1. While a claim for abatement of a deficiency assessment was
before the Commissioner of Internal Revenue, and when the period of
limitation on collection was about to expire, the taxpayer, in
order to secure delay and opportunity to present further proofs,
filed a bond to indemnify the Collector against any resulting loss.
After the period of limitation had run, the taxpayer filed a second
bond, for the purpose of releasing the surety on the first and
substituting a pledge of securities; then a third bond releasing
the pledge and introducing another surety. Each of the later bonds
recited the assessment, the pendency of the claim for abatement,
and the preceding bond, and was conditioned upon payment to the
Collector of such amount of the tax "as is not abated." Thereafter,
the Commissioner rejected the claim for abatement and sustained the
assessment, but the Board of Tax Appeals, which was not established
until after the second bond had been given, held at the instance of
the taxpayer that no tax deficiency existed, since collection
Page 287 U. S. 33
was barred by limitations. The United States sued on the third
bond.
Held:
(1) The bonds must be construed together in the light of the
circumstances. P.
287 U. S.
42.
(2) The purpose of the later bonds was to continue the
protection afforded by the first against any loss from delay,
whether through extinguishment of rights under the statute of
limitations or otherwise.
Id.
(3) The possible abatement referred to was partial reduction or
annulment of the assessment by the action of the Commissioner, or,
possibly, by a decision of the Board of Tax Appeals on the merits.
Pp.
287 U. S.
43-44.
(4) The action of the Board of Tax Appeals, announcing the bar
of the statute of limitations at the instance of the taxpayer, but
not determining the merits, was not an abatement within the meaning
of the bonds. P.
287 U. S.
44.
2. Section 906(e) of the Revenue Act of 1924, as amended by the
Acts of 1926 and 1928, which provides that, if the assessment or
collection of any tax is barred by limitations, the decision of the
Board of Tax Appeals to that effect "shall be considered as its
decision that there was no deficiency in respect of such tax" does
not release the taxpayer and surety from a bond, given before the
section was passed, for the purpose of protecting the United States
from loss that might result from according the taxpayer further
time within which to contest the validity of an assessment. Pp.
287 U. S. 43,
287 U. S. 45.
3. A literal construction of a statute leading to absurd results
should be avoided if possible. P.
287 U. S. 45.
56 F.2d 43 affirmed.
Certiorari, 286 U.S. 536, to review the affirmance of a judgment
recovered by the United States in an action on a bond.
Page 287 U. S. 34
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
In the District Court for Alabama -- August 25, 1930 -- the
United States sued the Gulf States Steel Company, principal, and
National Surety Company, surety, petitioners here, upon a bond
dated September 9, 1925, whereby they agreed to pay Snead,
collector of internal revenue, so much of the additional income and
profits taxes for 1917 assessed by him against the principal in
1921 "as is not abated." Judgment on a verdict went for plaintiffs;
the Circuit Court of Appeals affirmed; the matter is here by
certiorari.
Petitioners say the sole question presented is whether the
additional taxes were abated by the determination of the Board of
Tax Appeals (July 10, 1928) in a proceeding brought by the Steel
Company to review the Commissioner's final rejection of its demand
for abatement. The Board held
"that the respondent is now barred by statute from collecting
any part of the additional assessment made in April, 1921, and that
there is no deficiency for the year 1917."
It directed entry of an order to that effect.
The petition for certiorari asserts: "The sole question in this
case is whether the final decision of the Board that there was no
deficiency
abated' the tax." The following is the only
specification of error relied on here:
"That the Court erred in holding that the claim for the
deficiency of taxes was not abated by the final decision of the
United States Board of Tax Appeals that there was no
deficiency."
And, in their brief, counsel for petitioners say: "The sole
Page 287 U. S. 35
question in this case is whether the final decision of the Board
that there was no deficiency
abated' the tax."
March 28, 1918, the Steel Company filed its income and excess
profits tax return for 1917, and shortly thereafter paid the amount
apparently due. In April, 1921, the Commissioner made a deficiency
assessment of $153,815.30; May 6, 1921, the company filed claim and
demand for abatement of this entire sum upon the ground that the
additional assessment was unwarranted and illegal insofar as it
resulted (1) from the failure to compute the invested capital by
including the actual cash value of claimant's property on January
1, 1914; (2) from the action of the examiners in deducting only 7
percent of invested capital, instead of 8 percent, and (3) from
disallowance of certain interest payments as part of invested
capital.
