Piche, Peter E

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Boston College Law ReviewVolume 6 | Issue 2 Article 221-1-1965Taxation—Section 223 of the 1964 RevenueAct—Remittance in Response to AssertedLiability—Interest Deductibility in Year ofTransfer.—Charles Leich and Co. v. United StatesPeter E. PicheFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Taxation-Federal CommonsThis Casenotes is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been acceptedfor inclusion in Boston College Law Review by an authorized administrator of Digital Commons @ Boston College Law School. For more information,please contact nick.szydlowski@bc.edu.Recommended CitationPeter E. Piche, Taxation—Section 223 of the 1964 Revenue Act—Remittance in Response to AssertedLiability—Interest Deductibility in Year of Transfer.—Charles Leich and Co. v. United States, 6 B.C.L.Rev. 371 (1965), http://lawdigitalcommons.bc.edu/bclr/vol6/iss2/22CASE NOTESA filing . . . in an improper place or not in all the places required. . . is nevertheless effective with regard to any collateral as towhich the filing complied with the requirements of this Article. . . .The proper place to file a security interest in a fixture is in the local officeof the recorder of deeds 29ROBERT J. DESIDERIOTaxation—Section 223 of the 1964 Revenue Act—Remittance in Re-sponse to "Asserted Liability"—Interest Deductibility in Year of Trans-fer.—Charles Leidy and Co. v. United States.'—This is a motion forrehearing and amendment of a judgment on the ground that the judgmentwas inconsistent with Section 223 of the Revenue Act of 1964. 2 Eventsleading up to the present litigation began in 1949 when the taxpayer claimeda refund for overpayment of an excess profits tax for the taxable year 1942.The alleged overpayment was made in response to a deficiency assessment.Refund was refused and while this litigation was pending the tax authoritiesnotified Leich and Company by letter that an agent's report had been filedindicating another excess profits tax deficiency for the years 1943-1949.Taxpayer sent a letter of protest but was informed by the Internal RevenueService that consideration of its protest would be postponed,. pending theoutcome of the litigation between taxpayer and the Government relating to1942. The Service warned that the issues of the 1942 litigation were thesame as those in 1943-1949, and thus the latter would be controlled by thedoctrine of collateral estoppel. The trial court deciding the 1942 case ruledagainst the taxpayer in 1952. While the appeal period ran and while motionswere pending, Leich and Company remitted to the Internal Revenue Servicethe sums, plus interest, totalling the amounts purported to be the 1943-1949deficiencies. The 1952 decision respecting the 1942 deficiency was reversedon appeal. Taxpayer then brought action for refund of the remittances hehad made for the 1943-1949 deficiencies. In this action taxpayer alsosought the allowance of an interest deduction for the tax years 1952 and 1953.statement against any person who has knowledge of the contents of such financ-ing statement. (Emphasis supplied.)20 UCC § 9-401(1)(b).1 Charles Leich and Co. v. United States, 333 F.2d 871 (Ct. Cl. 1964).2 Section 223 of the Revenue Act of 1964 will be known as § 461(f) of the InternalRevenue Code of 1954. In the Senate Report and in the Senate Supplemental Report,this section is referred to as § 224. It is set forth as follows:Contested Liabilities—U—(1) the taxpayer contests an asserted liability, (2) thetaxpayer transfers money or other property to provide for satisfaction of theasserted liability, (3) the contest with respect to the asserted liability exists afterthe time of transfer, and (4) but for the fact that the asserted liability is con-tested, a deduction would be allowed for the taxable year of the transfer (or foran earlier taxable year), then the deduction shall be allowed for the taxableyear of the transfer. This subsection shall not apply in respect of the deductionfor income, war profits, and excess profits taxes imposed by the authority of anyforeign country or possession of the United States.371BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWTaxpayer contended that the portion of the overpayment which representedinterest was properly deductible in the year of payment from taxpayer's