West Virginia Steel Corp. v. Commissioner

Pierce, /., dissenting in part: I respectfully dissent from that portion of the Court’s opinion in which it has approved the imposition of a $4,000 addition to tax, for a nonwillful, over-the-weekend delay of one business day, in the filing of the petitioner’s 1952 return —notwithstanding that only $1,354' of the tax was not timely paid. The harshness of such action, which I think is unwarranted by proper construction and application of section 291(a), is indicated by the fact that such penalty exceeds the amount of the addition to tax which could have been imposed for fraud, if the entire determined deficiency had been due to willful intent to evade the tax.

My dissent is based on two grounds. First: I believe that on the basis of the undisputed facts and circumstances established by the evidence, the Court should have held that the petitioner’s delay in filing, was “due to reasonable cause”; and hence that no penalty should be imposed. And secondly: I believe that the Court, in holding that the addition to tax should be computed on the gross tax liability, without reduction for that portion of the tax which was timely paid, adopted a construction for section 291(a) which is: (a) Directly contrary to the construction of said statute, which the Internal Revenue Service has publicly announced to be its “existing administrative rule”; (b) directly contrary to a prior holding of this Court, as to the proper construction and application of said statute; and also (c) directly contrary to the construction which Congress has prescribed for application to the cognate provision of the 1954 Code.

1. Whether or not delay in the filing of a taxpayer’s return is “due to reasonable cause and not due to willful neglect,” is primarily a factual question. The following summary of the pertinent testimony of petitioner’s president, Roy Harris (which was not disputed) clearly reveals the facts and circumstances which occasioned the delay.

President Harris testified that the preparation of petitioner’s returns had, at all times since the corporation commenced business, been handled by R. B. Rollins Company, public accountants. During the preparation of its 1952 income and excess profits tax return, petitioner encountered difficulty in assembling the necessary figures; and it therefore applied to the Internal Revenue Service for a 60-day extension of time for filing the return. On March 11, 1953, an extension to May 15, 1953, was granted. In conformity with the terms of such extension, petitioner timely filed a tentative return, on which it was estimated that the total tax for the year would be $69,500; and it paid, as the “1st installment” thereof, 40 per cent of such estimated tax, or $27,800.

Harris further testified that on Monday, May 11, 1953, when he was getting ready to go to Cleveland to attend a mining congress which had relation to petitioner’s steel business, the chief accountant delivered to him the completed final return here involved. What then happened is disclosed by the witness’ following statements:

I had put it [the return] in my personal file because I had intended to be back on Friday, the 15th and mail the return, but I was tied up while I was there, I was very busy and instead of leaving Cleveland on Thursday night or Friday morning as I had intended to, I didn’t get away and I didn’t get home until about midnight Saturday night, and frankly, I forgot about the income tax return until I was in my car pulling out of the City of Cleveland was the first time I thought of it.

I had been so busy, so I thought of going down Sunday, which I did do and worked awhile and I thought I would get that thing out and I had the second thought that I called Mr. Keyser [the then district director of internal revenue for West Virginia] on Monday and explained what happened.

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I intended to mail the return, but then I had a second thought, and decided to wait and called Mr. Keyser the first thing Monday morning and I sent it over by messenger and it would get there as early as if it had been mailed on Friday.

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I did [call Mr. Keyser on Monday, May 18].

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I told him what happened, explained just what I have explained to the Court * * * and I told him I would send it over by messenger.

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Mr. Keyser told me that it wouldn’t be necessary, just to drop it in the mail and he said, “It always takes several days to process them anyway. Would you write a letter along with it for my attention so it will be handled right?”

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This is the letter [dated May 18, 1953] I wrote to the Director of Internal Revenue. “Attention Mr. Rob M. Keyser. In accordance with the telephone conversation * * * we are pleased to inclose herewith our final income tax return for 1952 together with check in the amount of $1354.44 covering payment in full of taxes now due. We regret this was not mailed to you on the 15th but the writer was detained at the mining congress and did not return to the office until today. The return was locked in his personal file and there was no way anyone else could get it. We are sorry it happened. Trust you will forgive us. Yours very truly,” signed by West Virginia Corporation by me.

The final return thus filed reported total income and excess profits tax for the year of $72,886.11; and the amount of the first 40 per cent installment due thereon, exceeded the installment paid on the previously filed tentative return, by the amount of $1,354.44. There is no claim or suggestion that there was any delinquency in payment of the tax shown on the final return, except as to said amount of $1,354.44. No penalty has been claimed, except for the above-mentioned delay of one business day, in the filing of the final return.

It should be observed that imposition of an addition to tax under section 291(a), for delay in filing a return, is not automatic. Eather, the statute provides expressly for the elimination of such a penalty in situations where the delay is “due to reasonable cause and not due to willful neglect.” In the absence of any statutory definition of said phrase, it may reasonably be assumed that the same was intended to cover situations in which a taxpayer’s conscientious intention to meet the fixed filing date is frustrated by unanticipated business or personal contingencies. And it may further be assumed that such phrase was intended to be applied reasonably, to promote its purpose. Under a system of “self-assessment” such as ours, in which the confidence and cooperation of taxpayers are indispensable, it would seem that every effort should be made to administer the statute in a fair and commonsense manner.

