Before McLAUGHLIN, STALEY and HASTIE, Circuit Judges.
The Commissioner of Internal Revenue assessed interest on certain alleged tax deficiencies for the years 1948 and 1949 against Hastings & Co., Inc. (taxpayer). The Commissioner notified the taxpayer of the assessment, whereupon the taxpayer brought suit in the district court for the Eastern District of Pennsylvania, asking that the Collector for the First Collection District of Pennsylvania be enjoined from collecting the assessed interest. The government, in turn, brought suit in the same court for collection.
The cases were consolidated for trial. Two orders were entered by the district court. One granted taxpayer's motion for summary judgment and granted the prayer for injunctive relief. The other dismissed the government's action to collect and granted judgment for the taxpayer.These appeals followed.
The following facts are not disputed. In the years 1948 and 1949,*fn1 the taxpayer filed tax returns which showed approximately $372 due for 1948 and $13,000 due for 1949. The 1948 tax as shown was paid, as was part of the 1949 tax. The taxpayer did not pay the balance of the 1949 tax shown on its return because it had filed an application for extension of time in order to stay payment since a net operating loss in 1950 was anticipated which would, under carry-back provisions of the Internal Revenue Code, 26 U.S.C. § 122, reduce or eliminate its tax liability for 1948 and 1949.
After the close of its 1950 fiscal year, the taxpayer filed timely application for benefits under the carry-back provisions of the Code, due to the 1950 net operating loss and claimed refunds for the 1948 tax and that portion of the 1949 tax which it had paid. The claims were granted and in due course paid.
The Commissioner then caused an audit of taxpayer's returns for 1948, 1949, and 1950 to be made.The audit (according to the agent's report) showed that the taxpayer's 1948 and 1949 taxable income was substantially greater than had been shown by taxpayer's figures in the original 1948 and 1949 returns. The audit also showed a greater net operating loss for 1950 than had been originally claimed by the taxpayer.
Because of the increased taxable income for 1948 and 1949, the net operating loss of 1950 (even though increased, according to the agent's report) was not sufficient to completely offset the taxable income for both 1948 and 1949, as was the case according to the original returns filed by the taxpayer for the three years. The 1948 taxable income was completely offset, but the 1949 taxable income was only partially offset.
The agent's figures for 1948 and 1950 were submitted to taxpayer and approved through its President in an agreement dated May 7, 1951.*fn2
Since the agent's report showed taxable income in 1949 upon which a tax was due, the taxpayer executed a "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax" for the year 1949. The waiver extended to the 1949 tax due and proper interest thereon.
On or about June 26, 1951, the Commissioner adopted the agent's report as his own determination, and on August 3, 1951, assessed against the taxpayer the deficiency in income tax for the year 1949 with interest to which the taxpayer had agreed. This tax and interest was paid and is not in issue.
The Commissioner also assessed against taxpayer interest on the deficiencies in taxes for 1948 and 1949, which deficiencies had already been "paid" by the taxpayer, in that they had been wiped out by the carry-back loss from 1950. It is the assessment of this interest which is in dispute.
We are first presented with the question of whether the interest was owing to the government. In Manning v. Seeley Tube and Box Co., 1950, 338 U.S. 561, 70 S. Ct. 386, 94 L. Ed. 346, the Supreme Court decided that interest on a validly assessed deficiency is not abated when the deficiency itself is abated by the carry-back of a net operating loss. The government claims that the Manning decision governs this case, but taxpayer contends that there is a significant difference between the facts in Manning and this case. In the Manning case, the deficiency was assessed prior to the application for carry-back of a net operating loss, whereas in this case the application for carry-back was made prior to the determination of deficiency.
Taxpayer contends that the Manning opinion expressly reserved decision on whether interest would be owing when the loss is claimed prior to the attempted assessment of a deficiency. But there is no indication in the opinion that the Supreme Court would have reached a different result had the facts been as here. Application of the principles announced in the Manning case to our case compels the conclusion that the taxpayer owed interest to the government. "We hold that the interest was properly withheld by the Collector. The subsequent cancellation of the duty to pay this assessed deficiency does not cancel in like manner the duty to pay the interest on that deficiency. From the date the original return was to be filed until the date the deficiency was actually assessed, the taxpayer had a positive obligation to the United States: a duty to pay its tax. See Rodgers v. United States, 1947, 332 U.S. 371, 374, 68 S. Ct. 57, 92 L. Ed. 3; United States v. Childs, 1924, 266 U.S. 304, 309-310, 45 S. Ct. 110, 111, 69 L. Ed. 299; Billings v. United States, 1914, 232 U.S. 261, 285-287, 34 S. Ct. 421, 425-426, 58 L. Ed. 596. For that period the taxpayer, by its failure to pay the taxes owed, had the use of funds which rightfully should have been in the possession of the United States. The fact that the statute permits the taxpayer subsequently to avoid the payment of that debt in no way indicates that the taxpayer is to derive the ...