Republic Petroleum Corporation, Plaintiff, v. United States of America, Defendant.lucy Cocchiara, Wife Of/and Louis J. Roussel,plaintiff-appellant, Cross- Appellee, v. United States of America, Defendant-appellee, Cross-appellant, 613 F.2d 518 (5th Cir. 1980)

This appeal concerns the tax consequences of the sale of two mineral leases by Louis Roussel and his wife, Lucy Cocchiara (collectively referred to as "taxpayer"), to Republic Petroleum Corporation ("Republic"). The stakes are high the district court determined, and the government does not dispute, that the taxpayer overpaid its taxes for the tax years 1959 to 1966 in the amount of $511,878.03; yet the court concluded that taxpayer was entitled to a refund of only $242,753.15. At issue on appeal are: (1) whether Republic assumed a mortgage burdening the mineral leases for the purposes of the installment sale provision of the Internal Revenue Code; (2) whether taxpayer was properly permitted to recover a refund of taxes attributable to the disallowance of deductions and losses for 1960 and 1962; and (3) whether taxpayer was entitled to a refund of taxes paid with the filing of his tax returns for 1959-65. A brief recitation of the facts prefaces our analysis of these issues.

On July 24, 1959, taxpayer sold two mineral leases to Republic, of which Mr. Roussel was the majority shareholder and the ultimate decision maker, for a consideration of $2 million. The "Act of Sale and Assumption of Mortgage"¹  executed on that date provided that Republic would pay taxpayer $50,000 in cash and assume taxpayer's indebtedness of $1,950,000 under a mortgage note in the amount of $2,500,000 due on demand at the Whitney National Bank ("Whitney Bank"). Four days later taxpayer and Republic signed a letter agreement²  stating that in lieu of the formal assumption of the mortgage Republic would give taxpayer a $1,950,000 promissory note, payable in monthly installments of not less than $25,000, plus interest. Republic's promissory note was secured by Roussel's own promissory note to the Whitney Bank, which was in turn secured by the mortgage on the leases.

Taxpayer's basis in the leases was $29,425.50. He realized a capital gain on the sale of $1,970,574.50. On taxpayer's tax return for 1959 he elected to report his gain on the installment basis pursuant to IRC § 453, 26 U.S.C. § 453,³  and continued to do so in each succeeding tax year through 1965. Taxpayer timely filed each of his returns and paid the amount of tax indicated thereon.⁴ 

Taxpayer and the IRS filed agreements (Forms 872) to extend the statute of limitations on assessment with respect to tax years 1959 to 1966 until June 30, 1972. On February 28, 1972, the IRS assessed deficiencies for 1959, 1961 and 1963-66⁵  and issued "Quick Assessment" notices for those years. The deficiency for 1959 was occasioned by the IRS' determination that taxpayer was not entitled to use the installment method and should have reported his entire gain from the sale of the mineral leases in 1959. Other adjustments in income, not relevant here, accounted for the deficiencies in each of the other years. On March 6, 1972, the IRS determined that the taxpayer had overpaid his taxes for 1960 and 1962.⁶  These overpayments were credited against taxpayer's deficiencies. Taxpayer paid the net deficiency assessments in full on March 13, 1972.

On August 15, 1973, taxpayer filed a claim for a refund for each of the years in issue. Those claims were denied, and taxpayer brought suit.⁷  The district court granted the government's motion for partial summary judgment to the extent that it barred taxpayer from claiming a refund for taxes paid with the filing of his returns but permitted taxpayer to claim a refund of taxes attributable to the disallowance of certain deductions and losses for 1960 and 1962. Republic Petroleum Corp. v. United States, 397 F. Supp. 900, 906-07 (E.D. La. 1975). The court further determined that taxpayer was not entitled to use the installment method to report his gain on the sale of the leases. Id. at 907-11. The court then proceeded to examine other adjustments that the IRS had made for the tax years 1959-66. In a separate judgment the court concluded that although the government had collected $511,878.03 more from the taxpayer than it was entitled to, taxpayer was entitled to judgment for only $242,753.15.⁸  Taxpayer appeals, and the government cross appeals, from these determinations. We affirm the district court's judgment, except to the extent that it permits taxpayer to recover a refund for tax years 1960 and 1962.

