and penalties on a prospective liability should be treated as estimated deposits and not payments entitling the taxpayer to interest in the event of their return. The Rosenman case was followed in Manee v. United States, 97 F. Supp. 993 (1951). The same result was reached in Busser v. United States, 130 F. 2d 537 (3d Cir. 1942).

To hold that the proceeds of the compromise offer did not represent an overpayment is not inconsistent with our holdings in Hanley v. United States, 105 Ct. Cl. 638 (1945) and Reading Company v. United States, 120 Ct. Cl. 223 (1951). In both of those cases the taxpayer had made bona fide payments of estimated taxes. When the tax liabilities were later determined, they were found to be less than the amounts deposited and we awarded interest on the sums which were refunded holding that the taxpayers had made overpayments. In this case, the plaintiff made a payment of less than the ultimately determined liability not for the purpose of depositing an amount against future liability but to attempt to force a settlement on his terms. This amount was returned prior to payment of the assessed deficiency and so, at that time, the Government did not have in its possession an amount in excess of plaintiff’s tax liability and there was no overpayment. As previously pointed out, the plaintiff could have recovered his settlement offer at any time and still not have been liable for any sums beyond which he eventually paid.

Since no compromise settlement of plaintiff’s tax liability was achieved, the assessment and collection of taxes, interest, and penalties by the defendant was not improper or illegal and the plaintiff’s claim for refund must be denied. Since the proceeds of the check could have been refunded to plaintiff at any time upon request and did not represent an overpayment, there is no authority to award interest on the occasion of its return to the taxpayer. Consequently, plaintiff’s petition must be dismissed.

It is so ordered.

Laramore, Judge; Maddek, Judge; and Jones, Chief Judge, concur.

Whitaker, Judge,

concurring:

Plaintiff transmitted his check for $41,266.32 as an offer in compromise of his entire tax liability. It was not delivered as a payment on account of his tax liability, since it was an offer in settlement of his entire tax liability; and, since this offer was rejected, I do not think plaintiff is entitled to interest on the amount. However, had it been a payment on account of tax liability, I would have grave doubt about the right of the Government to assess plaintiff with interest on the entire deficiency from the due date of the tax to the date of the assessment. While the amount deposited was less than the entire tax liability, and was not, therefore, an overpayment, it may be that in computing the amount of interest owed by plaintiff on the deficiency, credit should be given for the $41,266.32. However, I do not think it is necessary to come to a final conclusion on this question, because it was not a deposit on account of tax liability, but an offer in settlement.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Lloyd Fletcher, and the briefs and argument of counsel, makes findings of fact as follows:

1.(a) This is a suit for income tax refunds claimed by plaintiff for the calendar years 1941, 1942, and 1943, in the following amounts:

Amount Tear claimed
1941--- $15,631.58
1942- 17,202.12
1943- 5, 820. 75
38,654.45

(b) The principal issue is whether certain actions taken by the defendant, which actions are described hereinafter, constituted an acceptance by defendant of an “Offer of Settlement” made by the plaintiff to the Commissioner of Internal Eevenue under date of August 31,1945.

(c) Plaintiff states an alternative cause of action in which he claims from the defendant the sum of $14,401.65.

(d) The issue involved in plaintiff’s alternative cause of action is whether defendant became obligated to pay interest at the rate of 6 percent per annum on the sum of $41,266.32, which sum was transmitted to defendant with plaintiff’s aforesaid “Offer of Settlement,” said $41,266.32 having been held by defendant from September 19,1945, until July 13,1951.

2. (a) Plaintiff is an individual, a citizen of the United States, and resides at 460 Beach 143rd Street, Eockaway, New York.

(b) During the taxable years in question plaintiff was engaged in the wholesale leather business and maintained his place of business at 24 Spruce Street, Borough of Manhattan, New York, New York.

