UNITED STATES v. PRICE

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Argument of Howard A. Heffron

Chief Justice Earl Warren: Number 48.

United States, Petitioner, versus Sydelle Price.

Mr. Heffron, you may proceed.

Mr. Howard A. Heffron: Mr. Chief Justice, may it please the Court.

This case reaches this Court on a Government petition for certiorari to the Ninth Circuit.

The action involves a suit by the United States for the collection of income taxes which were allegedly due and owing for the year 1946 in an amount just short of $10,000.

After a full trial in the District Court, the district judge dismissed the suit on the merits, holding that it could not be maintained under the provisions of the Internal Revenue Code.

The Ninth Circuit after hearing the appeal en banc affirmed that disposition, so that the ultimate question before this Court is whether this collection suit for the recovery of internal revenue taxes maybe maintained.

Now, in order to answer that question, we must first turn to the statute which provides that a collection action may not be maintained unless certain statutory formalities have been complied with.

Those statutory formalities relate to the matter of affording to the taxpayer an opportunity to go to the Tax Court and contest the merits of the asserted claim for taxes prior to payment.

In this case, it is agreed that certain of the statutory formalities were not complied with.

To wit, the sending of the statutory notice, sometimes called the “90-day letter” provided in the Code, which formally advises the taxpayer that the Commissioner is asserting a deficiency in tax.

That letter was not sent and the question is whether the Government was relieved of the statutory obligation of sending that letter by reason of a certain document filed by the taxpayer in this case.

Now, that document is called an 870 waiver and it's a piece of paper which provides that pursuant to the provisions of the Internal Revenue Code, the restrictions provided in the Code are waived and consent is given to the assessment and collection of the following deficiencies in tax, which are then set forth.

This document is signed by the taxpayer.

The sole question before this Court is the effect to be given to this waiver that the waiver is valid and binding as the Government contends, then the Commissioner was relieved of the obligation of sending a 90-day deficiency notice.

And in that event, the prohibitions against collection actions are not applicable and the suit maybe maintained, if on the other hand, as taxpayer contends, the waiver, as a matter of law, was ineffective to relieve the Commissioner of the obligation of providing the taxpayer with the 90-day deficiency notice as a prerequisite to assessment of the tax, then this action admittedly has been brought under circumstances in which this Internal Revenue Code provides, it may not be maintained, that is, the formalities would not have been complied with.

In that event, the period for assessment having already expired, taxpayer will be relieved of this obligation and will have the action dismissed.

Justice John M. Harlan: What does the waiver do?

Waiver in assessment of tax benefit.

Mr. Howard A. Heffron: Yes, Your Honor please.

Justice Charles E. Whittaker: (Inaudible)

Mr. Howard A. Heffron: Well, under the provisions of the Code, as they stood at the time the Board of Tax Appeals was created, interest upon an amount asserted by the Commissioner as a deficiency, runs from the time the tax should have been paid until such time as there is in assessment.

That is interest upon the deficiency.

Once there is an assessment, there is another provision which provides for interest upon the assessment, in the event, it is not paid with in the 10-day period provided.

The notice of deficiency is a procedural means whereby Congress created recourse to the Board of Tax Appeals for a review of the merits of the Government's asserted claim for taxes prior to payment.

And the statute provides that when the Commissioner is a -- asserting a deficiency in tax, and that the term, “deficiency” is itself define in the Code.

In that event, he shall provide the taxpayer with a formal letter which notifies him of the assertion of that claim.

When that letter is provided, the taxpayer has 90 days in which to petition the Tax Court for review.

He fails to petition within that period, then at the end of 90 days, the Commissioner may assess the tax and proceed to collect it.

He does petition the Tax Court, why then the assessment is delayed until the final determination of the Tax Court is made.

Now, under the provisions of the Code as they stood and as they stand today, interest runs during this entire process against the taxpayer on the amount which may ultimately be found one way or another to have been due, over and above that which he reported as due.

And in 1926, an amendment was enacted, the Internal Revenue Code, to provide the taxpayer with a means by which he could stop the running of interest against him, in the event, he did not wish to proceed by -- via the Tax Court route.

Provide a means whereby the restrictions upon the Commissioner which prohibited him from immediately assessing the tax until he had afforded the taxpayer an opportunity to go to the Tax Court could be waived.

And under that Section whose construction is in dispute in this action.

Justice William J. Brennan: Now, that is 292, rather 272.

Mr. Howard A. Heffron: No.

That is 272 (d).

Justice William J. Brennan: Oh, I see.

Mr. Howard A. Heffron: Set forth in our brief --

Justice William O. Douglas: Well, there is --

Mr. Howard A. Heffron: -- on page 2.

Justice William O. Douglas: -- there was an amendment wasn't there that to the act to fox provision, which you take here, applicable to all future cases?

Mr. Howard A. Heffron: Well, there -- in the 1954 Code, a parenthetical clause was inserted in the applicable section that provide this waiver of the formalities by which the Commissioner proceeds to collect the tax, maybe filed by the taxpayer, whether or not, a notice of deficiency has been sent to him.

Justice William O. Douglas: Is that your position?

Mr. Howard A. Heffron: Our position is that -- that was the law prior to the 1954 Code.

And that this language in the 1954 Code was made necessary by a conflict in the holdings of the Circuit Court.

Justice William O. Douglas: (Inaudible) to apply to the opinion cases prior to 1954.

Mr. Howard A. Heffron: Well, it would -- it would be a rule which would apply to the validity of assessments which had been made on the strength of these waivers.

That is precisely the kind of assessment which is an issue in this case upon the taxpayer filing this waiver that Commissioner proceeded to assess the tax.

He did not send the 90-day letter, the means by which the taxpayer could have petitioned the Tax Court, but proceeded to assess it and it is the legality of that assessment which is in dispute in this action because if the waiver was ineffective, the assessment could not issue without a 90-day letter having been sent.

