
    VIRGINIA ELECTRIC AND POWER COMPANY, SUCCESSOR TO VIRGINIA PUBLIC SERVICE COMPANY v. THE UNITED STATES
    [No. 37-52.
    Decided November 30, 1954]
    
      
      Mr. H. Brice Graves for the plaintiff. Mr. T. Justim Moore, and Messrs. Himton, Williams, Gay, Moore & Powell were on the brief.
    
      Mr. John A. Bees, with whom was Mr. Assistant Attorney General H. Brian Holland, for the defendant. Messrs. Andrew D. Sharpe and Ellis N. Slack were on the brief.
   Madden, Judge,

delivered the opinion of the court:

This is a suit for additional interest which, the plaintiff contends, the United States should have paid in connection with the refund to it of excess profits taxes paid by the plaintiff’s predecessor. The Virginia Public Service Company paid the taxes in question for the year 1941. In 1944 that company was merged into the plaintiff. The refund, the interest on which is here involved, was made after 1944, and was made to the plaintiff, which had succeeded to all the rights of the Virginia Public Service Company. Hereinafter the words “plaintiff” and “taxpayer” will be used indiscriminately in referring to either the plaintiff or its predecessor.

For the year 1941 the plaintiff paid an income tax of $486,898.13, and an excess profits tax of $497,125.11. The income tax was smaller than it would have been if there had been no excess profits tax or a lesser one, since the excess profits tax is deductible from income, for income tax purposes.

In its return for the year 1942, the plaintiff showed an income tax liability of $111,696.91, but showed an excess profits tax credit of $754,833.05 more than the excess profits net income. There was, therefore, not only no excess profits tax due, but there was a large unused credit which, under the provisions of Section 710 (c) of the Internal Eevenue Code, could be carried back to reduce the excess profits income and excess profits tax for the preceding year, 1941. It was agreed between the plaintiff and the tax authorities that the carryback reduced the plaintiff’s 1941 excess profits tax by $430,437.37. As we have said, an excess profits tax, because it is deductible from the income subject to income tax, reduces the income tax. Therefore, when the carryback reduced the plaintiff’s 1941 excess profits tax by $430,437.37, it increased the 1941 income tax income, and the income tax. The amount of that increase was $133,435.56. Thus, retroactively, by reason of the carryback, the plaintiff was in the position of having overpaid its 1941 excess profits tax by $430,437.37, and underpaid its 1941 income tax by $133,435.56.

On June 2,1943, the plaintiff filed a claim for the refund of the $430,437.37 of excess profits tax for 1941. Section 3771 (e) of the Internal Eevenue Code provides that interest payable by the Government to the taxpayer on an overpayment of excess profits tax, which overpayment results from the operation of a carryback, shall not begin to accrue until the taxpayer has filed a claim for refund. Similarly, Section 292 (c) provides that interest on the income tax deficiency which always results from the operation of the carryback, shall not begin to accrue in favor of the Government until the taxpayer has filed its claim for the refund of the excess profits tax.

The claim for refund was, as we have said, filed on June 2, 1943. On that date, therefore, interest began to accrue to the plaintiff against the Government on some $430,000.00, and to the Government against the plaintiff on some $133,-000.00. We now have the interest running. Our problem is to determine how long it ran, in each direction.

On June 25, 1947, the Commissioner of Internal Revenue assessed the income tax deficiency, which, because of a small adjustment, was now determined to be $133,840.91, and interest thereon from June 2, 1943, of $23,348.30, a total of $157,189.21. That interest was computed, not to June 25, 1947, the date of the assessment, but only to April 28, 1946, because, 30 days before April 28,1946, the plaintiff had filed a waiver, which is provided for in Section 272 (d) of the Internal Revenue Code. Section 272 (a) (1) forbids the assessment of a deficiency until 90 days have elapsed after the mailing to the taxpayer of a notice by registered mail advising him, of the impending deficiency. Within the 90 days, the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. But if the taxpayer does not desire to do that, Section 272 (d) authorizes him to file a written notice waiving his right to do so, and consenting to the immediate assessment and collection of the tax. An important reason for the taxpayer, if he has no real objection to the assessment of the deficiency, to file such a waiver is that Section 292 (a) provides that interest on the deficiency shall cease to accrue on the 30th day after the filing of the waiver, or on such earlier day as the deficiency is assessed.