3. During the year 1945 the Bureau of Internal Eevenue (now Internal Eevenue Service) made an examination of plaintiff’s income tax returns for the calendar years 1941, 1942, and 1943. Under date of June 5, 1945, the Office of Chief Counsel, Bureau of Internal Revenue, transmitted to plaintiff’s attorney a statement of the income tax liabilities proposed against plaintiff for the years 1941,1942, and 1943. Said statement proposed additional taxes and penalties as follows:

SO percent Tear Deficiency penalty
1941_ $8,891.12 $4,509.37
1942_ 33,886.27 16,943.14
1943_ 8,748.89 4,373.45
51,524.28 25,825.96

4. The major cause of the aforesaid proposed deficiencies was the inclusion in plaintiff’s gross income for the years 1941, 1942, and 1943 of substantial amounts of additional sales by plaintiff’s business which were alleged to have been unrecorded in plaintiff’s books of record and not reported in his income tax returns for the aforesaid years.

5. Under date of August 31, 1945, plaintiff’s attorney addressed a letter to the Commissioner, Bureau of Internal Revenue, Washington 25, D.C., reading in pertinent part as follows:

Offer of Settlement
Re: Morris Moskowitz, New York, N. Y.
Symbols GC: P: WPB — 399416
Sir:
We respectfully submit for your consideration the following offer of settlement of the above-named case, based on the reasons cited which we believe will merit your approval as fair and reasonable to all concerned.
This offer is made without prejudice to the rights of the taxpayer, and with the understanding that, pursuant to the established procedure of your Bureau, it will not be used in any way against the taxpayer except as a basis for settlement according to its terms.
In accordance with the terms of this offer, there is enclosed herewith check of taxpayer in the amount of $41,266.32.
# if: % * *
■Slgj ° S 03 Ip g Is CO S 05 O O co ^ -P F-t | 3 | 0 ® d rc1 0'S"3 jS'Tl o ■"-I! Ill d o • H CO © ri c3 Qjt* — j ¡ ws •g-53 © o § the taxpayer hereby offers to pay the amount of $37,866.32 tax deficiencies and penalties, together with 6% interest on the deficiencies to August 31,1945 in the amount of $3,400.00 or a total of $41,266.32. A check in that amount is enclosed herewith.
Your favorable consideration is solicited, as it is earnestly believed that the proposed settlement will be to the best intereste of all concerned, and will fully meet the demands of justice in this case.
May we look forward to an early reply concerning your acceptance of this proposal.

6. On September 7,1945, Mr. Philip A. Brenner, plaintiff’s attorney, personally delivered the aforesaid letter of August 31, 1945, to the Assistant Head of the Penal Division, Office of Chief Counsel, Bureau of Internal Revenue. At the same time, Mr. Brenner also personally delivered to the aforesaid Internal Revenue official the plaintiff’s check bearing date September 6,1945, payable to the order of Collector of Internal Revenue in the sum of $41,266.32. The amount of plaintiff’s said check was the result of plaintiff’s own computations of his additional income tax liabilities, penalties and interest for the taxable years in question. Plaintiff’s method of computing his additional income tax liabilities was set forth by his attorney in the aforesaid letter to the Commissioner of Internal Revenue dated August 31, 1945.

7. Neither at the time that the aforesaid check in the sum of $41,266.32 was delivered, nor when its proceeds were received by the Collector of Internal Revenue had there been issued any statutory notices of deficiency for the years 1941, 1942, and 1943. Also, as of the times referred to, no assessments had been made against plaintiff covering deficiencies in income tax liability for the said years 1941,1942, and 1943. Prior to November 13, 1950, the only assessments made against plaintiff for the years in question were as follows:

1941_ $2,087.76
1942- 2,918.77
1943- 7, 597.22
Total- 12,603.74

8. The aforesaid check in the amount of $41,266.32 was not certified at the time that it was delivered by plaintiff’s attorney to the Assistant Head of the Penal Division on September 7,1945. The check was received by the Collector of Internal Revenue for the Second New York District on September 19, 1945. On September 24, 1945, apparently at the instance of the Office of the Collector of Internal Revenue, Second District of New York, said check was caused to be certified by the drawee bank, the Chase National Bank of the City of New York. According to the endorsement thereon, the check was deposited as an internal revenue collection by the said Office of the Collector of Internal Revenue into the Federal Reserve Bank of New York for credit to the Treasurer of the United States on September 25, 1945. However, the sum of the check, namely, $41,266.32, was not recorded on the books of the Collector of Internal Revenue as an internal revenue collection. Instead, said sum was entered on the records of the Collector in a Special Deposit Account Number 891500 as of September 25,1945.

9. A Special Deposit Account is a special bookkeeping account maintained in the boobs of the Internal Revenue Service into which account are entered the amounts of sums received or collected other than internal revenue collections. Sums offered by taxpayers in compromise of tax liabilities are entered in such Special Deposit Account.

10. On September 25, 1945, a Special Deposit Account sheet headed “Offer in Compromise” was established in the name of plaintiff with an opening debit of $41,266.32 opposite which was entered the remark “Proposed Deficiency Assessments.” This account was closed out on April 24,1951, by a credit entry of $41,266.32. The remaining entries in the “Remarks” column of the account sheet are “Reject. Sch. No. 15348-3/30/51” and “Tax — Pen—Int. 1941, 1942, and 1943.”

11. No interest is computed by the Internal Revenue Service on the amounts held by it in Special Deposit Accounts.

12. On January 4, 1946, plaintiff’s attorney sent a letter to the Department of Justice in which arguments were advanced in support of his contention that plaintiff’s tax liabilities for the years 1941,1942, and 1943 had been settled. This letter concludes as follows:

Accordingly, we respectfully submit that the tax liabilities of Mr. Moskowitz, both civil and criminal, for the years 1941, 1942, and 1943 have been settled by mutual agreement, in accordance with proper procedure of law and regulations, and the case should be considered as closed by action of the Government in certifying, collecting and retaining the proceeds of the check tendered upon that condition.
If you have any further questions we would appreciate the opportunity to discuss them with you at your convenience.

13. Under date of February 15, 1946, the Department of Justice responded to the aforesaid letter by a communication to plaintiff’s attorney over the signature of Sewall Key, Acting Assistant Attorney General, as follows:

This letter is in reply to your letter of January 4, 1946, wherein you contend that the tax liabilities of your client, both civil and criminal, for the years 1941, 1942 and 1943, have been settled by mutual agreement in accordance with the proper procedure of law and regulations, and the case should be considered as closed by the action of the Government in certifying, collecting, and retaining the proceeds of the check tendered upon that condition.
The arguments advanced by you in support of your conclusions have been carefully considered. We wish to advise you that the Department does not concur in your interpretation of the facts or the law. The proceeds of the check referred to in your letter have at all times been and still are refundable to your client either upon his demand at any time prior to the acceptance of the offer or upon the rejection of the offer contained in your letter of August 31,1945.
If you desire to submit any further material on behalf of Mr. Moskowitz, it is requested that you do so before March 1,1946.

14. Under date of February 24,1949, the Commissioner of Internal Kevenue, George J. Schoeneman, wrote a letter to the plaintiff reading as follows:

Your offer to pay $41,266.32 in compromise of your unpaid income taxes and the penalties and interest thereon for the years 1941,1942 and 1943, has been care--' fully considered and is hereby rejected.

At no time prior to said letter of the Commissioner of Internal Revenue dated February 24, 1949, formally rejecting plaintiff’s offer in compromise, did plaintiff receive from any representative or official of defendant any assurances, representations, or formal notifications, either orally or in writing, that plaintiff’s offer in compromise had been or would be accepted by defendant.

15. On March 1,1949, the plaintiff’s attorney wrote a letter to the Commissioner of Internal Revenue acknowledging receipt of the Commissioner’s letter of February 24, 1949, reiterating plaintiff’s contention that his offer of settlement had been accepted, and stating that “since the check with the offer of settlement was accepted by you, we thought the matter had been closed.”

