Fortugno v. Commissioner

Alfred Fortugno, et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent Fortugno v. Commissioner Docket Nos. 69025, 69026, 69027, 69028, 69029, 69032, 69033, 69034 United States Tax Court 41 T.C. 316; 1963 U.S. Tax Ct. LEXIS 12; November 26, 1963, Filed *12 Decisions will be entered under Rule 50. In order to forestall a jeopardy assessment by the respondent, petitioners on or about August 31, 1954, deposited $ 1 million with the respondent. The deposit was made prior to the issuance of both the 30-day and 90-day letters. Although the eight petitioners at the time of the deposit were aware of the aggregate amount respondent was proposing to assert against them collectively, they had no knowledge of their individual liabilities. The petitioners never requested respondent to assess their tax liabilities to the extent of the $ 1 million payment and never intended by the $ 1 million payment to waive their right to contest the correctness of respondent's determination. Held, the petitioners' remittance of $ 1 million at a time when no assessment or agreement existed with respect to their tax liabilities constituted a deposit rather than a payment of tax. Held, further, section 6401(c), I.R.C. 1954, has no application when a remittance is voluntary and prior to a determination of tax liability. Held, further, respondent is not estopped to deny that petitioners' remittance constituted payments of tax. Harold Kamens and William A. Ancier, for the petitioners in docket Nos. 69025, 69026, 69027, 69028, 69029, 69032, and 69034. Francis*14 X. McCormick, for the petitioner in docket No. 69033. Francis X. Gallagher, Scott A. Dahlquist, and Alvin C. Martin, for the respondent. Fay, Judge. FAY *317 The respondent determined that petitioners were liable for deficiencies in income tax and penalties under sections 291(a), 293(b), and 294(d)(2) of the Internal Revenue Code of 1939 and corresponding prior statutes for various years extending from 1934 to 1950. The parties have disposed of all issues regarding the deficiencies and penalties and are in agreement that the petitioners have paid an amount in excess of their tax liabilities. The only issue remaining for determination is when did the petitioners' remittances constitute an overpayment. The words "paid" or "payment" as they appear for the most part in this Findings of Fact and Opinion are words of convenience and are not to be construed as connotating the legal effect of the petitioners' remittances. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. All of the petitioners here failed to file income tax returns for the taxable years 1934 to 1939, inclusive, with the exception of Connie M. Fortugno Ruble, docket No. *15 69032, who filed an income tax return for the taxable year 1939 with the collector of internal revenue for the fifth collection district of New Jersey. All of the petitioners filed their income tax returns for the taxable years 1940 to 1950, inclusive, with the collector of internal revenue for the fifth collection district of New Jersey. On July 1, 1954, petitioner Anthony Fortugno was convicted, after trial, of income tax evasion, for filing false individual returns for 3 taxable years between 1946 and 1949, and for filing a false partnership return. Sometime around July 4, 1954, petitioners met with their attorney and were informed by him that if they wished to avoid a jeopardy *318 assessment against their property, they would have to pay $ 750,000 to the Government. The petitioners informed their attorney that $ 750,000 was too much and told him to offer the Government $ 400,000. The petitioners' attorney made the $ 400,000 offer to the Government, but it was rejected. Toward the latter part of July 1954, petitioners' accountant met with the district director of internal revenue and offered to pay $ 500,000 to the Government in order to forestall jeopardy assessments *16 against the petitioners. As a result of this offer, a conference was scheduled for August 11, 1954, between representatives of the Government and the petitioners. At the outset of the meeting on August 11, 1954, the Government spokesman stated that the offer of $ 500,000 was not adequate and that a much larger amount would have to be offered. The petitioners and their representatives were then, for the first time, given a tentative breakdown of the petitioners' tax liabilities which the Government was preparing to assert against them at a later date. The Government spokesman then informed the petitioners that since the tax liability totaled almost $ 1.9 million, a deposit of $ 500,000 would not adequately protect the revenue. The Government representatives indicated that a pledge of $ 1.5 million ($ 500,000 in cash plus $ 1 million in bonds) would be more appropriate. Some discussion took place concerning the accrual of interest in connection with the amount to be paid over to the Government. 