grossincome. The court refused to grant this deduction and as a result taxpayermoved for a rehearing on this issue. HELD: The remittances in questionwere deposits in the nature of a cash bond rather than in response to an"asserted liability," thus the claim for deduction in the year of transferwas unfounded and the motion for rehearing denied. Judge Whitaker dis-sented.It is suggested that the majority's decision does not adhere to the purposeof section 223 of the 1964 tax revision respecting the taxable year in whichdeductions may be taken. The court, before 1964, was limited to the Codesection which stated, "There shall be allowed as a deduction all interestpaid or accrued within the taxable year of indebtedness." 8 (Emphasissupplied.) The issue of interest deductibility was automatically settled, asit was in the original report of the Leich case, by determining whetherremittances were "payments" and hence were "overpayments," as are pre-requisite to the interest refunding section. That section specifies, "Interestshall be allowed and paid upon any overpayment in respect to any internalrevenue tax at the rate of 6 per cent per annum." 4 (Emphasis supplied.)The court in the original hearing connected the two sections and stated:[11 he remittances made by the taxpayer in 1952 and 1953 did notconstitute "payments" of a tax but were deposits in the nature ofcash bonds in order to stop the running of interest, it follows afortiori, that the portion of the remittances which representedinterest were not "paid" in those years and consequently could notbe deducted as an interest expense in those years.5After 1964, however, a taxpayer who was contesting an asserted liability couldallege a new theory of deductibility. The new theory is set out in Section223 of the Revenue Act of 1964. Moreover, by its provision in section 223(2) (a) the new revision was made retroactive to 1939.° On the 1964 motionfor rehearing, therefore, the Leich and Company claim was based onwhether the contested remittance came as a response to an "asserted liability"within the new addition to Section 43 of the Internal Revenue Code of 1939.It is contended that the purpose of this addition was to prevent preciselywhat occurred in the ruling on the motion in the principal case.The new phrase, "asserted liability" has no precedent. The meaning ofthe term "liability" is clear. "Asserted," on the other hand, is less definite, inthat it suggests only some unspecified claim by some unspecified opposingparty. Legislative intent, at least, is clear that this party need not be theInternal Revenue Service.The new subsection (f) is not limited to an asserted liability for8 Int. Rev. Code of 1954, 163(a).4 Int. Rev. Code of 1954, 6611(a).5 Charles Leich and Co. v. United States, 329 F.2d 649, 654 (Ct. CI. 1964).a S. Rep. No. 830, 88th Cong., 2d Sess. 101 (1964); 1964 U.S. Code Cong. & Ad.News No. 3, p. A-464.372CASE NOTEStaxes, but applies to any asserted liability where the requirementsof the new subsection (f) are met!Examples given by the Senate Supplemental Report following this state-ment show adverse activity by private parties as constituting assertedliability.8 It is true that the Senate further illustrated the new phrasesaying:The amendment provides that if a taxpayer contests an assertedliability, such as a tax assessment, . . . then the item involved isallowed as a deduction. . . 9 (Emphasis supplied.)The court relies heavily on this statement as a clue to the intent ofCongress. This illustration, however, does not go far enough. A privatelitigant, for example, could not levy an assessment, yet he could assert aliability. The formal notice and tax assessment procedures of the InternalRevenue Service, then, should not be the test of "asserted liability." Theprimary issue becomes, what is an asserted liability and does the Government'sactivity in the Leich case constitute asserted liability?In Leich the remittances in issue were made at a time when the taxpayercould not, in good faith, see any other practical alternative. An adversejudgment relating to the year 1942 had just come down. Appeal time wasstill running but Leich and Company had been apprised by the , InternalRevenue Service that the same law and facts would cause that judgment,if finalized, to collaterally estop dispute of the large 1943 to 1949 deficiency.The