Justice William O. Douglas: How many cases are we dealing with here (Inaudible)?

Mr. Howard A. Heffron: Well --

Justice William O. Douglas: (Voice Overlap)

Mr. Howard A. Heffron: It's difficult to pursue --

Justice William O. Douglas: (Voice Overlap) since 1954.

Mr. Howard A. Heffron: Yes, to --

Justice William O. Douglas: Not exactly (Inaudible)

Mr. Howard A. Heffron: Yes.

To compute the precise number of cases in which this issue is involved is not possible, but we can get some clue to the figures by -- by an indication of the manner in which it has been used in this way.

For the last five years of operation under the 1939 Code, we have been advised by the Internal Revenue Service that approximately 1,600,000 tax returns were closed on the strength of waivers of this kind.

That is waivers which were followed by assessments and not 90-day letters.

In addition, there are approximately 27,000 cases pending and District Directors offices all over the country under the 1939 Code, whose procedure will be affected by the result in this case.

And --

Justice Charles E. Whittaker: (Inaudible) 30-day letter and after we begin to protest in advance of the receipt of the 90-day letter.

Mr. Howard A. Heffron: Yes.

That practice --

Justice Charles E. Whittaker: (Voice Overlap)

Mr. Howard A. Heffron: -- that practice is still followed.

Justice Charles E. Whittaker: (Inaudible)

Mr. Howard A. Heffron: No.

That is the procedure which the Commissioner affords for administrative resolution of these matters.

Now, in addition the last annual report of the Commissioner of Internal Revenue discloses that there are now estimated 900,000 active delinquent accounts of taxpayers involving income taxes and presumably, the same kind of defense which was asserted by the taxpayer in this case, can be asserted by all other delinquent taxpayers under the 1939 Code against whom collection suits are brought.

So it's fair to say that there are literally thousands of tax returns and tax years which will be affected by this decision, as well as the determination of the Ninth Circuit holding as it did that an assessment could not follow upon a waiver of this kind, invites the -- the bringing of actions both to restrain the collection of taxes and the defensive actions on the same basis asserted here.

Justice William J. Brennan: Mr. Heffron, may I ask that in the -- that -- the problem concerned with word, “restriction”, in other words, whether restrictions may include the waiver of the 90-day notice.

Mr. Howard A. Heffron: Our problem is whether the term, “restrictions” as it is used there, which the taxpayer is authorized to waive, includes the sending of the 90-day letter.

Justice William J. Brennan: The waiver of the right to proceeding.

Mr. Howard A. Heffron: Yes.

Yes, the taxpayer contends that this -- the sending of a 90-day letter is not one of the restrictions and is the --

Justice William J. Brennan: Is that now --

Mr. Howard A. Heffron: Yes.

And it's the Government's position that restrictions means all restriction and that a 90-day letter, which is a prerequisite to assessing a tax, is as much a restriction upon assessing the tax as any of the other requirements and prohibitions set forth in the statute.

And further that the language of the Act which says, “At anytime the taxpayer may file a waiver,” means precisely what is says, “at anytime.”

Now, the -- the waiver provision was enacted as a result of this problem of interest, as it was conceived of at that time, the taxpayer was liable for interest from the date the tax should've been paid until the assessment and since the Commissioner at the time of the Revenue Act of 1926, which included this provision, had three years to assess in certain cases and four years in others, it is now three years, I might add under the 1939 Code.

And since where the taxpayer files no return, as was the case here, the Commissioner has no statute of limitations upon assessment, that it was unfair in the case of a taxpayer who was acknowledging liability, to require him to wait until the taxpayer finished his administrative processing of the case and issued a 90-day letter and following it, an assessment.

It was unfair that such a taxpayer require him to pay interest during this entire period when he had no desire to contest at this point.

Theoretically, under the Code, as it existed, if the Commissioner waited for the three year period before he proceeded to issue a 90-day letter, the taxpayer would be liable for three years interest at 6% percent per year, or here where there was no return file, that the Commissioner waited five or six years before he finally -- an investigation disclose this deficiency, by then the tax, the interest would be 30%, 36% on of -- at 6% a year.

Justice Charles E. Whittaker: Only one thing that bothers me (Inaudible) what was the presented taxpayer, that maybe involved here, (Inaudible)

Mr. Howard A. Heffron: The taxpayer could, of course, make a voluntary payment.

The question was whether that voluntary payment would stop running of interest against the taxpayer prior to an assessment.

It is the taxpayer's position here.

He provides and states that the problem was at that time and it was assumed by Congress when it enacted this waiver provision that a voluntary payment might not stop the running of interest because there was no assessment, and in that event, it would not be a payment of the tax.

Consequently, the problem as envisioned at that time was to provide for immediate assessment, to give the taxpayer some way of being assured interest was stopped by giving him a means for consenting to assessment at once, without any of these restrictions.

You remember under the Code, Commissioner could not assess until he furnished this letter, then he had to wait for full 90 days or 60 days that it originally was.

During this entire period, interest ran whether the taxpayer was willing to settle his dispute with the Government or not.

The intention was to provide some means whereby the taxpayer in that position could stop the running of interest and the waiver provision here was tied in with a -- an amendment enacted at the same time which provided that the waiver should have the effect of stopping interest, 30 days after it was filed or if an assessment followed whichever period was sooner, so that a taxpayer was not desiring the contest on that, he could file a waiver, and interest stopped, 30 days later, no matter how long it took the Commissioner to get around to formally assessing the tax.

He was afforded that protection and he could stop interest without himself losing the use of the money, which would be required, of course, if he made a voluntary payment.

The theory being until such time as the assessment followed, there was no payment of the tax, the taxpayer should not lose his right to this money.

Justice John M. Harlan: (Inaudible)

Mr. Howard A. Heffron: The First Circuit and the Sixth Circuit both held at the waiver is effective.