2 No agreement could be reached at this time, however, and it was decided that the respective parties should meet again later in the month. *17 The parties met again on August 27, 1954. The Government spokesman opened the meeting by stating that the petitioners "had created a jeopardy" by closing out their bank accounts and in order to offset this the Government was demanding that the petitioners put up $ 1.5 million. The Government spokesman added that if the money was not *319 put up, a receiver would be appointed to take over the family business and criminal action would be taken against the petitioners for converting assets. During the ensuing discussion the Government representatives indicated that they might accept a payment of $ 1 million in cash instead of the $ 1.5 million in cash and bonds originally demanded. The petitioners requested permission to discuss the Government's proposal during lunch. After lunch petitioners returned to the meeting and indicated that a $ 1 million payment would be acceptable. However, the Government representatives refused to accept the $ 1 million offer unless the petitioners signed a statement which the Government would prepare. The Government spokesman also stated that time was of the essence and that the matter had to be concluded that afternoon. Although the petitioners*18 did not want to sign the statement as prepared by the Government, they felt that unless the statement was signed and the $ 1 million paid, the Government would invoke the sanctions they had suggested earlier. The statement prepared by the Government and executed on August 31, 1954, by the petitioners provided as follows: August 31, 1954. District Director of Internal Revenue Newark, New Jersey Attached hereto are eight (8) checks drawn to the order of the District Director of Internal Revenue and dated August 31, 1954. These checks are more specifically identified as follows: Name of maker Bank Amount Daniel Fortugno Hudson County National $ 125,000 Silvia Fortugno do 125,000 Anthony Fortugno do 125,000 Alfred Fortugno do 125,000 Arthur Fortugno do 125,000 Adeline Fortugno do 125,000 Ann (Fortugno) Camp do 125,000 Connie (Fortugno) Rubel do 125,000 Your attention is directed to the fact that the Internal Revenue Service is now auditing the tax returns of the individuals enumerated above for years 1934 through 1950 inclusive and in anticipation of tax assessments which include penalties and interest being made, we desire to submit the*19 attached checks amounting to one million dollars, ($ 1,000,000) to be credited to our tax assessments when same are finally made. It is our understanding that the payment of one million dollars ($ 1,000,000) submitted herewith will stop the running of interest on that amount from this date of payment. It is further understood and agreed that the payment of one million dollars ($ 1,000,000), referred to above, will be applied against any unpaid liabilities of all of the above-mentioned taxpayers, or against any of them as the final determination of tax liability is made. In the event that the respective checks submitted herewith of each taxpayer toward the above-mentioned sum of one *320 million dollars ($ 1,000,000), should exceed the amount of the assessments made against such individual taxpayer, the excess of such check submitted by said taxpayer will be applied toward the payment of the tax liability of any or all of the other remaining taxpayers. Under no circumstances shall any part of the amount of the one million dollars, ($ 1,000,000), payment made herewith be returned to the respective taxpayers if the total amount of said payment is insufficient to satisfy the tax*20 assessments of any or all of the taxpayers mentioned herein. In the event that the aforementioned payment of one million dollars, ($ 1,000,000), should exceed the tax liability, when finally determined, of the taxpayers mentioned herein, then such excess over the amount required to satisfy