March 13, 1923, fifteen days before the five-year statute would
have barred collection of the deficiency assessment, the additional
tax being wholly unpaid and the abatement claim undetermined, in
order to secure delay and further consideration of objections, the
taxpayer as principal, with the American Surety Company as surety,
gave the collector a bond for $175,350, which recites:
"The condition of the above obligation is such that, if the said
Gulf States Steel Company will indemnify the said W. E. Snead as
Collector as aforesaid, or his successor in office, against all
loss, cost, damage, and expense to which he may be put by reason of
having allowed the said Gulf States Steel Company to withhold the
payment to him, as such Collector, of the sum of One Hundred and
Fifty-three Thousand Eight Hundred Fifteen and 30/100 Dollars
($153,815.30), claimed of it under the War Revenue Act of 1917,
pending the filing, by the said Gulf States Steel Company of
additional facts and information in support of a claim for the
abatement of said amount heretofore filed by it, then this
obligation to be null and void, otherwise, to be and remain in full
force and effect."
April 3, 1925, in order to obtain release of the American Surety
Company from the above-described bond, also to
Page 287 U. S. 36
make certain the payment of whatever the commissioner might
thereafter finally declare to be payable under the deficiency
assessment of 1921, the Steel Company executed a second obligation
and pledged as security $200,000 United States Liberty loan bonds.
This obligation recites:
"Whereas the Gulf States Steel Company did execute a bond in the
penal sum of One Hundred Seventy-five Thousand, Three Hundred and
Fifty Dollars, ($175,350.00), and in favor of W. E. Snead,
Collector of Internal Revenue, for the District of Alabama, which
said bond was signed by the American Surety Company of New York, as
surety, under date of the 13th day of March, 1923, and was given in
support of a claim for the abatement of assessments, penalties and
interests, under the Revenue Act of 1917. Being desirous of
relieving the above bound surety Company and further securing the
payment of any amount found to be due the United States government
under the above Revenue Act, now therefore if the undersigned Gulf
States Steel Company shall pay to W. E. Snead, Collector, or his
successors in office, such amount of the claim as is not abated,
together with all costs, damages, penalties, interest, or other
expense connected therewith, then this obligation shall be void,
otherwise it shall remain in full force and effect."
September 9, 1925, the Steel Company as principal, and National
Surety Company as surety, executed the bond in suit, conditioned as
follows:
"Whereas, an additional income tax has been assessed for the
year 1917 in the sum of One Hundred Fifty-three Thousand Eight
Hundred and Fifteen Dollars and Thirty Cents ($153,815.30), with
penalty and interest against the Gulf States Steel Company of
Birmingham, Alabama. A claim for the abatement of the additional
tax was filed with the Collector of Internal Revenue for the
District of Alabama at Birmingham. On the third day of April,
Page 287 U. S. 37
1925, the Gulf States Steel Company did execute its bond
securing the payment of so much of the additional assessment,
penalties and interest as is not abated. In lieu of surety on the
above bond, the said company did deposit with the Federal Reserve
Bank of New York, under Section 1029 of the Revenue Act of 1924,
the following described United States, Fourth Liberty Loan 4 1/2%
Gold Bonds of 1933-8 series, being of the par value of $200,000.00
(coupons), numbers ___. The above bonds were deposited on account
and subject to the orders of W. E. Snead, Collector of Internal
Revenue for the District of Alabama. Now therefore if W. E. Snead,
Collector of Internal Revenue, shall release and surrender the said
bonds to the said Company, and the principal, or sureties, either
or both, shall pay to the said Collector so much of the amount of
the claim as is not abated, together with penalties and interest
thereon as provided by Law, then this obligation shall be of no
effect. Otherwise, it shall remain in full no effect. Otherwise, it
shall remain in full force."
May 12, 1926, the Commissioner finally rejected
in toto
the Steel Company's long pending claim for abatement of the
additional assessment of 1921, and gave proper notice. This notice,
among other things, stated:
"You are allowed 60 days (not counting Sunday as the sixtieth
day) from the date of mailing of this letter within which to file a
petition with the United States Board of Tax Appeals, Earle
Building, Washington, contesting in whole or in part the
correctness of this determination."