Now, the -- when you view this enactment in terms of the desire to prevent the running of interest against the taxpayer, it seems to us that the position that taxpayer takes here nullifies that intention.

The taxpayer says that the waiver is no good until the 90-day letter issues.

At that time, he may waive and stop interest 30 days later.

Well, of course, the -- or the Commissioner has three years to issue the 90-day letter or in the case of no return, an unlimited period to issue the 90-day letter, and once the 90-day letter is issued and the whole administrative procedure has culminated in this 90-day letter, for the taxpayer then to waive and stop interest 30 days later, gives him really the benefit of a savings perhaps of 30 days interest, because originally, the Commissioner was prohibited from assessing for a period of 60 days following the statutory letter, so that under the taxpayer's view, the Commissioner who before was restricted for 60 days from assessing and, therefore, interest run during this 60-day period under the taxpayer's view here, the waiver filed after this 60-day letter was sent would stop interest 30 days later.

So the net benefit to the taxpayer is 30 days of interest plus on the --

Chief Justice Earl Warren: The Senate Committee said that was the reason for -- for it, did it not, that it would stop the interest running against the taxpayer.

Mr. Howard A. Heffron: Well, they -- I don't think, there's any dispute between the parities at the intention of enacting this waiver provision was to stop the running of interest.

The real --

Chief Justice Earl Warren: The only thing that bothers me about it was it if -- in the same paragraph where it said that, it also said, “But without taking away the right of the taxpayer to take the case to the Board,” that -- that's the Board of Tax Appeals before the Tax Court that's -- that's a little troublesome, isn't it?

Mr. Howard A. Heffron: Well, that -- at the time that this provision was enacted, the tax -- the Board -- then the Board of Tax Appeals was also given jurisdiction to determine overpayments of tax and the original draft of this Section to which the Committee Report refers contained the sentence which provided that the taxpayer filed a waiver.

He could still have an overpayment determined by the Board of Tax Appeals.

We say that the language in this Committee Report is simply designed to indicate that where the taxpayer gets to the Tax Court and files the waiver, in which case, the tax would presumably be collected, he does not lose his right to stay there because the Tax Court has been given power to determine an overpayment of tax.

Now, viewed in that context, this language is at the least, equivocal.

It is perfectly consistent with the balance of the statute which provided that the Tax Court, the Board of Tax Appeals, could declare overpayments.

Chief Justice Earl Warren: But how he can he ever get there, if there isn't a 90-day letter?

That's -- that's also troublesome, isn't it?

Mr. Howard A. Heffron: Yes.

Well, he can't get there if there isn't a 90-day letter and we say he shouldn't get there because the jurisdiction of the Tax Court has always been based on the taxpayer's controverting the assertion of the deficiency.

Ours is a self assessment system.

The concept of a deficiency, as defined in the Code, is premised upon the assertion of an additional tax by the Commissioner, which the taxpayer is disputing prior to payment.

So, for example, if the taxpayer files a tax return admitting so many dollars of tax due, he's not entitled to a 90-day letter.

That maybe assessed immediately, the definition of deficiency in the Code provides that similarly --

Justice William J. Brennan: (Inaudible)

Mr. Howard A. Heffron: Yes.

If the taxpayer files a tax return and shows so much tax due on the return, does not pay at this time, he is not entitled to a 90-day letter.

The Commissioner may assess that tax immediately.

This is an acknowledged liability.

Despite the fact the taxpayer may sue for refund at a later time, for present purposes, he is not contesting payment.

Now, we say that the waiver here is simply another technique --

Justice William J. Brennan: Well, that's --

Mr. Howard A. Heffron: -- for him to indicate that.

Justice William J. Brennan: Present purposes, he's not contesting liability as in your case, where he -- the self assessor, computes a certain tax.

Mr. Howard A. Heffron: Yes.

Justice William J. Brennan: He -- he's not contesting liability in that case.

Now here, the very issue is whether -- whether he waived the right to contest liability or whether he's simply waived the assessment and collection of the -- of the tax.

Mr. Howard A. Heffron: Well --

Justice William J. Brennan: That's the very issue involved here.

Mr. Howard A. Heffron: Well, to say that the taxpayer who files a return showing so much tax due is not contesting liability, this is true so far as all appearance are concerned.

But he, of course, is not bound by that.

He may sue for refund at a later time.

The question is whether he is contesting payment of an asserted tax, if he is contesting payment, why then he ought to go to the Tax Court, because the route was provided for just that situation.

If he is not contesting payment, he should not go to the Tax Court despite the fact that he may be disputing the correct amount of the tax.

For example, the Fourth Circuit and the Second Circuit have both held that where the taxpayer filed a return which shows so much due and then decides on his own, that he owes more tax or at least, he thinks an agent will propose additional tax and makes a payment of that sum to the Director, he has lost the right to go to the Tax Court.

There's no need to issue a 90-day letter.

Now, this is not because the taxpayer will never dispute that he owes this money.

It's because he is not presently controverting the Commissioner's right to collect the tax.

Now, we say here, when he files a waiver of this kind, which says, “I consent to assessment and collection of the tax.”

Similarly under our self assessment system, he is not presently controverting the payment of the tax, and therefore, there is no reason to treat him any differently from the taxpayer who files an amended return, showing more due from the taxpayer who makes a voluntary payment of this kind prior to a 90-day letter.

He decides -- as a matter of fact, the taxpayer who pays prior to the 90-day letter, at least, has given the Government of the use of the money.

He still has lost of his right to go to the Tax Court.

Justice Hugo L. Black: (Inaudible)

Mr. Howard A. Heffron: He would have to sue for a refund.

Justice Hugo L. Black: After what?

Mr. Howard A. Heffron: After the tax had been collected, or if the tax were being collected as in a collection action of this kind, he might attempt to raise the merits of this case.