the unpaid tax liability shall be returned to the respective taxpayers. We also desire to direct your attention to the fact that an agreement is now being prepared in connection with the above-mentioned assessments and the terms of said agreement will be binding upon us and the government when said agreement is properly executed. We expressly call attention to the fact that the within payment of one million dollars, ($ 1,000,000), shall not in any way prejudice the rights of any or all of us to contest the validity of said assessments or to take any other action which we may desire relative to said assessments. (S) Daniel Fortugno, (S) Anthony Fortugno, (S) Adeline Fortugno, (S) Connie (Fortugno) Rubel. (S) Silvia Fortugno, (S) Arthur Fortugno, (S) Anne (Fortugno) Camp. August 31, 1954. Receipt is acknowledged of all of the above checks with the exception of the check of Alfred Fortugno who is*21 in the U.S. Army. His check will be delivered on or about September 8, 1954. (S) Leo Ascher, Internal Revenue Agent. Received original and duplicate of above letter on August 31, 1954. (S) Leo Ascher, Internal Revenue Agent. On August 31, 1954, each of the petitioners with the exception of Alfred Fortugno submitted checks for $ 125,000 to the district director of internal revenue at Newark, N.J. Alfred Fortugno submitted his check for $ 125,000 to the district director on September 7, 1954. The respondent's bookkeeping treatment of the $ 1 million received from the petitioners was as follows: (a) Upon receipt of the seven $ 125,000 checks on August 31, 1954, the cashier's branch of the collection division of the Internal Revenue Service prepared a document entitled "Unclassified Account Voucher" -- "Serial No." This Unclassified Account Voucher contains a block number of 914271. The digit "9" in the block number indicates an unclassified or unidentified account and was used since there was no open account or open assessment against any of the seven petitioners whose checks had been received. The journal entry on August 31, 1954, for the receipt of the checks was a debit*22 to cash and a credit to "Unidentified collections." The remittance of $ 875,000 went into *321 the revenue receipts of the U.S. Treasury Department. The check received from Alfred Fortugno on September 7, 1954, was accorded similar treatment. (b) On November 1, 1954, the foregoing $ 1 million was transferred from revenue receipts to deposit fund in accordance with changes in Internal Revenue Service accounting procedures. On May 12, 1955, the foregoing $ 1 million was transferred from deposit fund to revenue receipts in accordance with changes in Internal Revenue Service accounting procedures. (c) On May 12, 1955, the foregoing $ 1 million was transferred from the account entitled "Unidentified collections" to the account entitled "Unassessed revenue collected -- advance payments -- individual income, other." The Internal Revenue Service also maintains a form designated Certificate of Assessment and Payments, Form 899, and on each Form 899 for each of the petitioners the following notation appears: "Advance Payment: Received 8/31/54 in Unidentified $ 125,000.00 -- Transferred to Advance Payment 5/12/55." As of August 31, 1954, the petitioners individually had no knowledge*23 as to the amount of their separate income tax liabilities. The respondent did not issue 30-day letters to petitioners until June 14, 1955, and statutory notices of deficiency were not issued until May 6 and May 7, 1957. The petitioners first learned of their individual tax liabilities when they received the 30-day letters. The petitioners never requested the respondent to assess their tax liabilities to the extent of the $ 1 million payment, and they never intended by making the $ 1 million payment to waive any of their rights to contest the correctness of the respondent's determination. OPINION The parties are agreed that petitioners have paid to the district director an amount in excess of their tax liabilities. The only issue before us is when was the overpayment made. Petitioners take the position that the overpayment was made on August 31, 1954 (or September 7, 1954), 3 at which time the $ 1 million was remitted to the respondent. The respondent takes the position that no overpayment exists until petitioners' tax liability is actually fixed by an assessment or by an agreement between the petitioners and the respondent. *24 Since this Court is