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Tube v. Manning.

decided: December 20, 1948.


Author: Goodrich

Before BIGGS, Chief Judge, and GOODRICH and O'CONNELL, Circuit Judges.

GOODRICH, Circuit Judge.

This is a suit by a taxpayer to get back some money from the Government. The taxpayer was entitled to a refund for taxes paid in 1941.*fn1 It was repaid $40,384.66 and the Government kept back $4513.34 which it claimed as interest upon an alleged deficiency. The District Court denied relief to the taxpayer who, therefore, seeks help here.

The point of the case can best be understood if non-technically stated, leaving statutory references and the like for footnote elaboration.The taxpayer paid the tax it thought due for income and excess profits for 1941. Later deficiencies on both income and excess profits taxes were asserted by the Commissioner. Because the taxpayer had gone into bankruptcy the assessments were perfected in the accelerated fashion provided for in the statute.*fn2 Then in 1943 the taxpayer had a severe operating loss. By the terms of the statute there is a carry-back provision for the operating loss and the taxpayer is entitled to credit therefor back through 1941.*fn3 As a result of the application of the statutory rule the alleged deficiency in the taxpayer's 1941 tax disappeared. Not only that, but the taxpayer became entitled to a refund on the amount it had paid for the same year. It is the difference between what it paid and what the Government paid it back that is the subject-matter of this suit.

It is argued on behalf of the Commissioner that the money was due when the deficiency was asserted.*fn4 The Government is, on this argument, entitled to interest on the difference between what the taxpayer paid and what the Government claimed until the debt due the Government was swept away by the application of the carry-back provisions of the statute already mentioned. The taxpayer, on the other hand, says that it does not owe interest for non-payment of deficiencies in taxes which, in the light of subsequent events, have been found not to exist.

We think the argument here is overwhelmingly on the side of the taxpayer. It should be noted at the outset that the taxpayer is not claiming any interest from the United States. If it were, a different sort of problem would be presented and some of the rather elaborate argument made on behalf of the Commissioner would be in point.*fn5 All the taxpayer wants is to get back the money it paid the Government which is undisputedly coming to it because of the carry-back provisions.It asks, in other words, for the return of principal only.

Interest not contracted for by the terms of an agreement between parties is generally described as damages for the detention of money to which another is entitled.*fn6 The Government adopts that theory in this case. But what money was the Government entitled to here? As it turned out, taxpayer not only did not owe any money, but had money coming back to it. The only thing on which an interest claim could be predicated is the inchoate liability of the taxpayer which disappeared under the application of the carry-back provisions of the statute.We think that inchoate liability is not sufficient to call for the payment of anything but inchoate interest, whatever that may be, and so far as real money is concerned the taxpayer is entitled to get it back.

Both sides admit there is little decided case law that is very helpful. The taxpayer certainly has analogous authority in its favor in one line of cases. These decisions allowed the recovery by the taxpayer against the Government of interest paid on a tax by the taxpayer in a situation where it developed that the assessment was erroneous. The taxpayer was allowed to recover the interest he had paid in spite of a compromise agreement made with the Government at the time he paid the interest. Big Diamond Mills Co. v. United States, 8 Cir., 1931, 51 F.2d 721; Colorado Milling & Elevator Co. v. Howbert, 10 Cir., 1932, 57 F.2d 769; Phelps v. United States, 2 Cir., 1939, 105 F.2d 904. It also cites a previous ruling by the Commissioner which tends to support this point of view.*fn7

The Commissioner relies heavily on Brandtjen & Kluge, Inc. v. United States, D.C. Minn. 1948, 78 F. Supp. 509. This case is not exactly in point because a plaintiff was trying to get back interest and the court did not think that a refund of a tax included interest. But it is pretty close to the case before us, and the court there relied upon the instant case in the District Court for authority. The Minnesota court also pointed out that the plaintiff's argument was "appealing, forceful and persuasive of the lack of logic in the Bureau's refusal to return the interest * * *." 78 F. Supp. 509, 513.

After reviewing the authorities and reading the legislative history cited to us by each side we conclude to reverse. And the basis for that reversal, simply stated, is that the interest on nothing (what taxpayer owed the Government) is necessarily nothing. Therefore, the taxpayer is entitled to his money.

The judgment will be reversed with directions to order judgment ...

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