Now, that was not done here.

The taxpayer has no time in the lower court although having had the full opportunity to do so, raise any question that there was a defense to the merits of this assessment.

So he did not avail himself of such an opportunity.

Chief Justice Earl Warren: Mr. McLane.

Argument of W. Lee Mclane, Jr.

Mr. W. Lee Mclane, Jr.: Thank you, Mr. Chief Justice.

I suppose problem that presents itself to the Court is like the most problems that present themselves to men throughout their lives.

The result, well, to some extent, if not wholly depend upon the framework of reference within which you view it, or the set of perspectives with which one views it.

In the presentation by counsel, great emphasis has been laid upon the fact that this is a situation where a taxpayer is not contesting liability.

First of all, I think that we would have to dispute that.

The waiver form which is involved in this case and the waiver form which is used by the Treasury in thousands of cases, is found in page 15 of the transcript.

It states -- I'm sorry, may it please the Court, page 14 and page 15.

It states at the bottom of that form that the execution and filing of this waiver at the address shown in the accompanying letter, will expedite the adjustment of your tax liability as indicated above.

It is not however, a final closing agreement under Section 3760 of the Internal Revenue Code and does not therefore, preclude the assertion of a further deficiency in the matter provided by law, should've subsequently be determined that additional taxes due, nor does it extend the statutory period of limitation for refund, assessment or collection of the tax.

In other words, when a taxpayer has executed such a waiver form, this tax liability for the year has not been settled.

There are many cases in which the courts have sustained the Commissioner in asserting deficiencies and during a period beyond the execution of such a waiver.

Justice Charles E. Whittaker: (Inaudible)

Mr. W. Lee Mclane, Jr.: Yes.

Justice Charles E. Whittaker: (Inaudible)

Mr. W. Lee Mclane, Jr.: Yes, Your Honor, but our position here is that he has assessed.

He is -- he is consenting to the assessment of a tax which is based on a determination of a deficiency.

And that here, there has never been a determination of a deficiency and our reasoning was based on the language of Sections 272 (a) and 272 (d) and I'd like --

Justice Potter Stewart: Mr. McLane.

Mr. W. Lee Mclane, Jr.: Yes, sir.

Justice Potter Stewart: According to your position, what did he -- what was the effect of signing this form?

Mr. W. Lee Mclane, Jr.: Well, I think in the Ninth Circuit, that a waiver form such as this is premature and invalid.

It's executed before a notice of deficiency has been issued.

Justice Felix Frankfurter: It's a futile document?

Mr. W. Lee Mclane, Jr.: That is correct, Your Honor.

Justice Charles E. Whittaker: Well, what would be -- what in the world is the purpose of that precluding if after the 90 days have expired and the assessment has been made?

Mr. W. Lee Mclane, Jr.: Well, because the assessment is often that made after -- after the 90-day letter is issued, it will be made after 90 days have expired.

But let us take a case -- well, let us take a case where the notice of deficiency is issued on January 1st of 1936.

Normally, the Commissioner -- or rather the Commissioner cannot assess until February, March, April 1st of 1936.

There's 90 days that must wait.

In this case, if the notice of deficiency is issued on January the 1st, 1936, the Commissioner may then assess the tax and bill for interest on January 2nd, 1936, if the taxpayer has executed a waiver form, when he has received the notice of deficiency.

Justice Charles E. Whittaker: (Inaudible), the taxpayer receives a 90-day letter on January 1.

On that day, he signed his waiver and returned it.

Mr. W. Lee Mclane, Jr.: Understood --

Justice Charles E. Whittaker: The Commissioner upon receipt, may make the assessment.

Mr. W. Lee Mclane, Jr.: That is correct, Your Honor.

Justice Charles E. Whittaker: (Inaudible) by the waiver, right?

Mr. W. Lee Mclane, Jr.: Yes.

That is correct, Your Honor.

Justice Charles E. Whittaker: And therefore, if payment is made, he would stop.

Mr. W. Lee Mclane, Jr.: That is correct, Your Honor.

Justice Charles E. Whittaker: Right?

Mr. W. Lee Mclane, Jr.: That is correct.

Justice Charles E. Whittaker: And you did just that -- and you -- you signed the waiver, but you didn't pay?

Mr. W. Lee Mclane, Jr.: We did not get a notice of deficiency here, Your Honor.

The taxpayer, that is, did not receive a notice of deficiency.

Justice Felix Frankfurter: (Inaudible), the 90-day notice.

Mr. W. Lee Mclane, Jr.: That is correct.

Justice Felix Frankfurter: You did just 30-days.

Mr. W. Lee Mclane, Jr.: Well, I don't know.

I did not represent these people at that time, Your Honor.

Now, our point and I think the important one that we urge here is that -- it seems to us that prior to 1954, if the interpretation is placed upon Section 272 (a) and 272 (d), which the Government urges, it means that a taxpayer who execute such a waiver, never receives a right to go to the Tax Court.

And in this particular case, because the notice of deficiency, as a matter of fact, is -- is not issued by the Commissioner when such a waiver form has been executed.

Now, in the particular case before the --

Unknown Speaker: (Inaudible)

Mr. W. Lee Mclane, Jr.: Once a waiver form such as the one before the Court has been executed, it is the practice of the Commissioner, not to issue a statutory notice of deficiency.

Consequently, there is no opportunity ever given or afforded to the taxpayer to appeal that assessment or determination of the deficiency.

I used the word, “To the Tax Court of United States.”

He must first pay the tax, then file a claim for a refund and sue for refund.

But may it please Your Honor in this case, and this is the reason, I think, this is a good case for a decision to be reached on this problem.

This taxpayer will never have had a determination on the merits as to the tax involved herein, for the reason that no notice of deficiency was issued therefore, she could not go to the Tax Court.

