
    RODNEY MILLING COMPANY v. THE UNITED STATES
    [No. 46483.
    Decided February 2, 1948]
    
      
      Mr. Temple W. Seay for the plaintiff.
    
      Mr. Phil D. MoreloeJc and Mr. Joseph A. Hoskins were on the brief.
    
      Mrs. Elizabeth B. Davis, with whom was Mr. Acting Assistant A ttorney General Bewail Key, for the defendant. Mr. Andrew D. Sharpe and Miss Helen R. Oarloss were on the brief.
   Littleton, Judge,

delivered the opinion of the court:

The question involved in this tax case is whether plaintiff is entitled to the benefits of Section 128 of the Internal Revenue Code (added by Section 157 of the Revenue Act of 1942,56 Stat. 798,856) which provides for an election method in the taxability of recovered unconstitutional Federal taxes.

Plaintiff is engaged in the flour milling business and during the period July 9, 1933, to and including April 30, 1935, it paid processing taxes under the Agricultural Adjustment Act. In its income tax returns for the fiscal year ended May 31, 1934, and May 31,1935, it took processing taxes as deductions from gross income. After that act was declared unconstitutional by the Supreme Court on January 6, 1936, Congress enacted the Revenue Act of 1936, 49 Stat. 1648, which provided in Title YII thereof for the refund of amounts collected under the Agricultural Adjustment Act and also by Title III of the same act for a tax on unjust enrichment on account of the unconstitutional processing taxes which had been collected and as to which plaintiff had received or would receive a benefit through deductions from gross income for income tax purposes, through refund or otherwise. Thereafter plaintiff duly filed claims for refund of processing taxes. It also filed unjust enrichment tax returns for the fiscal years ending May 31,1935, to May 31,1937, inclusive, in connection with which the Commissioner later determined tentative deficiencies in the unjust enrichment tax for those three years. After conferences between'the officials of the Bureau of Internal Revenue and counsel for plaintiff, a compromise was reached of the claims of the respective parties as to the amount of the liability for processing taxes and also the liability for unjust enrichment taxes. Pursuant to Section 506 of the Revenue Act of 1936, 49 Stat. 1739, a written agreement was executed by plaintiff on January 27,1942, embodying the terms of the compromise, under which it was agreed that plaintiff would pay a net amount of $50,521.68 in satisfaction of its liability for the unjust enrichment tax after the allowance of credit for the refund of processing taxes. On the same day that agreement was entered into, January 27, 1942, plaintiff executed a further document in which it agreed that such net amount was determined by deducting from a total unjust enrichment tax and interest of $136,673.40 a refund of processing taxes and interest of $86,151.72 (which was made up of processing tax in the amount of $59,478.92 and interest of $26,672.80). On the same day, plaintiff executed a still further document in which it agreed to include in its income tax return for the year of recovery the processing taxes which were credited against the unjust enrichment tax in the agreement referred to above. The Commissioner accepted the agreement on March 27, 1942, which made effective the credit or recovery of the $59,478.92 of processing taxes on that date. In accordance with its agreement, plaintiff included the amount of such credit in its income tax return for the fiscal year ended May 31,1942, and paid the tax shown due thereon.

After the enactment of the Eevenue Act of 1942, which became effective October 21,1942, plaintiff, on April 14,1943, filed a claim for refund of $21,712.94 for the fiscal year ended May 31, 1942, in which it sought the recovery of the entire amount of tax paid on account of the inclusion in that return of the refund of processing taxes of $59,478.92 on the ground that such amount did not represent income for 1942. In the alternative, it asked for the refund of $10,560.65 on the ground that it was entitled to the benefit of the application of Section 128 of the Internal Eevenue Code.

Pursuant to Section 128, plaintiff, on April 26, 1943, filed with the Commissioner the executed form required by the Commissioner’s regulations under that statute setting out its election and consent relative to the treatment of the item of $59,478.92. The Commissioner disallowed the claim in its entirety.

Plaintiff’s petition here is along the same lines as the claim for refund, that is, it seeks recovery of the total amount of tax, and in the alternative the benefits of Section 128. However, it has now abandoned the claim for the larger amount, thus leaving for consideration the single question of the applicability of Section 128 which reads as follows:

Income (excluding interest) attributable to the recovery during the taxable year of a tax imposed by the United States which has been held unconstitutional, and in respect of which a deduction was allowed in a prior taxable year may be excluded from gross income for the taxable year, and the deduction allowed in respect thereof in such prior taxable year treated as not having been allowable, if—
(a) The taxpayer elects in writing (at such time and in such manner as may be prescribed by regulations prescribed by the Commissioner with the approval of the Secretary) to treat such deduction as not having been allowable for such prior taxable year, and
(b) The taxpayer consents in writing to the assessment, within such period as may be agreed upon, of any deficiencies resulting from sucli treatment, even though the statutory period for the assessment of any such deficiency had expired prior to the filing of such consent.