Pursuant to the above provisions, interest against the plaintiff on its deficiency of $133,840.91 ceased to accrue on April 28, 1946, the 30th day after the filing of its waiver. The Government agrees to that. But what of the interest running in the other direction, from the Government to the taxpayer, on the larger sum of $431,744.96. As we have said, it began to accrue on June 2, 1943. Of that principal debt, $157,189.21 was liquidated by applying it against the plaintiff’s deficiency, and the interest accrued on it. That left a balance of $274,555.75 which was refunded to the plaintiff on July 12, 1949, with interest running from June 2, 1943. That part of the transaction is not in dispute.

The dispute is as to how long interest accrued in favor of the plaintiff on the $157,189.21, that part of the plaintiff’s overpayment of its excess profits taxes which was retained by the Government to pay the deficiency of the plaintiff’s income taxes, with accrued interest. The Government, in making its refund, included interest on that amount only to April 28, 1946, the date on which it stopped charging the plaintiff interest on the plaintiff’s deficiency. If it were simply a question of ordinary accounting, the Government would, it seems to us, be right. After the plaintiff had filed its waiver, the amount of its obligation to the Government was agreed upon, and the Government had more than enough of the plaintiff’s money in hand to pay itself. The natural tiling would be for it to credit itself with that amount, and continue to charge itself only with the balance.

But the plaintiff points to a statute which, it says, specifically requires another method of computation. Section 3771 (b) (1) of the Internal Revenue Code says that interest shall be allowed and paid

In the case of a credit, from the date of the overpayment to the due date, of the amount against which the credit is taken, but if the amount against which the credit is taken is an additional assessment of a tax imposed by the Revenue Act of 1921, 42 Stat. 227, or any subsequent Revenue Act, then to the date of the assessment of that amount.

As we have seen, the plaintiff’s deficiency was not assessed until June 25,1947, although the plaintiff had filed its waiver consenting to immediate assessment in March of 1946. The interest on $157,189.21 at six percent for that period of more than a year amounts to $10,897.

The Government says that it has been the uniform practice and policy of the Treasury, based upon equity and fairness, to do what it did in this case. It has refused to recognize the applicability of Section 3771 (b) (1) to such cases. Government counsel, in justification of at least the result reached by the Government, argues that the cases of carry-backs, reducing the excess profits taxes and increasing the income taxes of prior years, do not create true deficiencies, nor true overassessments. They involve, not disputes, but mere mathematical recalculations. They create, so he says, no basis for any statutory notice of a deficiency or for the filing of a statutory waiver, or an appeal to the Tax Court. They create no basis for a formal credit, such as is referred to in Section 3771 (b) (1). Counsel says that the statutory phrase “in the case of a credit” must mean the ordinary kind of a case in which a liability for one taxable year is collected by means of a credit from an overpayment for a different year. Counsel concedes that the Commissioner of Internal Revenue, in his handling of the plaintiff’s affairs, used the words deficiency, overassessment, waiver, and credit as if this were a case where the statutes were applicable. We think the labels were correctly applied, and that the statutes were applicable. We think that the Commissioner of Internal Revenue did not have the power, in the teeth of the statute, to treat the plaintiff’s situation as if it were a mere matter of rational accounting. As to the equities of the situation, we do not know why the Commissioner failed, for more than a year, to make the assessment which had been consented to. If he had made the assessment promptly, the interest here sued for would not have accrued.

The plaintiff is entitled to recover the sum of $10,897.

It is so ordered.

Laramore, Judge; Whitaker, Judge; and Littleton, Judge, concur.

Jones, Chief Judge,

dissenting:

I cannot agree to the conclusion reached by the majority. When plaintiff signed the waiver, the parties were in complete agreement as to all issues involved. The actual assessment was simply a pro forma matter.