When the suit was filed in the District Court below, it was filed seeking judgment for x dollars of tax, based on this waiver form.

I did not offer evidence dealing with the merits of the deficiency.

Had I done so, I would've expected that it would've been excluded on the ground that the Commissioner was attempting to obtain judgment based on an amount of tax which purportedly by the terms of the waiver, has been agreed to by the taxpayer.

Furthermore, there would've been another defect had we offered such evidence.

One of the prerequisites for a suit for refund is that a claim for refund must have been filed further to, and so it seems to us that here is a case in which a taxpayer will not ever be able to have a determination on the merits of this particular tax.

Justice Charles E. Whittaker: (Inaudible), I think that maybe so with respect to this assessment, but is it not entirely due to the fact that you consented to the assessment?

Otherwise, you would've gotten the 90-day letter, but when you consented to the making of the assessment, did you not thereby waive any efficacy or need to the issuance of the 90-day letter?

Mr. W. Lee Mclane, Jr.: No, Your Honor.

I don't think so.

And the reason I say not is that I don't -- I don't argue or I'm contending that these waiver forms consent to an assessment if executed without the prior issuance of a notice of deficiency.

Justice Charles E. Whittaker: Well, it says in so many words exactly just that, does it not?

Mr. W. Lee Mclane, Jr.: Yes, but it also says, may I offer respectfully, Your Honor.

At the top of the provision -- at the top of the waiver pursuant to the provisions of Section 272 (d), that it is our argument that pursuant to the Sections of 272 (d) means that there must first be a determination of a deficiency.

Justice Charles E. Whittaker: (Inaudible) December 31, 1946, income (Inaudible) $9965.48.

Mr. W. Lee Mclane, Jr.: That is correct, Your Honor.

Justice Charles E. Whittaker: And that's (Inaudible).

Now it was indeed after that, they send you a 90-day letter, so as you might contest it in the Tax Court?

Mr. W. Lee Mclane, Jr.: That is our view, Your Honor.

In fact, we argue that the 90-day letter should've been issued before the notice of -- that -- that is this waiver was sent to the taxpayer and executed.

And that this waiver is a useless act.

That was a position the Ninth Circuit took in the two cases which they decided.

Justice Charles E. Whittaker: Why should in effect, they have a right to make an agreement -- contract that they won't (Inaudible)?

Mr. W. Lee Mclane, Jr.: Well, I think he can, Your Honor, except for the provisions of the statute which provide --

Justice Hugo L. Black: I think (Inaudible) some statute that makes it unlawful?

Mr. W. Lee Mclane, Jr.: No, Your Honor.

But I think the language of Section 272 (d) and may I just refer to the two words which I think are -- the controlling words in this particular problem.

At the bottom of Section 272 (d), which is the waiver of restrictions, which the Commissioner relies upon here --

Justice Hugo L. Black: What page is that?

Mr. W. Lee Mclane, Jr.: I'm sorry, Your Honor.

Its page 4, of the brief for Sydelle Price, about two thirds of the way down, the provision states, “Waiver of restrictions.”

The taxpayer shall, at anytime, have the right by a signed notice in writing filed with the Commissioner to waive what?

To waive the restrictions provided in subsection (a) of this section on the assessment and collection of the whole or any part of the deficiency.

Justice Hugo L. Black: Well, that gives some right, but did he have to have a right, if he wants to make the contract for himself, in order to -- picks up a certain way of paying the taxes.

Why wouldn't he have a right to do it under the statute (Inaudible)?

Mr. W. Lee Mclane, Jr.: Well, he probably could contract with the Government the way --

Justice Hugo L. Black: (Voice Overlap)

Mr. W. Lee Mclane, Jr.: I doubt that, Your Honor, because it says on the surface of the instrument that --

Justice Hugo L. Black: That may not be called a contract, but in effect, he -- he goes to the tax (Inaudible) you're doing this except for his position.

Now --

Mr. W. Lee Mclane, Jr.: Well, but -- but that is --

Justice Hugo L. Black: And -- and he paid that deficiency.

He did pay that deficiency and what would happen, could you then have sued to recover?

Mr. W. Lee Mclane, Jr.: Oh, Yes, Your Honor.

As the matter of fact, the vast majority refund suits that at least come from our office are based on this waiver forms, that is, they've been executed, the tax had been paid.

Justice Hugo L. Black: Your argument, it seems to me (Inaudible) is this, and since there is a right, to go to the Tax Court under certain positions, the taxpayer waives it, it's (Inaudible)

Mr. W. Lee Mclane, Jr.: No.

It seems to me, Your -- Your Honor, that our argument is that he may waive it, when he's got it or when he's been given the right to go to the Tax Court.

Justice Hugo L. Black: Your point is no deficiency ever comes into existence --

Mr. W. Lee Mclane, Jr.: That is --

Justice William J. Brennan: -- until there is such a (Voice Overlap) --

Mr. W. Lee Mclane, Jr.: Determination.

Justice William J. Brennan: And that's when the fact you compete as or (Inaudible) deficiency, that's a technical term, maybe that comes to the existence after the 90-day notice is sent.

Mr. W. Lee Mclane, Jr.: That is correct, Mr. Justice Brennan.

As a matter of fact, if you will then refer up to the top of Section 272, you will find, in the first sentence, the qualifying words, if in the case of any taxpayer the Commissioner determines that there is a deficiency, it is our view that the words, “the deficiency,” refer to a determination of the deficiency.

There cannot be a deficiency until one has been determined.

Now, Judge Simons, in the Moore case, took the view there could ascertainment on a tentative basis, and I respectfully challenge that notion.

Justice Felix Frankfurter: You're standing on the literal language of the statute, which amounts to a direction to the Director, to a taxpayer which he must obey, unless the taxpayer waives an announced deficiency.

Mr. W. Lee Mclane, Jr.: I'm -- that is correct, Your Honor.

