Appeal from a judgment of the United States District Court for the Western District of New York, John T. Elfvin, Judge, summarily dismissing complaint to recover income tax penalties. Vacated and remanded.
Lumbard, Kearse, and Altimari, Circuit Judges.
Plaintiff Eastman Machine Company ("Eastman") appeals from a judgment of the United States District Court for the Western District of New York, John T. Elfvin, Judge, dismissing its complaint to recover $229,932 in income tax penalties paid to the Internal Revenue Service ("IRS") pursuant to § 6653 of the Internal Revenue Code of 1954 ("Code"), 26 U.S.C. § 6653 (1976), as a penalty for the fraudulent underpayment of tax in connection with the late filing of Eastman's federal income tax return for the year 1972. Eastman sought the refund on the ground that its return should not be deemed late because Eastman had requested and been granted an extension of time in which to file the return. The district court granted the government's motion for summary judgment dismissing the complaint, finding that Eastman's return had not been timely filed. On appeal, Eastman argues principally that summary judgment was inappropriate because there was a genuine issue as to whether the IRS had implicitly granted an extension of time to file Eastman's return. We agree and, accordingly, we vacate the judgment dismissing the complaint and remand for further proceedings.
A. The Filing of the 1972 Return
Eastman's federal income tax return for 1972 was due to be filed on March 15, 1973. On April 12, 1973, Eastman's accountants, Lucker, Kennedy & Felmeden ("Lucker"), wrote the IRS requesting an extension of time to file the return. The letter was accompanied by, inter alia, a Form 7004 "Application For Automatic Extension of Time to File Corporation Income Tax Return" and an affidavit. The Lucker letter stated that "[t]he accompanying affidavit . . . explains the circumstances giving rise to this request for consideration of the application for extension of time and also a waiver of penalty which may otherwise be due." The affidavit, signed by a law partner of James H. Heffern, the lawyer who customarily had prepared Eastman's tax returns, stated that Heffern had been ill in 1972-73; that he had informed Eastman that it should hire an accountant, as he would not be able to complete the company's 1972 returns; that he had agreed to file requests for extensions of time in which to file the returns; that because of his illness, Heffern had failed to file the requests; and that the omission was not discovered until after the March 15 due date. Eastman's conversations with IRS representatives in connection with the delayed return are described in Part I.B. below; the IRS did not respond in writing to Eastman's request for an extension.
Eastman filed its return on April 27, 1973. The return showed total tax in the amount of $459,864.67, of which more than $200,000 had previously been paid as estimated tax payments; Eastman paid the remaining amount due with the return. The return was accompanied by copies of the April 12 Lucker letter and accompanying documents requesting an extension and a waiver of penalties, an executed Form 4571 "Explanation for Late Filing of Return or Late Payment of Tax" dated April 25, 1973, and a covering letter dated April 24, 1973, requesting that "consideration be given to a waiver of penalties relating to the late filing of [the return]."
On April 27, the IRS revenue officer who processed Eastman's application wrote on the back of Eastman's Form 4571: "Waive all penalties. Reasonable cause is accepted by this R.O." In July 1973, the IRS issued a statement of tax due. The statement showed interest due on the tax that should have been paid by March 15, but it did not assess a penalty.
In 1975, it came to light that during 1972, Eastman's president had diverted corporate income to himself. This had caused an underreporting of Eastman's taxable income on the 1972 return, and an understatement of Eastman's tax liability in the amount of $59,983. When these facts were discovered, the IRS, attributing civil fraud to Eastman because its president had been its principal officer and principal stockholder, assessed civil fraud penalties against Eastman pursuant to 26 U.S.C. §§ 6653(b) and (c). As they then existed, § 6653(b) imposed a penalty in "an amount equal to 50 percent of the underpayment" of tax, and § 6653(c) defined "underpayment" in terms of the amount of the taxpayer's actual tax liability less any tax shown on a return that was filed on or before its due date "determined with regard to any extension of time for such filing." Invoking these provisions, the IRS assessed a penalty of $29,992 with respect to the $59,983 of tax that was not shown on Eastman's 1972 return (a penalty that Eastman does not contest), plus a penalty of $229,932 with respect to the $459,865 tax that Eastman had shown and paid on its 1972 return prior to the discovery of the president's diversions.
Eastman paid the entire penalty in 1980 but filed an administrative claim with the IRS seeking a refund of the $229,932, asserting that in April 1973 it had asked for and de facto been granted an extension of time in which to file its 1972 return. Thus, it argued, the return was timely filed, and the tax of $459,865 59,865 shown on that return (and paid by Eastman in or before 1973) should not have been considered part of its "underpayment." The IRS denied the administrative claim.
In 1981, Eastman filed the present action to recover the $229,932 penalty, plus interest and attorneys' fees. The government moved for summary judgment dismissing the complaint on the ground that it was undisputed (1) that Eastman had not filed its 1972 return until after the due date; (2) that Eastman had requested an "automatic" extension of its time to file the return; (3) that under § 6081(b) of the Code and Treas. Reg. 1.6081-3(a)(2), such a request "must be filed on or before the date prescribed for the filing of the return," 26 C.F.R. § 1.6081-3(a)(2) (1987); see 26 U.S.C. § 6081(b) (1976); and (4) that Eastman had not made its request until after the return was overdue.
Eastman sought and eventually obtained discovery from the government, and subsequently cross-moved for summary judgment in its favor. Eastman argued in effect that although an application for an "automatic" extension would have been untimely, its request had sought a discretionary extension, see 26 U.S.C. § 6081(a) (1976). It contended that since the request was never denied and no late-filing penalties were assessed, it had de facto ...