I. Assumption of Taxpayer's Mortgage.

Section 453 of the IRC⁹  permits a taxpayer to report his gain from the sale of real property on the installment method so long as the payments received by the taxpayer in the year of sale do not exceed 30 percent of the selling price. Where a mortgage is "assumed by" a purchaser, however, the amount of the mortgage, to the extent that it exceeds the vendor's basis, is included as a payment received during the year of sale in determining whether payments in that year exceeded 30 percent of the price. Treas. Reg. 1.453-4(c) (1979). Thus, if Republic assumed the mortgage to which the mineral leases were subject, taxpayer would not be entitled to use the installment method.¹⁰  Conversely, if Republic did not assume the mortgage, as taxpayer contends, taxpayer would be entitled to report his gain on an installment plan.

The district court found that Republic had in fact assumed the mortgage.¹¹  Aware that the installment sale provisions are "relief provisions" to be "strictly construed," 2 Mertens, Law of Federal Income Taxation § 15.01 at 3, we conclude that the district court's finding was correct.

The most persuasive evidence supporting the district court's finding is the explicit language of the "Act of Sale and Assumption of Mortgage" in which Republic expressly assumed the mortgage and bound itself to the discharge of the mortgage note. See n.1 Supra. That document clearly and unequivocally states that "the present purchaser assumes, binds and obligates itself for the payment of the indebtedness of vendor" under vendor's mortgage note payable to Whitney Bank. Moreover, the minutes of a special meeting of Republic's board of directors held on July 24, 1959, the same day on which the "Act of Sale" was executed, indicate that assumption of the mortgage was a prerequisite of the sale.¹² 

Although Republic did subsequently execute a promissory note, there is ample evidence that Republic undertook to satisfy taxpayer's obligations to the bank. For example, one of Republic's checks, payable to taxpayer, was described on Republic's books as a payment "to reimburse interest charges paid by (taxpayer) to Whitney National Bank." As the district court observed, "Why would Republic reimburse Roussel for interest payments he had made on the mortgage unless it had assumed the obligation to make such payments?" 397 F. Supp. at 908-09. Another check was described on Republic's books as a "payment on mortgage loan." In still another instance a check was made directly payable to the Whitney Bank. Furthermore, although the promissory note indicated that Republic would pay taxpayer no less than $25,000 plus interest per month, its payments in 1959 were considerably less than the minimum amount and were "directly related to the payments due to the Whitney Bank under the mortgage," as found by the trial court. Id. at 908.

On the other hand, taxpayer's position is supported by the existence of the promissory note, as well as by certain testimony offered at trial. A CPA associated with Republic and taxpayer testified that Republic issued the promissory note after she reviewed the "Act of Sale" and ascertained that the collateral mortgage sought to be assumed under the act of sale could not, in her opinion, be assumed. An officer of the Whitney Bank testified that the bank's records reflect that Republic was never indebted to it. He further testified that taxpayer paid off his loans from the bank on February 20, 1961, and that the mortgage note was surrendered to taxpayer on that date, whereas Republic did not satisfy its obligation to taxpayer until December 30, 1965.¹³ 

We are convinced that the district court properly held for the government on this issue. Any doubt that we might harbor is dispelled by taxpayer's treatment of the mortgage in the course of this suit. In his initial claim for a refund for 1959, taxpayer Admitted that Republic had assumed the mortgage as part payment for the leases. Only one month before trial did taxpayer amend his claim to assert that no mortgage obligation had been assumed. As the district court concluded:

Considering the fact that Roussel had full control over all aspects of the transaction, his own uncertainty as to what transpired served to emphasize the confusing nature of the sale. Suffice it to say, however, that from the date of the act of sale until one month before trial, Roussel believed Republic had assumed his mortgage liability.

Id. at 909.