The facts with respect to income and deductions and as to the action required in meeting the prescribed conditions clearly bring plaintiff within the above statute and permit recovery unless it is precluded from such recovery by certain facts-and conditions which we will discuss later. Taking section 128 as it is written and applying its provisions to the facts in this case, we find that the income with which we are concerned ($59,478.92) represents an unconstitutional tax which plaintiff recovered by way of credit in the fiscal year ended May 31, 1942, and that when those taxes were paid in the fiscal years ended May 31,1934, and 1935, deductions were taken therefor in the income tax returns for those years. Where that condition exists the statute provides that the amount of the recovery income may be excluded in the year of recovery, provided two conditions are met, namely, that the taxpayer file notice of his election at such time and in such maimer as the Commissioner may prescribe by his regulations, and that the taxpayer consent in writing to an assessment of deficiencies on account of disallowance of the deductions which were taken in the years when the unconstitutional tax was taken as a deduction. Plaintiff duly filed such notice of election and consent. Without more, plaintiff has satisfied every requirement of the statute.

Defendant opposes recovery, however, on a number of grounds, the first of which is that such recovery is prohibited by the Commissioner’s regulations. The Commissioner, in Treasury Kegulations 103, in prescribing the terms and conditions under which recoveries may be had under Section 128, set out the following situations under which, recovery conld not be had:

Where a taxpayer’s liability for income tax with respect to the deduction or the recovery or with respect to the tax liability for the year of the deduction or recovery has been finally determined by a written agreement or by a decision of the Board of Tax Appeals or of any court, the taxpayer will not be entitled to the benefits of section 128 or of this section.

Clearly, if that provision is valid, plaintiff is precluded from recovery because a written agreement was certainly entered into with respect to the amounts of the taxes with which we are concerned and also, for one of the years for which a deduction was taken, a petition was filed with the Tax Court. However, we are of the opinion that such provision of the regulations is not authorized either by the statute in question or by the Commissioner’s general authority to make regulations. The only provision in Section 128 with respect to regulations is that the Commissioner may prescribe the time and manner in which the taxpayer shall make his election and that condition has been fully complied with by plaintiff. In addition, the Commissioner, of course, has general authority to make regulations and those regulations have the force and effect of law if they are reasonable and come within the law with respect to which they are issued. Maryland Casualty Co. v. United States, 251 U. S. 342; United States v. Kirby Lumber Co., 284 U. S. 1; and Commissioner v. Wheeler, 324 U. S. 542. However, a regulation which does more than seek to carry out the intent of Congress and thereby alter or amend the law is without force and effect. Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129. The statute provides in plain terms that where unconstitutional taxes are recovered in a later year and a taxpayer has received the benefit from an income tax deduction in an earlier year, the. amount of recovery may be excluded from income, provided the taxpayer so elects as required by the statute, and, in addition, consents to the assessment of the deficiency or deficiencies for the year or years where the original benefit was had from the deduction. There is nothing in the statute which would justify placing-these additional limitations on the right of recovery.

Defendant, however, says in effect that plaintiff, as a matter of law, is not entitled to recover for the very reasons which are set out in the regulations and that therefore the regulations are reasonable and should be sustained. The first of' these reasons is that a written agreement was entered into' on account of the unconstitutional tax with which we are concerned and that to allow recovery in this case would be in violation of that agreement. We do not so read the agreement and the effect of the applicability of this statute thereon. Plaintiff does not here question the amounts agreed upon. Under the agreement the amount of the unjust enrichment, tax for which plaintiff was liable was determined and the amount of the recovery of processing taxes to which plaintiff' was entitled was also determined. These matters to which the agreement of March 27 related have not been changed. One-consideration in connection with the agreement was that the amount of the recoverable processing taxes for which plaintiff was given credit in the agreement in reduction of its unjust enrichment tax, would be included in taxable income for income tax purposes in the year of recovery. Plaintiff' carried out that portion of the agreement. However, after-all of these events had occurred, an entirely new statute was. enacted which gave to plaintiff a right which it did not theretofore have, namely, a right of election with respect to the-treatment for income tax purposes of the recovered processing taxes. The written agreement which plaintiff and the-Commissioner entered into was provided for by a specific section (506) of the same act (Revenue Act of 1936) which provided for the taxation of unjust enrichment in Title IIT and the recovery of unconstitutional taxes in Title VIX. That, statute provides that an agreement thereunder shall be a final settlement of the “liability for tax and the claim or claims for refund covered by such agreement.” The allowance of recovery by plaintiff under Section 128 in this proceeding, will1 in no manner change the liability for tax nor the refund covered by the agreement. Since all of these provisions were in the Revenue Act of 1936 when Congress added Section 128-to tbe Internal Revenue Code by the Revenue Act of 1945 which dealt with the subject matter of these provisions, it is reasonable to conclude that had Congress intended to limit the right of recovery in the manner provided in the regulations it would have done so in express terms. Since it did not do so and since the statute is clear and unambiguous, we can not agree that such limitation was either intended or that plaintiff, because of the agreement, is precluded from pursuing its new right of action thereunder.