I'm relying on the literal language of the statute and on the legislative history behind that particular section which indicates proof.

Chief Justice Earl Warren: We'll recess now.

Print this transcript Transcript: 

Argument of W. Lee Mclane, Jr.

Chief Justice Earl Warren: Mr. McLane, you may proceed.

Mr. W. Lee Mclane, Jr.: Thank you Mr. Chief Justice.

Mr. Justice Frankfurter asked at the end of the last session whether we were relying upon the literal language of the statute and that is correct.

However, in the brief, we've attempted to add some small amount of legislative history to the literal language of the statute in an effort to aid the Court in determining how this particular section should be interpreted today.

And I would like to emphasize before I sit down a little bit of that legislative history.

In the first place, when this Section 272 (d) was first inserted into the Revenue Act of 1926, it was the act of thought not apparent.

In other words Section 272 is a procedural section by which a taxpayer is afforded a method of going to the Tax Court of the United States.

It is not a section which restricts the Commissioner from collecting the tax under certain circumstances as a matter of emphasis I understand.

But then when Section 272 (d) was added to the Act in 1926, it provided, and I'd like to read directly from the Senate Finance Committee Report, that the law provide that where deficiency is assessed, there shall be assessed at the same time interest at the rate of 6% from the time the deficiency should've been paid to the date of assessment, in order to commit the taxpayer to pay the tax and stop the running of interest.

The Committee recommends in Section 274 (d), which was the predecessor of 272 (d), of the bill that the taxpayer at any time be permitted to waive in writing the restrictions on the Commissioner against assessing and collecting the tax, but without taking away the right of the taxpayer to take the case to the Board.

Now, it is our view that since there is only one way that the taxpayer may take the case to the Board of Tax Appeals, i.e., a statutory notice of deficiency having been issued that this language simply means that a taxpayer wants to have the right to waive the restrictions against assessment and stop the running of interest after he had first received a notice of deficiency.

In 1933, the first of the decisions of the Ninth Circuit which held these waivers to be premature and invalid was handed down and that was the case filed Mutual Lumber versus Poe.

The position of the Court was reaffirmed in 1935 in a case entitled McCarthy versus Commissioner and those were the only two cases dealing with the validity of these waivers under Section 272 (d) until about 1938.

At that time, a Subcommittee of the Ways & Means Committee of the House of Representatives proposed, and I quote from the language of that report, “As the result of two decisions of the Circuit Court of Appeals for the Ninth Circuit, Mutual Lumber versus Poe, McCarthy versus Commissioner, a valid waiver cannot be given by a taxpayer prior to the formal determination of the Commissioner as evidenced by a 60 or 90-day letter that there is a deficiency in tax.”

Although that report was issued, no amendment was made in 1938.

Then in 1942, the Commissioner of Internal Revenue proposed an Administrative Procedural Code in which again, there was a provision proposed to remedy this situation.

That code or proposal was not adopted.

However, in 1954; the Congress finally did make a change in this section which is now before the Court, Section 272 (d), and they added the words whether or not a notice of deficiency has been added.

Now, the taxpayer submits that this legislative history sustains the proposition that these waivers could not be valid unless a prior notice of deficiency had first been issued.

Chief Justice Earl Warren: Mr. McLane, what has been --

Mr. W. Lee Mclane, Jr.: Yes sir.

Chief Justice Earl Warren: -- the practice of the -- of the Commissioner between the time this 1938 proposal was made and the 1954 change in the statute?

Did they continue to use these waivers in the manner they've been used in this case or not?

Mr. W. Lee Mclane, Jr.: Yes that is correct Your Honor, except there is one interesting feature.

I was at one time with Chief Counsel's office of the Bureau of Internal Revenue, and at that time, they were used in the manner in which they were used in this case.

However, I would like to point out to the Court that in almost every case which the Government has cited here, the waiver form was entitled at the top; waiver of right to file petition in the Tax Court of United States.

Then, as a result of some of the decisions, the form of the waiver was changed and the provision at the top provided waiver of restrictions on assessment and collection of deficiency in the tax.

So, that while it is true that the Commissioner has used these waiver forms in the manner which they were used here, I think the question was at least that the taxpayer knew, that is the taxpayer who was not represented by counsel, what he was waiving, because there is nothing in the terminology of the waiver form which advices a taxpayer who is not a lawyer that he is waiving his right to appeal to the Tax Court of the United States.

All it says is that he's waiving his right, waiving whatever restrictions there are on assessment and collection of the deficiency.

Justice Charles E. Whittaker: Now, why would that --

Mr. W. Lee Mclane, Jr.: Sir?

Justice Charles E. Whittaker: -- (Inaudible) that no exemptions maybe made if the 90-day letter was given, until after the 90 days had expired and not even then until if the proceeding has been brought (Inaudible)

Mr. W. Lee Mclane, Jr.: Well, of course Your Honor it's our view that it can't be waived until the notice has been issued and there has been a determination of the deficiency.

Justice Charles E. Whittaker: I still don't understand why, when you have a notice, a 90-day notice when you have considered to the -- and if only relevant for difference which you have to make, it would have been you would have got the 90-day letter, since you wouldn't have it due to litigate in a Court's action.

Mr. W. Lee Mclane, Jr.: Well, Your Honor, it seems to me that if-- if you view these waiver forms that's concerning to an assessment or agreeing to default, in other words, that one is inclined to say that a taxpayer should not be permitted to stand upon a technical position as no notice of deficiency has been issued.

I don't view them as such and I suggest to the Court that the Commissioner does not view them as such, because the very terms of the waiver itself provide that they are not a determination of the taxpayer's tax liability.

The note that follows at the bottom of the waiver forms states flatly that they are not the final closing agreements and that further deficiencies may be determined.