deficiency was $66,000 in principal, with compounded interest of nearly$27,000. Moreover, interest was accruing on the total at the rate of 6 per centper annum. Several motions on the appealable judgment were pending.Whatever the chances of reversing this collaterally estopping judgmentmight be, they must surely have appeared even smaller in the shadow of theaccumulating interest. The majority, looking at these facts and seeing noformal assessment, found no asserted liability.As was indicated above, the meaning of the new phrase was suggestedby Congress in a context other than tax assessment. "Asserted," as defined byBlack's Law Dictionary means: "To state as true, declare; maintain." 10The majority's suggestion that the term "asserted liability" is "somethingakin" to tax assessment seems untenable not merely because parties otherthan the revenue authorities can assert liabilities, as has been shown, but also7 S. Supp. Rep. No. 830, 88th Cong., 2d Sess. 243 (1964) ; 1964 U.S. Code Cong. &Ad. News No. 3, p. A-603.8 Ibid.A taxpayer may provide for the satisfaction of an asserted liability by trans-ferring money or other property to the person who is asserting the liability, orby transfer to an escrow agent provided that the money or other property isbeyond the control of the taxpayer. However, purchasing a bond to guaranteepayment of the asserted liability, an entry on the taxpayer's books of account,or a transfer to an account which is within the control of the taxpayer is not atransfer to provide for the satisfaction of an asserted liability. (Emphasissupplied.)9 S. Rep. No. 830, 88th Cong., 2d Sess. 100 (1964) ; 1964 U.S. Code Cong. & Ad.News, No. 3, p. A-463.19 Black, Law Dictionary (4th ed. 1951).373BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWbecause the tax authorities, themselves, can contest a liability to finalitywithout actual assessment. 11 It could therefore be argued that the decision ofthe majority in the Leich case too narrowly construes the congressionaland common intendment of the term in issue.On the other hand, Judge Whitaker in his dissent looked to the realities,as Congress would seem to prefer. 12 His interpretation of the new phrase isin keeping not only with the ordinary meaning of the words but also withthe practicalities of business and litigation and the doctrine of collateralestoppel. His grounds may be briefly stated in equation form: actual noticeof the 1943-1949 deficiency plus collateral estoppel from the 1942 litigationis equivalent to "asserted liability." It would have been more in keepingwith the utilitarian year-of-outgo-year-of-deduction purpose of the Congressto require that the Commission permit Leich and Company the interestdeduction claimed here. Again, the Senate Report states Congress's intent:[171 our committee . . . believes that it is unfortunate to deny tax-payers a deduction with respect to an item where the payment hasactually been made, even though the liability is still being con-tested either as to amount or as to the item itself.18The facts alluded to indicate that the taxpayer's remittance was not"voluntary" as the majority would characterize it. Rather, the remittancewas made to the Government in response to activity by the tax authorities,which activity in common and congressional understanding could well beconstrued as "asserted liability."Mention should be made of the situation that would arise for a taxpayerif deductions once allowed under section 461(f) were found to be unwar-ranted due to actual liability having later been avoided. Concepts of incomewould clearly include the overpayment of the deduction in the year ofrefund.14Whether specification of the purpose of the remittance as being other11 Int. Rev. Code of 1954, §§ 6212-6216. These sections provide for the 90-dayletter and Tax Court procedures whereby assessment is postponed while liability isasserted with all the forces of the Internal Revenue Service.12 S. Rep. No. 830, 88th Cong., 2d Sess. 100 (1964); 1964 U.S. Code Cong. & Ad.News, No. 3, p. A-463:The objective of the reporting of items of income and deduction under theinternal revenue laws generally is to realistically and practically match receiptsand disbursements attributable to specific taxable years. The internal revenuelaws contain a number of adjustments designed , to accomplish this result. Yourcommittee