It is axiomatic that we may look through the form in which a taxpayer has cloaked a transaction to the substance of that transaction. Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S. Ct. 707, 708, 89 L. Ed. 981 (1944); Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652, 657 (5th Cir. 1958). Taxpayer's belated attempt to transform the assumption of his mortgage into a promissory note leaves us unpersuaded that the parties intended any result other than an assumption of taxpayer's mortgage.¹⁴ 

II. Timeliness of Taxpayer's Claims for Refunds.

A taxpayer may not bring suit for a refund unless he has "duly filed (a claim for refund) . . . according to the provisions of law in that regard." 26 U.S.C. § 7422(a). See United States v. Felt & Tarrant Manufacturing Co., 283 U.S. 269, 272, 51 S. Ct. 376, 377, 75 L. Ed. 1025 (1931). To be timely a claim for a refund of an overpayment of taxes must be filed by the taxpayer "within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later . . .." 26 U.S.C. § 6511(a).¹⁵  However, if the claim is not filed within three years after the return is filed, "the amount of the . . . refund shall not exceed the portion of the tax paid" during the 2 years immediately preceding the filing of the claim. Id. § 6511(b) (2) (B).

A. The 1960 and 1962 Tax Years.

The government contends that taxpayer was barred from making a claim for the refund of taxes for tax years 1960 and 1962. The government reasons as follows: its audit indicated that taxpayer had overpaid his taxes for those years at the time he originally filed his returns; taxpayer made no additional payments for those years at any time thereafter; therefore, taxpayer's August 15, 1973, claims for refund for those tax years were not filed within two years of payment (or three years of filing) as required by section 6511(a).

The district court found that taxpayer's claims for a refund for 1960 and 1962 Were filed within two years from the time that the tax for those two years was paid:

The taxpayer's additional tax liability resulting from the disallowance by the IRS of the disputed deductions and losses is the allegedly erroneous assessment giving rise to the claims for refund. That liability was satisfied or "paid" when the IRS applied the credit the taxpayer otherwise would have received because of his erroneous inclusion of income for the two years in question to satisfy the additional assessments. This offsetting of added tax liability against overpayment must be deemed to constitute payment of the additional tax liability.

397 F. Supp. at 906. This approach was rejected, however, in Kingston Products v. United States, 368 F.2d 281, 285-88, 177 Ct. Cl. 471 (1966).

The difficulty with this argument is that the audit of taxpayer's single . . . tax return for a particular year is not composed of a separate deficiency or overassessment as regards each adjustment, but necessarily results in either a deficiency or an overassessment. (citations omitted) The principle of credit allowances, therefore, "applies After the offsetting amounts are ascertained and not to their ascertainment." Babcock & Wilcox Co. v. Pedrick, supra, 212 F.2d (645) at 648 ((2nd Cir.)). The principle thus applies only as between different kinds of tax for a single tax year or against taxes of different years (ibid), so that A tax is deemed to be paid if a cash credit of the taxpayer is charged against a determined assessment or If an overpayment of one year is credited against a deficiency of another year.¹⁶ 

Id. at 287 (emphasis added). We are persuaded by the Court of Claims' reasoning that the offsetting of adjustments for a single tax year (1960 or 1962) by the IRS in the instant case does not constitute payment of tax for the purpose of IRC § 6511(a). Accordingly, we conclude, contrary to the district court,¹⁷  that taxpayer is not entitled to recover a refund for either 1960 or 1962.

B. The 1959, 1961, 1963, 1964, and 1965 Tax Years.

The district court held that the amounts of taxpayer's refund for each year could not exceed the amount that he had paid for that year in response to the "Quick Assessments" in 1972.¹⁸  In the court's view, section 6511(b) barred the taxpayer "from claiming a refund in 1973 for taxes paid with the filing of his returns in 1959-66." 397 F. Supp. at 907. We agree. Taxpayer clearly paid his remaining tax liability for those years, as determined by the IRS, on March 13, 1972. His claim for a refund, filed on August 15, 1973, was therefore timely under section 6511(a), having been brought within two years from the time the tax was paid. However, the amount of refund to which taxpayer is entitled is limited by section 6511(b) (2) to the portion of the tax that he paid within the two years preceding August 15, 1973 namely, to the amounts of the deficiencies that he paid in cash, or by the application of credits from other years,¹⁹  in 1972.