given jurisdiction to find an overpayment of taxes under section 6512(b) of the Internal Revenue Code of 1954 with respect to any year properly before it, and since the issue in this case *322 concerns whether an overpayment exists as of a particular taxable year, we conclude that we have jurisdiction in the instant proceedings. See Fred Draper, 32 T.C. 545, 555 (1959); Estate of Lawrence M. Colfelt, Jr., 35 T.C. 769, 772 (1961). The rule adhered to by this Court, which rule also represents the weight of authority, is that no overpayment exists with respect to a particular fund until all or a part of that fund has been assessed or until the taxpayer acquiesces in the proposed deficiency or a part thereof and the deposited fund is allocated to the payment of the agreed deficiencies. Fred Draper, supra;Estate of Lawrence M. Colfelt, Jr., supra;James F. Keith, 35 T.C. 1130 (1961); Fred J. Arheit, 31 T.C. 46 (1958). See also Rosenman v. United States, 323 U.S. 658 (1945);*25 Lewyt Corp. v. Commissioner, 215 F. 2d 518 (C.A. 2, 1954), affirming 18 T.C. 1245 (1952), reversed in part and affirmed in part on other issues 349 U.S. 237 (1955); Atlantic Mutual Insurance Co. v. McMahon, 153 F. Supp. 48 (S.D.N.Y. 1957); United States v. Dubuque Packing Co., 233 F. 2d 453 (C.A. 8, 1956); Rose v. United States, 256 F. 2d 223 (C.A. 3, 1958); Thomas v. Mercantile Nat. Bank at Dallas, 204 F. 2d 943 (C.A. 5, 1953). See and cf. United States v. Consolidated Edison Co., 336 U.S. 380 (1961). Since no assessment was outstanding at the time of petitioners' remittances, if petitioners are to prevail they must show that their remittances were made with the intention of satisfying an asserted tax liability. Lewyt Corp. v. Commissioner, supra;Fred J. Arheit, supra. The record discloses that the petitioners' remittances were made prior to the issuance of*26 both the 30-day letters and the statutory notices of deficiency, that as of August 31, 1954, the petitioners had no knowledge of the exact amount of their individual tax liabilities, and that the petitioners at the time they made the $ 1 million remittance to the respondent had no intention of acquiescing in the respondent's proposed tax deficiencies. In view of these facts, we are unable to conclude that petitioners' 1954 remittances satisfied an asserted tax liability. Petitioners contend, however, that the rule requiring an assessment or acquiescence in an asserted tax liability before a remittance can constitute a payment is no longer apposite in view of section 6401(c) of the Internal Revenue Code of 1954. This section provides that -- An amount paid as tax shall not be considered not to constitute an overpayment solely by reason of the fact that there was no tax liability in respect of which such amount was paid. We believe petitioners' reliance upon section 6401(c) is misplaced. Section 3770(c) of the Internal Revenue Code of 1939, which is the predecessor to section 6401(c), was added to the Internal Revenue Code of 1939 by the Current Tax Payment Act of 1943. *27 The latter *323 act was designed primarily to collect taxes from wage earners and certain self-employed individuals as the income was earned and thus imposed a duty upon taxpayers to make payments before their actual tax liability became defined. The legislative history of section 3770(c) indicates that Congress was cognizant of the fact that since taxpayers were now required to make payments to the Government before their liability was actually known, a situation could easily arise whereby a taxpayer might pay amounts to the Government in excess of his true liability. At this same time Congress was also aware of a current belief, which had been engendered by certain court decisions, that a payment could not result in an overpayment if no tax liability actually existed. As a result of these cases, doubts were being expressed that withholdings or estimated tax payments in excess of the tax liability even though made in good faith would not be overpayments and consequently would not earn interest. To put these doubts to rest, Congress added section 4(d) to the Current Tax Payment Act of 1943. 