The further objection is made and also provided in the regulations that recovery cannot be had by reason of the finality of a decision by the Tax Court. At or about the same time when the closing agreement was under consideration, plaintiff had appealed to the Tax Court on account of deficiencies determined by the Commissioner for the fiscal years ended May 31, 1935, and 1936. These deficiencies had resulted in ¡part from the disallowance by the Commissioner of deductions claimed by plaintiff of processing taxes paid for those years. These petitions were settled by a stipulation of the parties in which deficiencies were determined for each year •and a decision was entered thereon by the Court in accordance therewith. One of the considerations which induced the ■Commissioner to enter into the stipulation was that plaintiff had agreed in the agreement heretofore mentioned, to include the recoverable processing taxes in taxable income for the fiscal year ended May 31,1942, which plaintiff did as we have shown. The allowance of recovery here will not affect the finality of the Tax Court’s decision with respect to anything which was there determined. This suit is not for recovery of any tax for 1935 but rather the suit is for 1942. All the statute does by setting up a new cause of action of which plaintiff is taking advantage is to say that the amount to (which plaintiff would otherwise be entitled for 1942 on account of the exclusion of the refund of processing taxes from income, should in effect be reduced on account of any benefit which plaintiff theretofore received from taking these taxes as a deduction in prior years. This is accomplished by requiring that plaintiff consent to the assessment of deficiencies for the years where the benefits were derived even though tbe statute of limitations bars such assessment. The objection of defendant in this respect would not be applicable to 1984, where no petition was filed, and also we do not think it is valid as to 1935 for the reason that it is a new right given by this statute in order to reduce the amount which would otherwise be recoverable when suit is brought for the later year and thus prevent what would otherwise be an inequitable adjustment and give to a taxpayer a double benefit.

The further question remains as to the amount of the judgment which should be entered. The matter is not discussed by the parties other than a request by plaintiff, to which no objection is made, that judgment be entered in its favor for $10,560.65, which, under its computation, represents the difference between the tax on the excluded overpayment of $59,478.92 for 1942, that is, $21,712.94, and the total of the two deficiencies for 1934 and 1935 of $11,152.29 due to the disallowance of corresponding deductions in those years ($29,190.24 in 1934 and $30,288.68 in 1935).

While subsection (b) of Section 128, supra, refers to “assessment” of any resulting deficiencies, it is clear that the purpose of this subsection was to exact of the taxpayer, as a condition to the treatment authorized by the statute, in written consent that he would pay any deficiency resulting from such election and treatment even though the bar of the statute on assessment and collection of such deficiencies had fallen. The statute, as is usual in internal revenue laws, is couched in administrative language, but it has long been recognized by such laws, and this court has long recognized in cases before it, that liability for taxes may be paid or satisfied without the necessity of a formal administrative assessment. This court has jurisdiction to determine all claims which the Government may have against a claimant and to-determine and apply all legal offsets and credits. Although not formally set up by a pleading, the Government has a claim under the statute against plaintiff for the “resulting deficiencies” for 1934 and 1935, which plaintiff has consented in writing to pay, and the defendant should have judgment for these deficiencies.

In view of the foregoing, entry of judgment in favor of plaintiff for the overpayment for the fiscal year ended May 31,1942, on account of the exclusion from the income of that year of the recovered processing tax of $59,478.92, will be suspended pending a submission by the parties of a computation of the amount of such overpayment and the amount of the resulting deficiencies for the fiscal years ended May 31, 1934, and May 31,1935. It is so ordered.

Howell, Judge; Madden, Judge; Whitaker, Judge; and Jones, Chief Justice, concur.

In accordance with the above findings of fact, conclusion of law and opinion entered February 2, 1948, a stipulation was filed by the parties June 17, 1948, setting forth that the correct amount of the overpayment of income, excess profits and declared value excess profits tax for the fiscal year 1942 is $22,262.68, and that the interest thereon from the dates of payments should be computed “on the amount of $2,934.23 from December 12, 1944; on the amount of $16,872.59 from April 22,1943; on the amount of $818.62 from February 10, 1943; on the amount of $818.62 from November 16, 1942; and on the balance of $818.62 from August 16,1942.”

Pursuant to the stipulation of the parties and the provisions of Section 157 of the Revenue Act of 1942, it was ordered, June 21, 1948, that judgment be entered for the plaintiff in the sum of $11,152.29 with interest at six percent per annum on $5,473.17 thereof from August 15, 1934, and on $5,679.12 thereof from August 15, 1935, to June 21, 1948 (date of judgment in lieu of assessment).

It was further ordered that judgment be entered for the plaintiff in the sum of $22,262.68, with interest at six percent per annum on the amount of $2,934.23 from December 12, 1944; on the amount of $16,872.59 from April 12, 1943; on amount of $818.62 from February 10, 1943; on the amount of $818.62 from November 16, 1942, and on the balance of $818.62 from August 16, 1942, in accordance with Section 177 (b) of the Judicial Code as amended by Section 808 of the Revenue Act of 1936.  