Justice Charles E. Whittaker: You don't question about that, you can pay stopping interest, the next day buy reclaim for refund when and it's denied six months expire whichever first occurs to (Inaudible) your money back.

Mr. W. Lee Mclane, Jr.: That is true Your Honor.

Assuming the taxpayer has the funds to pay the tax.

In this case, there were no such funds and that's why the Commissioner was forced to sue in the District Court for judgment, in order to have that judgment in the event the taxpayer subsequently obtain funds.

I -- I know that this argument that the Commissioner makes that really this is not such a disastrous situation because taxpayer can pay the tax and subsequently sue for a refund is valid to the extent that it has a taxpayer involved who has the funds to pay a tax but there are many who do not.

And I would say that in reply to Mr. Justice Black's question that if you look at this as though it were a contract or an agreement despite what the language of the section provides that you may say that the taxpayer should be bound by it.

However, I would like to emphasize that the waiver form itself states that it is filed pursuant to the provisions of Section 272 (d).

And now we are back to 272 (d) which gets us to the point that Mr. Justice Stewart, I'm sorry Mr. Justice Stewart and Mr. Justice Brennan raised that in Section 272 (d), it states that the taxpayer shall have the right at any time to waive the restrictions on the assessment and collection of the whole or any part of the deficiency.

And it is the two words, “the deficiency,” which the taxpayer relies on Your Honor.

The words “the deficiency” it seems to us must be interpreted by referring to Subsection 272 (a) which is the same section and you will find those two words in the second sentence of Section 272 (a).

They are the last two words.

It says, “For a redetermination of the deficiency.”

A reading of that sentence refers one back to the first sentence of Section 272 (a) which states, “If the Commissioner determines that there is a deficiency in respect to the tax.”

And it was the view of the Ninth Circuit and it is our view that those words qualify Section 272 (d), that is, there must be a determination of the deficiency before a taxpayer may waive or file a valid waiver under Section 272 (d).

Justice Charles E. Whittaker: There must -- there must be (Inaudible)

Mr. W. Lee Mclane, Jr.: That is correct Your Honor.

Justice Charles E. Whittaker: That is you give -- receive 30-day letter and you have a negotiation?

Mr. W. Lee Mclane, Jr.: That I do not know, I did not represent these taxpayers.

However, let us assume that that was the case Mr. Justice Whittaker, the -- the 30-day letter creates no rights to go to any Court to litigate or to dispute the matter except within the confines of the Treasury Department itself.

Now, the Government has used the number of taxpayers and the amount of revenue that's involved here as some indication of the importance of this decision.

I of course cannot compete with the millions of dollars that may be involved but I would like to point this out to the Court that this decision, this view of the Ninth Circuit has been the law in that Circuit since 1933.

The other decisions in conflict thereto had been the law since about 1939 or 1940 I think Moore versus Cleveland Railroad was decided in 1940.

Therefore, this is a problem which has existed for at least 25 years.

Chief Justice Earl Warren: Have they followed -- have they followed the practice of this decision in the -- in the Ninth Circuit that was proclaimed since 1933?

Mr. W. Lee Mclane, Jr.: No the Commissioner has not issued a notice of deficiency in the Ninth Circuit in order to sustain the validity of the waiver form.

He has adopted the same practice that he has used throughout the country --

Chief Justice Earl Warren: Throughout the country.

Yes.

Mr. W. Lee Mclane, Jr.: -- that is not issuing the notice of deficiency once the waiver form as executed.

Chief Justice Earl Warren: Yes.

Mr. W. Lee Mclane, Jr.: So that if the Government is in difficulty now on a nationwide basis, I submit to the Court that it is because the case is now here on appeal, because prior to the petition for certiorari, there was only one circuit which adapted this view that was the Ninth Circuit.

The other two circuits had adapted the contrary position and so had the Court of Claims.

I would like to suggest to the Court if it has the time that Roos versus U.S., a Court of Claims case that dealt with this problem and there is language in that opinion which indicates that the judge who wrote the opinion believed that the Senate Finance Committee language of 1926 stating that such a waiver could be executed but without taking away the right of the taxpayer to go to the Board meant that the taxpayer could not waive his right to go to the Tax Court of the United States.

One other point --

Chief Justice Earl Warren: Do you recall that Mr. Heffron's said about, that I asked him about that and -- and he made an explanation of what you have in mind.

Mr. W. Lee Mclane, Jr.: I'm sorry Your Honor I don't understand --

Chief Justice Earl Warren: Well, I -- I told him that it was little troublesome to --

Mr. W. Lee Mclane, Jr.: Oh, yes.

Chief Justice Earl Warren: -- in that statement --

Mr. W. Lee Mclane, Jr.: Yes.

Chief Justice Earl Warren: But without taking away the right of the taxpayer -- of the taxpayer to take the case to the Board and he had an explanation for that I say, do you have in mind so you could answer?

Mr. W. Lee Mclane, Jr.: Yes I have his explanation but I am -- it's very frank to say I don't follow it, because the language very clearly says that without taking away the right of the taxpayer to take the case to the Board.

I don't think the case refers to an overpayment.

I think it refers to the determination of the deficiency.

Now, one other and final point that I'd like to make and answer to a question that was raised was whether -- I think Mr. Justice Whittaker raised that, whether a taxpayer didn't obtain a great deal of (Inaudible) by virtue of the fact that the tax could be assessed immediately after the waiver form or at the 90-day letter had been issued, immediately after the 90-day letter had been issued.

The -- the Commissioner is not required to assess the tax once the 90-day letter had been issued, he may wait until the appropriate statute of limitations has expired before assessing the tax if there's no waiver form executed.

That is if a 90-day letter is issued and a taxpayer does not appeal to the Tax Court, he may wait until a year or two years has gone by assuming there is that much time left and the running of the statute of limitations for the assessment of the tax.

It is his practice however to assess the tax fairly shortly after the 90-days has run.