The filing of the waiver stopped interest, 30 days after the signing, on the amount due the Government. If the purely ministerial act of levying the deficiency assessment had been made within the 30-day period, it would have stopped the accumulating interest on the item due the plaintiff. To claim interest on an item that for all practical purposes had been settled by agreement of the parties places undue emphasis on the technical provisions of the law, and contrary to its manifest purpose.

The parties were in complete agreement as to both items 30 days before April 28,1946. All parties understood what their rights were. Since interest was stopped as of that date by virtue of the agreement on the item due the Government, it should have ended for the same reason on the amount due the plaintiff. Rodgers v. United States, 123 C. Cls. 779, 783.

FINDINGS OF FACT

The court, having considered the agreed statement of facts submitted by the parties, and the briefs and arguments of counsel, makes findings of fact as follows:

1. Since 1909 plaintiff has been, and still is, a corporation organized and existing under the law of the State of Virginia with its principal office in the city of Richmond. It is an electric public utility corporation and its principal business consists of the generation and sale of electric energy.

2. Virginia Public Service Company, also a Virginia electric public utility corporation (hereinafter referred to as VPS), was formed in 1926 and had its principal place of business in Alexandria, Virginia. On May 26, 1944, VPS was merged with and into the plaintiff. Plaintiff thereupon succeeded to all the rights, privileges, and immunities of VPS by operation of law pursuant to merger statutes of the State of Virginia.

3. VPS kept its books of account on the accrual method and on the basis of a calendar year. It timely filed a federal income and declared value excess profits tax return and an excess profits tax return for the year 1941 with the Collector of Internal Eevenue at Richmond, Virginia. Such returns disclosed an income tax liability of $543,959.90, no declared value excess profits tax liability, and excess profits tax liability of $194,189.20. These taxes were assessed and paid to the Collector on dates and in amounts shown in Exhibits A and B to the petition herein. These exhibits are incorporated in and made a part of this finding by reference.

4. An audit of the 1941 income and excess profits tax returns of VPS in the Bureau of Internal Revenue during 1942 resulted in a determination by the Commissioner of Internal Revenue that its correct income tax liability was $483,019.26 and that its correct excess profits tax liability was $478,356.51, producing an overassessment of income tax of $60,940.64 and a deficiency of $284,167.31 in excess profits tax plus interest thereon of $7,664.73. On July 24, 1942, VPS executed Treasury Form 874, waving restrictions on assessment and collection of this deficiency and accepting the overassessment in income tax. Thereafter, by reason of a further adjustment for an accrual of capital stock tax, the excess profits tax liability as previously determined, was revised to show a total tax liability of $497,125.11 producing a further deficiency of $18,768.60 which with interest of $1,138.46, was assessed as shown on Exhibit B. The prior income tax determination also was changed to show a liability of $486,898.13 and an overassessment of $57,061.77. This overassessment was scheduled and allowed and the deficiency in tax and interest was assessed and collected as shown in Exhibits A and B, corrected as follows: Exhibit B erroneously shows cash payments on September 17, 1942, of $232,733.19 and on May 12,1945, of $21,901.34, when in fact such payments were $232,026.52 and $22,608.01, respectively.

5. On March 15, 1943, VPS filed its income and declared value excess profits tax return and its excess profits tax return for the year 1942 with the Collector at Richmond. This income tax return disclosed an income tax liability of $111,696.91 which was assessed and paid and is not now in controversy. The excess profits tax return disclosed no excess profits tax liability. It reported an excess profits credit of $754,833.05 more than the excess profits net income.