believes that allowing the deduction of items in the year paid, eventhough they are still being contested in the courts or otherwise, more realisticallymatches these deductions up with the income to which they relate than wouldthe postponement of the deduction, perhaps for several years, until the contestis settled. (Emphasis supplied.)18 Ibid.14 Ibid.To the extent that deductions are allowed under this rule and then subsequentlyas a result of the contest the items were found not to be payable, adjustmentcan be made for this overstatement of the deduction by the inclusion of theoverstatement in income in the year in which the amount of the liability isfinally determined.374CASE NOTESthan for bond filing would have avoided the pitfall of the Leich case is notclear. Specification of purpose was a factor not unemphasized in a casecited in the original hearing on the issue of "payrnent." 15 Nevertheless,the court also considered other factors. In some few cases where the pre-requisites are fulfilled for its application, Section 6501(d) of the InternalRevenue Code of 1954 will allow a "Request for Prompt Assessment." Apreliminary judicial or administrative ruling might be sought, to providecertainty that a remittance was in response to an "asserted liability."'°PETER E. PICHETrade Regulation—Federal Trade Commission Act—Gasoline-TBATying Agreements as Unfair Competition.—Goodyear Tire el RubberCo. v. FTC;' Texaco, Inc. v. FTC.2—In the first of these two cases, theAtlantic Refining Co. and the Goodyear Tire & Rubber Co. entered into awritten sales commission agreement by the terms of which Goodyear was topay Atlantic a ten per cent commission on all sales of Goodyear tires, bat-teries, and accessories (TBA) to Atlantic dealers in return for Atlantic'spromoting Goodyear products to these dealers. The majority of Atlanticdealers leased stations from Atlantic; the leases, in addition to being can-cellable at the will of either party, contained provisions giving Atlantic controlover station advertising, hours, maintenance, and other particulars. TheFTC, after an original finding by a Hearing Examiner that Atlantic hadcoerced its dealers to stock Goodyear TBA, entered a sweeping order, notonly upholding this ruling, but also condemning the whole sales commissionsystem as a violation of Section 5 of the Federal Trade Commission ActsIn addition, the Commission prohibited both Goodyear and Atlantic fromentering into any future similar agreements with any other companies. Thecourt, affirming the FTC, HELD: Apart from overt coercive methods, At-lantic had sufficient economic power over its dealers to force their purchaseof sponsored TBA; and, considered in the context of this economic power,the sales commission contracts were, in effect, tying arrangements and illegalsince a substantial amount of commerce had been affected.In Texaco, sales commission agreements were again involved, here be-15 Atlantic Oil Producing Co. v. United States, 35 F. Supp. 766 (Ct. CI. 1940).Discussion of the meaning of the term, "payment" has been purposely avoided in thisnote, as the matter was not directly in question. It should be pointed out, however, that"payment" and "asserted liability" may, in some cases, be constituted by similar circum-stances when Internal Revenue Service activity is in issue. For an excellent discussion ofthe term, "payment" see, Alexander, Overpayments of Taxes or Government Investmentat Six Per Cent: The Problem of Allowance of Interest, 7 Tax L. Rev. 231 (1952).16 Emmanuel, Federal Tax Refund Procedures, 5 U. Fla. L. Rev. 133 (1952); Stark,Claims for Refund of Federal Taxes, 41 Iowa L. Rev. 496 (1956).1 331 F.2d 394 (7th Cir. 1964).2 Trade Reg. Rep. (1964 Trade Cas.) II 71189 (D.C. Cir. July 30, 1964).3 38 Stat. 719 (1914), as amended, 15 U.S.C. § 45(a) (1) (1958): "Unfair methodsof competition in commerce, and unfair or deceptive acts or practices in commerce, aredeclared unlawful."375

Taxation—Section 223 of the 1964 Revenue Act—Remittance in Response to Asserted Liability—Interest Deductibility in Year of Transfer.—Charles Leich and Co. v. United States

Taxation—Section 223 of the 1964 Revenue Act—Remittance in Response to Asserted Liability—Interest Deductibility in Year of Transfer.—Charles Leich and Co. v. United States

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