By an original petition to the Board of Tax Appeals, July 9,
1926, the Steel Company asked a "redetermination of the deficiency
set forth by the respondent [Commissioner] in his notice of
deficiency . . . dated May 12, 1926." The prayer follows:
"The petitioner prays for relief from the deficiency asserted by
the respondent and from payment of the taxes
Page 287 U. S. 38
assessed in the following and each of the following
particulars:"
"(a) That the petitioner be allowed as a deduction from its
gross income for the year 1917, the sum of $47,021.82 as
amortization of the cost to it of the lease (or stock) of Clinton
Mining Company or as depletion or exhaustion of the leased
properties based upon a cost of $145,000.00; or (b) That the
Clinton Mining Company be granted a reasonable allowance for the
exhaustion or depletion of the leased properties based upon a March
1, 1913, value of the leasehold, and that amount so allowed be
deducted in computing the consolidated net income of the
petitioners and Clinton Mining Company for the year 1917: (c) That
the petitioner be allowed $11,000,000.00 in computing its invested
capital for 1917, on account of the property paid in for stock on
December 1, 1913."
"Wherefore petitioner prays that this Board may hear and
determine the deficiency herein alleged."
By an amended petition, March 2, 1927 (after
Bowers v. New
York & Albany Lighterage Co., 273 U.
S. 346), the Steel Company renewed its request for "a
redetermination of the deficiency set forth by the respondent in
his notice of deficiency" dated May 12, 1926.
The petitions are identical, except the amended one contains two
new paragraphs which allege extinguishment through the statute of
limitations of all liability of the Steel Company for the
additional taxes; also the following new prayer:
"(d) That the Board determine that the liability of the
petitioner for the payment of the alleged deficiency has been
extinguished by the running of the Statute of Limitations upon its
collection and/or that the collection of said alleged deficiency
was barred at the expiration of five years after said returns were
filed. "
Page 287 U. S. 39
The Board of Tax Appeals in July, 1928, held:
"None of the bonds in the instant case can be said to constitute
a consent in writing by both the Commissioner and the taxpayer to a
later determination, assessment, and collection of the tax in
question, and no other exception to the running of the statute of
limitations provided in any of the Acts being present, and no suit
or proceeding for the collection of tax having been begun prior to
the expiration of five years from the date of filing the return,
and the five-year period having expired prior to the passage of the
Revenue Act of 1924, we hold that the respondent is now barred by
statute from collecting any part of the additional assessment made
in April, 1921, and that there is no deficiency for the year 1917.
Bowers
v. New York & Albany Lighterage Co., [
273 U.S.
346]; C. B. Shaffer v. Commissioner, [12 B.T.A. 298];
United
States v. John Barth Co.. [
279
U.S. 370]; Art Metal Works v. Commissioner, 9 B.T.A. 491. Our
decision in this respect in no wise disposes of any questions
arising as to liability on the bond."
The consequent formal entry recites:
"It is ordered and adjudged that the collection of the
deficiency, if any, in income and excess profits taxes for the year
1917 is barred by the Statute of Limitations. . . ."
Bowers v. New York & Albany Lighterage Co.,
273 U. S. 346,
construed the provision, Revenue Act 1921, prohibiting suit or
proceeding for the collection of income or excess profits taxes
after five years subsequent to the return, and held it applied both
to suits in court and to distraint proceedings. Prior to this tax,
officers went upon the view that the statute of limitations did not
apply to distraint.
United States v. John Barth Co., 279 U.
S. 370, ruled that the limitation in Revenue Acts 1918,
1919, 1921, and 1924 upon the time within which income and
Page 287 U. S. 40
excess profits taxes may be assessed and suits begun to collect
is inapplicable where the suit is upon a bond given to secure
payment of taxes theretofore returned and assessed, in order to
obtain postponement of payment pending decision upon claim for
abatement; also, that a bond made in such circumstances affords a
cause of action separate and distinct from one to collect the
tax.
Prior to 1924, in order to contest the Commissioner's
assessment, the taxpayer had to pay the sum demanded and bring suit
to recover.
Graham v. Du Pont, 262 U.
S. 234,
262 U. S. 258.
Title IX, Board of Tax Appeals, Act June 2, 1924, c. 234, 43
Stat. 253, 336, established the Board of Tax Appeals and authorized
it to hear appeals from the Commissioner's action in respect of
deficiencies before payments, etc. Under this act, if the Board
disallowed an alleged deficiency, thereafter the Commissioner could
enforce collection only by suit in court.