Justice Hugo L. Black: Yes, as I understand the (Inaudible) when the 90-day waiver has been passed, 90-day -- (Inaudible) re-determination filed in the 90 days, the Commissioner is not required to within that time to make this reference.

Mr. W. Lee Mclane, Jr.: Except as required by the statute of limitations.

Justice Hugo L. Black: (Inaudible)

Mr. W. Lee Mclane, Jr.: That is correct Your Honor.

Justice Hugo L. Black: And what's the significance to it?

Mr. W. Lee Mclane, Jr.: Well I thought Your Honor had pointed out that the taxpayer was obtaining a great deal of benefit by having executed a waiver form such as we have in this case regardless of whether or not a notice of deficiency had been issued.

Justice Hugo L. Black: Well, my point was, as I understood, isolate it immediately upon receipt of notice that there was to be a deficiency assessment, a plea to that assessment and then (Inaudible) pay without interest.

Mr. W. Lee Mclane, Jr.: That is correct Your Honor.

If -- if the conclusion has reached that such a waiver form is valid without a notice of deficiency.

That is he does stop the running of interest if this waiver form is valid without the notice of deficiency having been issued prior thereto.

Thank you.

Chief Justice Earl Warren: Mr. Heffron.

Argument of Howard A. Heffron

Mr. Howard A. Heffron: I'd like to quote from the respondent's statement of the problem which gave rise to the statute under consideration.

He says, this prohibition is referring to the prohibitions against assessment created a problem for the taxpayer who did not wish to file a petition in the Tax Court within the 90 days but who desire that interest stopped running on a deficiency.

We agree with that and we say the way that taxpayer stopped interest from running on a deficiency was by filing the waiver without waiting for the 90-day letter.

If by hypothesis, he doesn't want to go to the Tax Court, why do we have to send him on and insist that he pay interest during that entire interval?

That is what the position of the Government comes down to in this case.

Now, there is a clear distinction between a notice of deficiency, which is the 90-day letter and the deficiency itself.

That's made very clear in the statute which defines deficiency in tax -- in Section 271.

As used in this chapter, deficiency mean the amount by which the tax imposed exceed the excess of the amount shown on the return, the amounts previously assessed, and this would be an amount previously assessed, or the amounts previously collected without assessment as where the taxpayer pays voluntarily.

Now, on the other hand, the other provisions clearly distinguish the notice itself.

The deficiency is simply the liability which the Act itself creates, it doesn't matter who determines it.

It may never be found out but the deficiency is there.

It is the true liability of the taxpayer less what he has acknowledged his -- his tax.

For example, 272 (c) provides that the taxpayer does not file a petition in the Tax Court, the deficiency, notice of which has been mailed to him shall be assessed which clearly distinguishes the deficiency itself from the notice.

The very section we're discussing here distinguishes it.

It says, “No assessment of a deficiency shall be made until notice has been mailed to the taxpayer.”

So, the deficiency is a concept entirely distinct from the notice.

And it's the Government that is relying on the definition as contained in the Internal Revenue Code.

When the waiver provision says you may waive restrictions on the deficiency, the deficiency is not a notice of deficiency it is the liability which is created by the statute less the offsets such as whatever is acknowledged on the return or has been previously collected.

The entire administrative process, the Internal Revenue Service, from the moment an agent appears on the premises to examine the return is designed to procure one of two results, either to procure agreement from the taxpayer that he will pay the proposed additional amount of tax.

In which case the taxpayer signs an 870 to stop the running of interest, because since he's already agreed to pay this amount, there is no reason to go forward with the rest of the administrative procedure and provide him with a 90-day letter or if the taxpayer does not agree to the proposal, he has successive layers of review within the Internal Revenue Service, he can go to a group chief.

He can file -- get a 30-day letter and protest and go to the Appellate Division which is part of the Internal Revenue Service.

If all of these means avail not to reach a settlement of the dispute, he receives a 90-day letter, so that he can go to the Tax Court if he wants to.

Justice Charles E. Whittaker: You are making perhaps another fact that if the deficiency was there, all the notice does is to identify it.

Mr. Howard A. Heffron: Precisely.

The notice is the identification by which the taxpayer can go to the Tax Court and dispute something alleged by the Commissioner as due over and above that, which he has acknowledged is due on his return or in some other way as by the waiver.

But at every stage of the administrative process as these -- these literally thousands and thousands of controversies between agents and taxpayers are resolved, at every stage the taxpayer's afforded an opportunity, if he agrees with the proposed additional tax, to sign a waiver that closes the case out.

There is no need to go to the Tax Court; there is no need to issue a 90-day letter.

We're stopping the running of interest on behalf of the taxpayer because the Government can immediately collect it and if the Government can collect it, then there's nothing to take to the Tax Court because there is no deficiency.

Justice Charles E. Whittaker: But doesn't that mean -- but does it mean that (Inaudible) claim for refund which he filed the next day --

Mr. Howard A. Heffron: Yes.

Well that is the difference between the two routes Congress has established to contest tax liability.

Now, there's no question here as respondents seem to imply of whether the taxpayer understood this waiver.

He had full opportunity below and the District Court to raise any question of a stopple of misrepresentation of anything which would impair the binding effects of the waiver.

That was not done; there is no question of that sort at all in this case.

As the Government sees that the only question here is construction of the statute and whether when Congress said that no assessment shall be made until a notice has been mailed whether that notice is not a restriction which the taxpayer can waive.

Now, we say it is clear under the statute that that is a restriction that the taxpayer can waive.

Now, the respondent has also referred to a Committee report of 1938 which indicates that these cases in the Ninth Circuit had held, there was an invalid waiver.

Committee also said, “Your Subcommittee, while feeling that the language of the statute is already sufficiently clear, feels compelled to do precisely what was done in the 1954 Code just to make sure.”