I believe that the Court’s application of the phrase “due to reasonable cause,” to the facts and circumstances here present, is unnecessarily harsh and inequitable; and that the effect of this is to establish a precedent for the application of such phrase which will defeat its intended purpose, and rob it of most of its usefulness.

2. As regards the method for computing an addition to tax under section 291 (a), said section provides in material part:

there shall be added to the tax: 5 per centum If the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. * * *

This raises the question: 5 per centum of what is to be added to the tax? There are at least three possible interpretations. (1) The statute could mean: 5 per cent of the net amownt of the gross tax reported on the return, after reduction for any part of the tax timely paid by the taxpayer through advance payments, or on a declaration of estimated tax, or by withholding at the source, or by credit for overpayments on returns for prior years. Or (2) in the case of a corporate return on which the tax could be paid in installments, the statute might mean: 5 per cent of the installment of tax payable at the time the return was due, if all subsequent installments were paid on time, and (as here) the Government made no demand for acceleration of such installments. Or (3) the statute might mean: 5 per cent of the gross tax imposed by the statute, including both the tax reported on the return and any deficiency subsequently determined, without reduction for any portion of the tax timely paid, or for any credit for overpayments allowable.

In considering this problem, the following sequence of events, having relation to the method of computation, is significant.

First: When the 1954 Code was enacted, Congress included in subsection (a) of section 6651 thereof, a provision for an addition to tax for failure to file tax returns (including those for income tax and also for various other types of taxes) which is, in material respects, substantially the same as section 291(a) of the 1939 Code here involved. And then, immediately thereafter, it included subsection (b), which provides as follows:

(b) Penalty Imposed on Net Amount Due. — For purposes of subsection (a), the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed upon the return.

Second: Almost immediately after said 1954 Code had become effective, the Internal Revenue Service published Rev. Rul. 54-427, 1954- 2 C.B. 42 , 43, in which the following statement is included: 1

The effect of this section [6651(b)] is to provide specific statutory authority for the existing administrative rule whereby the delinquency penalty is computed on the net amount of tax due on the return rather than on the gross amount of tax required to be shown on the return. [Emphasis supplied.]

Third: On January 7, 1955, this Court decided the case of Thomas A. McGovern, T.C. Memo. 1955-1 , wherein the taxpayer and his wife had been delinquent in filing income tax returns for both of the years 1949 and 1950. The Court, in approving the imposition of additions to tax for both years, under section 291(a), said:

This penalty, however, must be measured by petitioners’ tax liability, less the amount of tax withheld at the source on petitioner’s wages. In other words, as in the case of the delinquency penalty for 1949, credit should be allowed the petitioners for taxes withheld before applying the delinquency penalty for 1950.

In the instant case, the deficiency notice in which the penalty involved was determined, was not issued until December 8, 1955, which was subsequent to the foregoing sequence of events; and, as shown on its face, it was issued out of a regional office of the Internal Revenue Service, in the Cincinnati region. This Court, in its Opinion herein, posed the question: “[I]f such an administrative practice [such as that publicly announced in the above-cited Cumulative Bulletin] did exist, it is perhaps natural to speculate as to why it was not applied in the instant case.” The most likely answer to this is: That the regional administrative officer who recommended the penalty, probably overlooked the above-mentioned pertinent announcement of the Internal Revenue Service, since it was included in a ruling that pertained primarily to the 1954 Code, rather than to the 1939 Code; that he probably also overlooked the above-cited Memorandum Opinion of this Court, which was not officially published; and that, in such circumstance, he probably followed the not uncommon practice of applying that construction to the statute, which would “protect the revenue” by yielding the largest possible exaction.

In any event, it is obvious that the construction of section 291(a) which the Court has approved in the instant case, could lead to ridiculous results. For example, the late filing of a return for a large amount of tax, of which all but $1 had been timely paid, could give rise to an addition to tax of thousands of dollars. Indeed, in numerous cases, the bulk of the tax is satisfied by payments made on declarations of estimated tax, or by withholdings on salaries or wages, or by other prepayments and credits; and in such situations, the imposition of a penalty measured by the gross tax, as distinguished from the net tax remaining due, might be disastrous.

I believe that in the instant case, if any addition to tax is to be approved, the Court should have required it to be computed in accordance with the “existing administrative rule” for construction of section 291(a) of the 1939 Code, which the Internal Revenue Service publicly announced in its above-mentioned Revenue Ruling 54-427; and in accordance also with the prior decision of this Court in Thomas A. McGovern, supra. Both are contrary to the method of computation approved in the majority opinion herein.

The “Introduction” to the Cumulative Bulletin above cited, states in part:

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for the announcement of official Internal Revenue rulings, and for the publication of Treasury Decisions, Executive orders, legislation, and court decisions pertaining to Internal Revenue matters.

It is the policy of the Service to publish in the Bulletin all substantive and procedural rulings of importance or general interest, the publication of -which is considered necessary to promote a uniform application of the laws administered by the Service. * * * All published rulings have received the consideration and approval of the Chief Counsel.

Revenue Rulings reported in the Bulletin do not have the force and effect of Treasury Department Regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other cases, and may be cited and relied upon for this purpose. * * *