The Revenue Act, February 26, 1926, Title X; Board of Tax
Appeals, c. 27, 44 Stat. 9, 105, 107, amended Title IX, Board of
Tax Appeals, Organization and Procedure, Act of 1924,
supra, by adding thereto, among other things (under
subtitle "Organization and Procedure"), the following wholly new
paragraph:
"Sec. 906(e) If the assessment or collection of any tax is
barred by any statute of limitations, the decision of the board to
that effect shall, for the purposes of this chapter and of this
title and of the Revenue Act of 1926, be considered as its decision
that there is no deficiency in respect of such tax."
Sec. 274(a) and (b) of this Act are in the margin.
*
Page 287 U. S. 41
The Revenue Act, May 29, 1928, "Title IV, Administrative
Provisions," 45 Stat. 791, 871, 872, c. 854, § 601, amended the
above-quoted § 906(e) to read:
"If the assessment or collection of any tax is barred by any
statute of limitations, the decision of the Board to that effect
shall be considered as its decision that there is no deficiency in
respect of such tax."
The original complaint in the present cause alleges that the
Steel Company's claim for abatement of the additional assessment
for the year 1917 was rejected by the Commissioner May 12,
1926,
"for the full amount thereof, whereby there remained unpaid and
unabated of the said assessment One Hundred Fifth-three Thousand,
Eight Hundred Fifteen Dollars and Thirty Cents ($153,815.30), which
said finding and determination of the Commissioner of Internal
Revenue rejecting said claim for abatement has remained and now is
in full force, vigor and effect, unvacated, unreversed, and
unmodified, and is subject to no credits, set-offs or counterclaims
other than hereinafter
Page 287 U. S. 42
set forth."
Petitioners denied this allegation. They maintained that the
Commissioner's action had been reversed and the additional taxes
abated by the opinion and ruling of the Board of Tax Appeals, and
this seems to have been the only point relied upon in the Circuit
Court of Appeals which rejected petitioners' theory and approved
the challenged judgment on the bond.
Concerning the Board's action, that court said:
"This is not a finding that the tax or any part of it should be
abated. It does not abate any part of it. It is but a formal
judgment that the tax, as tax, is, because the bar of limitations
has fallen, not collectible. Since it is this, and no more, it has
the effect upon the suit on the bond here, and no more, that the
fact found in the Barth case and the legal conclusion there
announced, that time had run against the tax and that it was
therefore uncollectible, had on the suit on the bond there."
The bond in suit must be construed in the light of surrounding
circumstances.
Hill v. American Surety Co., 200 U.
S. 197,
200 U. S.
203-205. They are narrated above.
As in
United States v. John Barth Co., supra, the plain
purpose of the first bond, March 13, 1923, was to prevent immediate
collection of the assessed additional taxes and to provide against
any loss which might follow delay whether through extinguishment of
rights under the statute of limitations or otherwise. We think it
sufficiently clear that the two succeeding bonds were intended to
continue the protection afforded by the first. The taxpayer, having
attained its purpose through these bonds, now claims that the
United States cannot enforce the obligation which induced the delay
contemplated by all parties. It seeks escape through literal
construction of a statute evidently designed to protect taxpayers
in different circumstances.
Considering the state of the record, it is only necessary now to
pass on one point: were "the additional assessments, penalties and
interest" "abated" by the Board of
Page 287 U. S. 43
Tax Appeals' final determination, within the meaning of the bond
in suit? Unless this is answered in the affirmative, the judgment
below must stand. There is no suggestion that it should be upset
upon any other ground.
Petitioners maintain that the Board had jurisdiction of the
appeal from the Commissioner, that it definitely ruled "the
collection of the deficiency, if any, of income and excess profits
taxes for the year 1917 is barred by the Statute of Limitations,"
and that the necessary result of this ruling was abatement of the
additional assessments mentioned in the 1925 bond. This conclusion,
they say, is inescapable under the clear mandate of § 906(e),
Revenue Act of 1924, as amended by the Acts of 1926 and 1928:
"If the assessment or collection of any tax is barred by any
statute of limitations, the decision of the Board to that effect
shall be considered as its decision that there is no deficiency in
respect of such tax."
As the provisions of § 906(e) first came into the law after
execution of the bond, they could not then have been within
contemplation of the parties. The bond of 1925, like the two
preceding ones, was given to protect the United States against
loss; it referred to the tax liability existing March 13, 1923,
$153,815.30, and was intended to guarantee payment of that sum
unless reduced or annulled by some future action of the
Commissioner. Payment might have been enforced, but the taxpayer
claimed the amount assessed was too high, and procured further
delay for investigation by executing the bond. The possible
abatement -- partial reduction or annulment -- there referred to
depended upon the future decision of the Commissioner.