16. On March 21, 1949, the Chief Counsel of the Bureau of Internal Revenue wrote a letter to the plaintiff’s attorney in response to the latter’s letter of March 1, 1949, stating, in pertinent part, as follows:

The mere cashing of the check did not constitute an acceptance of the compromise offer. The only action thereon was the Commissioner’s rejection, of which the taxpayer was notified by the Commissioner’s letter of February 24th.

17. On April 11,1949, a letter, commonly called a “thirty-day letter” was addressed to plaintiff by the Internal Revenue Agent in Charge, Second New York Division, advising the plaintiff of proposed adjustments in his income tax liabilities for the years 1941,1942, and 1943.

18. After being granted two extensions of time, on August 1,1949, plaintiff timely filed a formal protest to the proposed adjustments to his tax liabilities with the Internal Revenue Agent in Charge, Second New York Division.

19. On October 12, 1950, plaintiff filed a waiver on Treasury Department Form 870, consenting to assessment of proposed deficiencies in tax and penalties for the years 1941, 1942, and 1943 which with interest thereon totaled $79,920.77. On November 13, 1950, taxes, penalties and interest for the years 1941, 1942 and 1943 were assessed against plaintiff by the Collector of Internal Revenue, Second New York District as follows:

20. The Collector of Internal Revenue advised plaintiff by a letter dated April 26, 1951, that the Collector’s Office was holding Treasury Check No. 613 in the amount of $41,266.32, representing “a rejected offer in compromise submitted in lieu of an unpaid tax liability.” By a letter dated May 15, 1951, plaintiff’s attorney advised the Collector of plaintiff’s refusal to accept said check in the sum of $41,266.32 “for the reason that it was our understanding that such amount would be credited as of September 19, 1945, to the deficiencies assessed in November 1950.”

21. In a transmittal letter dated July 13,1951, the Collec-. tor enclosed to plaintiff the aforesaid Treasury Check No. 613, bearing date April 26, 1951, and in the amount of $41,266.32. No interest on said amount was computed or paid by defendant.

22. Plaintiff’s attorney responded to said transmittal letter on July 17, 1951, stating that plaintiff “accepts the check under protest, without thereby waiving any rights in this proceeding.” With the said letter of July 17, 1951, there were transmitted to the Collector four checks, each dated July 17, 1951, and payable to the order of Collector of Internal Revenue in the following amounts:

Check No. 150_$18, 021. 80
Check No. 151___ 43,151.20
Cheek No. 152- 16, 617.06
Cheek No. 153_ 2,130. 71

23. The total amount thus paid by plaintiff to the Collector of Internal Revenue was $79,920.77. The difference between said total amount and the sum of $41,266.32 transmitted with plaintiff’s Offer of Settlement on September 7, 1945, is $38,654.45 which is the amount claimed herein by plaintiff in the first cause of action asserted in his petition, as amended.

24. On January 24, 1952, the plaintiff filed timely claims for refund with, the Collector of Internal Revenue covering the years 1941, 1942, and 1943 in the respective amounts of $15,631.58, $17,202.12, and $5,820.75. The total amount so claimed by plaintiff to be refundable for all years involved is $38,654.45. In said claims for refund, taxpayer also stated his alternative claim that he was entitled to interest on the amount of the check described in finding 6 above during the period its proceeds were held by the defendant. At the time of filing of the petition herein, more than six months had expired since the filing of the aforesaid claims for refund. The Commissioner of Internal Revenue has never mailed by registered mail any notice, or notices, of the disallowance of said claims.

CONCLUSION 03? LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover, and therefore, plaintiff’s petition must be dismissed. 
      
       Treas. Reg. 12 (1920 Ed.), Arts. 46 and 48, as amended, T.D. 3652, 1924-2 Cum. Bull. 412, as extended T.D. 4885, 1939-1 Cum. Bull. 396.
     