6. On June 2,1943, VPS timely filed with the Collector a refund claim for excess profits tax in the amount of $430,-437.37 paid for the year 1941. The basis of this claim was that the unused excess profits credit of $754,833.05 for 1942, constituted an unused excess profits credit adjustment within the meaning of Section 710 (c) of the Internal Revenue Code applicable to 1941 to reduce the excess profits net income and the excess profits tax liability for that year. Following discussions between representatives of VPS and of the Commissioner of Internal Revenue, it was agreed that a carryback of the unused 1942 credit to 1941 would result in an overassessment of excess profits tax of $430,437.37 and in a deficiency in income tax of $133,435.56 for 1941. VPS filed a Treasury Form 874 waiver on March 29, 1946, consenting to an immediate assessment of the deficiency, and agreed to accept the overassessment. Upon reconsideration, it was later agreed that the determined overassessment of 1941 excess profits tax should be $431,744.96 and that the income tax deficiency was $133,840.91. VPS filed another Form 874 waiver on March 13, 1947. Copies of the claim for refund and of the two waivers appear as Exhibits C, D, and E to the plaintiff’s petition and are incorporated herein by reference.

7. On June 25,1947, a deficiency of $157,189.21, including $133,840.91 as income tax, and $23,348.30 as interest thereon, was assessed against VPS. This interest was computed as follows: The sum of $28,254.34 was calculated on $133,435.56 from June 2, 1943, which was the filing date of the refund claim, to April 28, 1946, which was 30 days after the first waiver was filed. The sum of $93.96 was calculated on $405.35 from June 2, 1943, to April 13, 1947, which was 30 days after the second waiver was filed. This deficiency was collected as shown on Exhibit A.

8. The overassessment of $431,744.96 in 1941 excess profits tax was allowed as an overpayment and credited or refunded to Virginia Electric and Power Company as shown on Exhibit B; $274,555.75 was refunded by Treasury check dated July 12,1949, and the interest paid on that refund is not now in dispute. The remaining $157,189.21 of the overassessment was credited as follows :

(a) 1941 income tax (first waiver)_$133,435.56
(b) Interest on item (a), above_ 23,254. 34
(c) 1941 income tax (second waiver)_ 405.35
(d) Interest on item (c), above_ 93.96
Total_ 157,189.21

Interest on $157,189.21 at six percent per annum for the period March 29, 1946 at which time the waiver was filed, through June 25, 1947 when the deficiency was assessed, amounts to $10,897.

9. Interest of $27,422.71 was allowed and has been paid on the portion ($157,189.21) of the 1941 overpayment of excess profits tax credited to 1941 income tax and interest as shown on Exhibit B as follows:

(a) On $133,435.56' and $23,254.34 (items (a) and (b) of Paragraph 8, above) from June 2,1943, which was the date the refund claim was filed, to April 28,1946, which was 30 days after the first waiver was filed_$27,306.97
(b) On $405.35 and $93.96 (items (e) and (d) of Paragraph S, above) from June 2, 1943, to April 13, 1947, which was 30 days after the second waiver was filed_ $115.74
Total_ 27,422.71

■ 10. In letters dated February 17 and August 18,1950, and April 26 and June 21, 1951, from the plaintiff to the Commissioner of Internal Bevenue and in conferences between representatives of the plaintiff and of the Commissioner in 1950 and 1951, it was contended on behalf of the plaintiff that more interest should have been allowed and paid. Representatives of the Commissioner of Internal Revenue refused to authorize or make any additional allowance and so advised the plaintiff in a letter dated October 10,1951, of which a copy is attached as Exhibit E to the plaintiff’s petition, incorporated herein by reference.

11. The computations of interest assessed against YPS (finding 7 above) and of interest allowed and paid to Virginia Electric and Power Company (finding 9 above) were made in accordance with a uniform policy and practice of the Internal Revenue Service established after 1989 and continued to date. Such practice was based upon and followed a policy established in the Office of the Commissioner of Internal Revenue. It was not based upon any ruling either published or unpublished of the Chief Counsel commonly known as a G. C. M.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiff is entitled to recover, and it is therefore adjudged and ordered that it recover of and from the United States the sum of ten thousand eight hundred ninety-seven dollars ($10,897.00). 
      
      Amended January 21, 1955.
     
      
       Amended January 21, 1955.
     
      
      Amended January 21, 1955.
     