On appeal to the Board, the taxpayer challenged the assessment
as erroneous; also because under the statute of limitations there
remained no right to enforce the tax. As to the first ground, the
Board found nothing. It declared only that the statute had run
against the right to collect the tax -- this upon the taxpayer's
prayer. In no
Page 287 U. S. 44
proper sense was there a redetermination of the deficiency
assessed in 1923. The anticipated bar of the tax by the statute
could not affect the controversy -- was not the point in issue, was
not disputed. The bond required payment of a stated sum under the
assessment already made, unless this should be abated by the
Commissioner. What abatement should be allowed was the matter
before him, and a reexamination of his determination was
necessarily limited to those matters which might have been
presented to him. By the prayer based on the statute of
limitations, the taxpayer defeated a determination of the real
controversy.
In the circumstances, possibly, a decision upon the merits might
have been regarded as the Commissioner's action within the
implication of the bond. The effective scope of the decision
rendered is no broader than the issue, opinion, and findings. It
left undisturbed the Commissioner's assessment of 1923. This the
bond undertook to pay wholly without regard to the right to enforce
the tax as such.
The existence of the bar under the statute, as against the lien
or right to enforce the tax as such, was never the subject of
controversy -- was not denied. And, as the present suit is not to
enforce the tax as such, but an obligation given in contemplation
of the loss of right to enforce, a decision proclaiming this loss
is but announcement of something expected by all parties -- an
unfruitful pronouncement upon an immaterial point.
United
States v. John Barth Co., supra. See United States v.
Martin Hotel Co., 59 F.2d 549. As the Board failed to pass
upon the Commissioner's refusal to reduce the amount of the
assessment, that sum, with interest, etc., now represents what is
due upon the bond. The Board expressly disclaimed purpose to rule
concerning this obligation -- the question was not present. It
might, with propriety, have examined the objections to the amount
of the 1923 assessment, but the taxpayer asked another course.
Page 287 U. S. 45
Section 906(e) may find proper application on an ordinary
appeal, as for example, where the Commissioner's right to assess is
challenged because the statute of limitations had run, or where, as
in
Bowers v. New York & Albany Lighterage Co., supra,
the collector asserts the right to enforce payment by distraint
after the statutory bar. It can have no application to what may
have been said or done by the Board when undertaking to redetermine
a deficiency having no possible relation to the statute of
limitations.
The literal construction of § 906(e) proposed by the petitioners
would lead to consequences manifestly unjust, if not absurd. When
the bond in suit was executed, the statute had extinguished the
right of the United States to enforce the tax as such. That
Congress thereafter actually intended to release the parties
whenever the Board should declare this fact is beyond belief. The
thing announced by the Board had no real relation to the obligation
of the bond. When possible, every statute should be rationally
interpreted with the view of carrying out the legislative intent.
We cannot attribute to Congress the purpose necessary to support
petitioners' urgence.
Affirmed.
*
"Sec. 274. (a) If in the case of any taxpayer, the Commissioner
determines that there is a deficiency in respect of the tax imposed
by this title, the Commissioner is authorized to send notice of
such deficiency to the taxpayer by registered mail. Within 60 days
after such notice is mailed (not counting Sunday as the sixtieth
day), the taxpayer may file a petition with the Board of Tax
Appeals for a redetermination of the deficiency. Except as
otherwise provided in subdivision (d) or (f) of this section or in
§ 279, 282, or 1001, no assessment of a deficiency in respect of
the tax imposed by this title and no distraint or proceeding in
court for its collection shall be made, begun, or prosecuted until
such notice has been mailed to the taxpayer, nor until the
expiration of such 60-day period, nor, if a petition has been filed
with the Board, until the decision of the Board has become final.
Notwithstanding the provisions of § 3224 of the Revised Statutes,
the making of such assessment or the beginning of such proceeding
or distraint during the time such prohibition is in force may be
enjoined by a proceeding in the proper court."
"(b) If the taxpayer files a petition with the Board, the entire
amount redetermined as the deficiency by the decision of the Board
which has become final shall be assessed and shall be paid upon
notice and demand from the collector. No part of the amount
determined as a deficiency by the Commissioner but disallowed as
such by the decision of the Board which has become final shall be
assessed or be collected by distraint or by proceeding in court
with or without assessment."