4 See H. Rept. Conf. Rept. No. 510, 78th Cong., 1st Sess., p. 48. *28 In view of the above, it seems apparent that section 3770(c) was intended to apply only to payments made in good faith and in fulfillment of a specific statutory duty. It was obviously not intended to cover voluntary payments made prior to any determination of tax indebtedness. In accord: Murphy v. United States, 78 F. Supp. 236 (S.D. Cal. 1948); Manee v. United States, 97 F. Supp. 993 (S.D.N.Y. 1951); Dubuque Packing Co. v. United States, 126 F. Supp. 796 (N.D. Iowa 1954), affd. 233 F. 2d 453 (C.A. 8, 1956); Atlantic Mutual Insurance Co. v. McMahon, supra. Although the Court of Claims takes a contrary view with respect to the effect of section 3770(c), now section 6401(c), Reading Co. v. United States, 98 F. Supp. 598 (Ct. Cl. 1951); Hanley v. United States, 63 F. Supp. 73 (Ct. Cl. 1945), we believe the position adopted by this Court more clearly reflects the intention of Congress. Finally, petitioners urged on brief, although they failed to raise*29 the issue in their pleadings, that the respondent should be estopped from denying that they are entitled to interest on their 1954 remittances, since at the time such remittances were being discussed respondent's agents assured them that they would receive interest on the amounts deposited. Estoppel is an issue that must be specifically pleaded. Estate of Thomas E. Steere, 22 T.C. 79, 82 (1954), affirmed sub nom. Rhode Island Hosp. Tr. Co. v. Commissioner, 219 F. 2d 923 (C.A. 1, 1955); Lodi Iron Works, Inc., 29 T.C. 696, 702 (1958). In any event, even if the issue were properly before us, estoppel would not be available here as a defense for two reasons. First, a taxpayer's right to interest depends not on an administrative prerogative but on *324 statutory authority. See sec. 6611, I.R.C. 1954. Such being the case, if respondent's agents stated that petitioners were entitled to interest on their remittances, the statement was one of law and not of fact. To give rise to an estoppel the misrepresentation must be one of fact. City Machine & Tool Co., 21 T.C. 937, 951 (1954);*30 Darling v. Commissioner, 49 F. 2d 111 (C.A. 4, 1931), affirming 19 B.T.A. 337 (1930), certiorari denied 283 U.S. 866 (1931); Gaylord v. Commissioner, 153 F. 2d 408 (C.A. 9, 1946), affirming 3 T.C. 281 (1944). Second, it is a prerequisite to the assertion of an estoppel claim that the so-called aggrieved party must have relied on the misrepresentations to his detriment. City Machine & Tool Co., supra;Lodi Iron Works, Inc., supra;Tide Water Oil Co., 29 B.T.A. 1208 (1934). In the instant case, petitioners testified unequivocally that they paid the $ 1 million to the Government in order to forestall a jeopardy assessment and the appointment of a receiver. Since the threat of a jeopardy assessment and not the promise of interest provoked the deposit, we fail to see how respondent's alleged statements as to interest caused petitioners in reliance thereon to act to their detriment. Accordingly, we conclude that petitioners' remittances here did not constitute*31 a payment of tax until such time as the petitioners agree to, or acquiesce in, the asserted tax deficiencies. Decisions will be entered under Rule 50. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Silvia Fortugno, docket No. 69026; Adeline Fortugno, docket No. 69027; Anthony Fortugno and Mollie Fortugno, docket No. 69028; Anthony Fortugno, docket No. 69029; Connie M. Fortugno Ruble, docket No. 69032; Arthur Fortugno, docket No. 69033; and Anne Fortugno Camp, docket No. 69034.↩ 2. The exact tenor of the interest discussion is difficult to resolve. Petitioners' witness testified as follows: Q. Was any statement made, Mrs. Ruble, at that time as to whether or not the money which was asked to be paid would draw interest in the event of a refund? A. Yes, Mr. Ascher [the Government representative] specifically told us that the money, the $ 500,000 would draw $ 2,500 monthly interest. Respondent's witness testified as follows: Q. Was there anything else that occurred at the conference that you have not testified about? A. Yes. I made a statement in connection with the accrual of interest on the $ 500,000 proposed as a pledge toward the liability.Q. Do you recall what statement you made in that connection? A. I made the statement that interest on the $ 500,000 could be saved to the extent of $ 2,500 a month. * * * *Q. In what way would it be saved? A. I stated interest would be saved to the extent that the $ 500,000 of cash would then be applied against the liability when it was finally determined.↩ 3. September 7, 1954, was the date on which Alfred Fortugno's check for $ 125,000 was received by the respondent.↩ 4. Sec. 3770(c), I.R.C. 1939↩.