Taxpayer contends that the years 1959-66 should be treated as one unit rather than as separate tax years for the purpose of the statute of limitations. Accordingly, he concludes that he is entitled to a refund of the total amount of his overpayments as determined by the district court ($511,878.03) because he paid a greater sum ($710,656.01 plus a credit of $20,441.25) within the two years preceding his filing claims for refunds. Taxpayer cites as authority Plankinton v. United States, 267 F.2d 278 (7th Cir. 1959), and relies in particular on the following quotation:

The Government concedes that generally remittances made Prior to the time the taxpayer's liability is defined do not constitute "payment" of a tax for the purpose of commencing the limitation period on refund claims. It recognizes that such is the holding of Rosenman v. United States, 323 U.S. 658, 65 S. Ct. 536, 89 L. Ed. 535; (other citations omitted).

Id. at 280 (emphasis added). Plankinton, however, involved the payment of Estimated income taxes; as the court there noted, the predecessor of section 6511(b) (section 322(b) of the Internal Revenue Code of 1939) was not intended to preclude a refund of estimated taxes, which were simply payments "on account." In the instant case, however, the taxpayer himself defined his tax liability when he filed his returns for the years 1959-66. His remittance with each return was not merely a payment "on account" but was intended to discharge what the taxpayer deemed to be his tax liability. Plankinton is thus inapplicable here.²⁰ 

We discern no reason to depart from the long-accepted principle that taxes are computed on an annual basis. See 26 U.S.C. § 441(a); Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363, 51 S. Ct. 150, 151, 75 L. Ed. 383 (1931). As the Supreme Court noted in Commissioner v. Sunnen, 333 U.S. 591, 598, 68 S. Ct. 715, 719, 92 L. Ed. 898 (1948): "Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a Separate cause of action." (emphasis added). By his conduct taxpayer implicitly acknowledged that each tax year was to be treated separately: although he paid the asserted deficiencies for tax years 1959, 1961, 1963, 1964, and 1965 on the same day, he made a separate payment for each year; moreover, he filed a separate claim for a refund for each individual year.

In light of the foregoing discussion, we find that the district court correctly treated each tax year separately and limited the amount of taxpayer's refund for each year to the amount that taxpayer paid For that year in 1972. Because the amount of overpayment determined by the court for 1961 ($71,233.29) exceeded the sum of $31,756.98 that taxpayer had paid for that year in 1972, the district court properly limited the amount of the refund for 1961 to $31,756.98. The same reasoning applies to tax years 1963, 1964, and 1965. On the other hand, because the amount of the overpayment for 1959, as determined by the court ($602.08), was less than the amount of the deficiency assessed and paid for that year in 1972 ($482,722.82), the district court properly included only the amount of the overpayment in its judgment. The same is true for tax year 1966. Thus, although the taxpayer had overpaid his taxes for tax years 1959-66 in the amount of $511,878.03, the district court concluded that he was entitled to recover only $242,753.15, plus interest. Because we have determined in Part II.A., Supra, that taxpayer was not entitled to recover for tax years 1960 and 1962, the taxpayer is properly entitled to a refund in the amount of $228,535.27, plus interest.

Taxpayer urges us to grant him relief on equitable grounds. However, "general principles of equity may not override statutory requirements for timely filing of tax refund claims." Kingston Products, supra at 288. Accord Young v. United States, 203 F.2d 686, 689 (8th Cir. 1953).

Taxpayer's reliance on the mitigation provisions of the Code, 26 U.S.C. §§ 1311-1315, is also misplaced. For those provisions to apply there must have been "a decision by the Tax Court or a judgment, decree, or other order by any court of competent jurisdiction, Which has become final." Id. § 1313(a) (1) (emphasis added). A district court opinion is not final when it is entered but becomes final only after it has been appealed. Benenson v. United States, 385 F.2d 26, 30 (2d Cir. 1967). Taxpayer must therefore bring a separate mitigation action at the conclusion of his appeal if he seeks to mitigate the judgment below.²¹ 

The judgment of the district court is

AFFIRMED in part and

REVERSED in part.